Chapter 2 - Regulatory and Legal Environment

Federal Bureau of Investigation (FBI)

A bureau of the DOJ which plays a central role in investigating FI fraud and theft as well as enforcing key money laundering legislation.

Committee on the Global Financial System (CGFS)

A committee under the BIS that is a central bank forum for the monitoring and examination of broad issues relating financial markets and systems. Helps to elaborate appropriate policy recommendations to support the central banks in the fulfillment of their responsibilities for monetary and financial stability. Specializes in finding threats to global financial markets.

Committee on Payment and Settlement Systems (CPSS)

A committee under the BIS that is a standard-setting body for payment and securities settlement systems. Also serves as a forum for central bank to monitor and analyze developments in domestic payment, settlement, and clearing systems, as well as in cross-boarder and multi currency settlement schemes.

Group of Governors and Heads of Supervision (GHOS)

A committee under the BIS that is the governing body of the Basel Committee; comprised of central bank governors and (non-central bank) heads of supervision from member countries.

Tiers of capital

A key component in global regulation of the banking industry used to gauge capital levels: 1. Common equity (most stable) 2. Other long-term capital (preferred stock or long-term debt)

Durbin Amendment

A provision intended to limit debit card interchange fees and increase competition in payment processing.

Financial Intelligence Unit (FIU)

A specialized government agency established in many countries to deal with the problems of money laundering and similar financial crimes. The US version is FinCEN.

Financial Stability Board (FSB)

A standard-setter established to provide international coordination of national financial authorities and international standard-setting bodies. Works to develop and promote the implementation of effective regulatory, supervisory, and other financial sector policies. Provides an agenda for strengthening financial systems and the stability of international markets, but actual changes to regulations must be enacted by the relevant national financial authorities. Has members from the G20, World Bank, IMF, BIS, and OECD. Primary goals are to: - Maintain financial stability - Promote openness and transparency in financial sectors - Implement international financial standards - Conduct periodic peer reviews

Bank for International Settlements (BIS)

A standard-setter; the world's oldest international financial institution and principal center for international central bank cooperation. Current focus is on fostering cooperation among central banks and other agencies in pursuit of monetary and financial stability. Activities include: -Fostering cooperation among central banks and other agencies in pursuit of monetary and financial stability - Makes important contributions to the collection, compilation, and dissemination of economic and financial statistics -Performs traditional banking functions for the central bank community, as well as trustee and agency functions -Provides and organizes emergency financing to support the international monetary system when needed. Houses the following committees: 1. Group of Governors and Heads of Supervision (GHOS) 2. Committee on the Global Financial System (CGFS) 3. Committee on Payment and Settlement Systems (CPSS)

European Securities and Markets Authority (ESMA)

A standard-setting body that is an independent EU authority that contributes to safeguarding the stability of the EU's financial system by ensuring the integrity, transparency, efficiency, and orderly functioning of securities markets, as well as enhancing investor protection. Fosters supervisory convergence between securities regulators and across financial sectors Developed a single rule book for securities legislation.

European Payments Council (EPC)

A standard-setting body that is the coordination and decision-making body of the European banking industry in relation to payments. The purpose of this body is to support and promote the SEPA. Develops payment schemes and frameworks that help to realize the integrated euro payments market. Defines common positions for the cooperative space of payment services.

Basel Committee on Banking Supervision (BCBS)

A standard-setting body under the BIS that provides a forum for regular cooperation on banking supervisory matters. Objective is to reduce systemic risk, enhance the understanding of key supervisory issues, and improve the quality of banking supervision worldwide. Does so by exchanging information on national supervisory issues, approaches, and techniques, as well as developing guidelines and supervisory standards, primarily in the area of capital adequacy. Responsible for the Basel Accords (I, II, and III).

Deposit Insurance

A tool implemented by many countries to protect their depositors against loss from the failure of a bank or other financial institution. Increases the overall confidence in the banking system, especially on the part of smaller depositors. Protects the assets of smaller deposit customers (typically consumers, although corporate accounts are also typically covered up to a certain amount) who would be most hatred by a bank failure. Does bring along concerns related to moral hazard.

Basel I

An accord set by the BCBS under the BIS for implementation by member central banks; established minimum capital ratios for large banks based upon the credit risk of the various assets of each bank. These capital standards were put into effect by the G10 countries in 1992.

Basel II

An accord set by the BCBS under the BIS for implementation by member central banks; expanded the risk ratings implemented by Basel I and added an assessment of operational risk to the existing credit risk evaluation in establishing core capital requirements for major banks. Based on 3 pillars: 1. Minimum capital requirements (to address credit and ops risk) 2. Supervisory review (framework for evaluating risk) 3. Market discipline (disclosure requirements for risk metrics and capital adequacy)

Basel III

An accord set by the BCBS under the BIS for implementation by member central banks; extended Basel II to address stress testing and market liquidity risk, as well as capital adequacy. A comprehensive set of reform measures, developed in response to the Recession of 2009 and scheduled to be implemented through 2018, to strengthen the regulation, supervision, and risk management of the banking sector. Goals include: 1. Improve the banking sector's ability to absorb shocks 2. Improve risk management and governance 3. Strengthen banks' transparency and disclosures

Central Bank

An entity that is responsible for implementing and managing a country's monetary policy (i.e., money supply and interest rates); oversees the country's commercial banking and payment systems (e.g., European Central Bank, Federal Reserve Bank, People's Bank of China, Bank of England) Bear responsibility for: 1. Monetary Policy 2. Currency Issue 3. Supervision and Regulation 4. Government Services 5. Depository Institution Services

Office of Foreign Assets Control (OFAC)

An office of the Treasury Department that administers and enforces economic and trade sanctions against targeted foreign countries, terrorist-sponsoring organizations, and international narcotics traffickers. Can impose controls and freeze foreign assets. Powers expanded under the US Patriot Act.

Money Laundering

Any financial transaction which generates an asset or value as the result of an illegal act, which may involve actions such as tax evasion or false accounting. The three stages include: Placement: The physical deposit of cash proceeds from illegal activities into an FI Layering: A series of financial transactions designed to separate cash proceeds from their criminal or terrorist origins Integration: Creating what appears to be a legitimate explanation for the source of funds

Dual Banking System

Banks can choose to be either federally or state chartered at creation.

Traditional Bank Product Exception

Banks may condition the terms, including price, of an offer based on the requirement that the customer purchase or use other products from the bank, as long as all of the products are available separately to the same customer.

Moral hazard

Because banks know the federal government may cover losses they will be more risky in investing; because depositors know their money is insured they will look less into the credit worthiness of a bank

Multiplication of deposits

Causes the issue of the money supply of a country being much greater than just the amount of currency in circulation. A result of the ability of commercial banks to multiply the deposits that it holds by lending deposits out to companies and individuals, who in turn redeposit those funds back into the system so that they can be lent out a second time, and so on. This allows banks to create money and increase the overall money supply in any given country.

Seigniorage

Central banks generate income from issuing currency in exchange for government bonds; these funds are used to support the central bank or remitted to the local government. This is called __.

Currency Issuance

Central banks manage this by "selling" currency to investors in exchange for government bonds.

Depository Institution Services

Central banks provide services that include the operation of clearing and settlement systems, the provision of coin and currency, and the holding of reserve balances. This is called __ __ __.

Government Services

Central banks providing basic deposit and safekeeping services as well as the sale and redemption of government securities. This is called __ __.

Financial Regulation

Challenges affecting __ __ include: 1. No true central regulatory authority in the financial services industry 2. Increase in unregulated investment opportunities (i.e., private equity, derivatives, sovereign funds) 3. A growing dominance of a few very large FIs that operate in multiple countries 4. Cross-boarder ownership of most securities exchanges 5. Technology that allows an FI to conduct business virtually anywhere in the world 6. Integration of global financial money and capital markets

The Secret Service

Created in 1865 to suppress counterfeit currency. Now part of the US Department of Homeland Security, it deals with counterfeit currency, credit card fraud, and identity theft.

Depositor Confidence

Critical to a banks survival; lack thereof can lead to "a run on the bank"

FRB Regulations

D: Reserve requirement E: EFT payments J: Check collection and settlement Q: Earnings Credits Y: Bank Holding Companies Z: Credit Cards BB: Credit needs of the community CC: Speeds the collection and return of checks

Electronic Fund Transfer Act (EFTA) (1978)

Defines the rights and responsibilities of customers using all electronic funds transfer services except wire transfers. Limits customer liability for unauthorized banking transactions involving ATMs and POS terminals, provided the customer promptly notifies the bank or other institution that issued the card.

Capital requirements

Determines how much capital (equity funds) an owner must contribute to the business; usually in the form of a ratio of capital to at-risk assets. The higher the ratio of capital to at-risk assets, the lower the risk on the part of the bank.

Bank Secrecy Act (BSA) (1970)

Deters money laundering and the use of secret foreign bank accounts. Requires all FIs report suspicious financial transactions which creates a paper trail. Requires any trade or business org that receives $10,000 or more in cash to file IRS Form 8300.

Money supply

Directly affected by the multiplication of deposits; the more loans FIs make, the larger this pool is. Determining the proper size of the __ __ is a key element of monetary policy

Gramm-Leach-Bliley Act (1999)

Eliminates many of the provisions of the Glass-Steagall Act, especially those that created barriers among the functions of commercial banking, investment banking, and insurance. Includes: -Permits the creations of financial holding companies -Allows one capital requirement at the parent level, Makes the Fed it's regulator -Allows easier entry by foreign banks to the US market -Includes provisions for consumer protection

Dodd-Frank Wall Street Reform and Consumer Protection Act (2010)

Enacted in response to the Recession of 2009, one primary objective meant to bring more transparency and accountability to the derivatives market by: -Closes regulatory gaps -Requires central clearing and exchange trading -Requires market transparency, -Adds financial safeguards, -Sets higher standards of conduct

US Congress

Enacts legislation and the regulatory agencies develop regulations based on the legislation

Money Laundering Control Act (MLCA) (1986)

Enhanced the BSA by making it a crime to structure transactions in such a ways as to avoid the reporting requirements of the act. Requires FIs to establish effective KYC guidelines, be aware of parties to large-value funds transfers, and file currency transaction reports and criminal referrals.

Financial Crimes Enforcement Network (FinCEN)

Established as bureau of the Treasury, is the primary agency that oversees and implements policies to prevent and detect money laundering by criminal or terrorist organizations.

Federal Deposit Insurance Corporation (FDIC)

Established as part of the Glass-Steagall Act, is an independent agency whose primary role is to protect depositors from losses caused by bank insolvency. Direct supervisory authority over state-chartered banks that are non-members of the Fed, and backup authority over national and Fed member banks.

Bretton Woods Agreements

Established the rules used to govern monetary relations among the world's major financial powers following WWII; established the IMF and IBRD (both now part of the World Bank); a majority of the life of the BIS has been spent implementing and defending this agreement.

USA PATRIOT Act (2001)

Extended many of the provisions of the MLCA to non-financial businesses potentially handling large-value transactions such as car, boat, plane, and jewelry dealers. Requires FIs to report: inconsistent business activity, attempts to avoid reporting, unusual or multiple funds transfers, insufficient or suspicious information.

Regulation

Five areas in which the __ of FIs is concentrated: 1. Monitoring and managing the overall safety and soundness of the banking system, 2. Setting and implementing monetary policy, 3. Determining guidelines for the chartering of banks and other depository FIs, 4. Allocating credit toward certain sectors of the economy and protecting consumers, and 5. Protecting investors purchasing securities through FIs

Foreign Shell Banks

Foreign banks without a physical presence in any country

International Association of Deposit Insurers (IADI)

Formed in May 2002 to enhance the effectiveness of deposit insurance systems by promoting guidance and international cooperation. Domiciled under the BIS.

Securities and Exchange Commission (SEC)

Governed by the securities laws of 1933, 1934, and 1940, is a federal agency designed to maintain a fair and orderly market for investors by regulating and supervising securities sales. Focuses on protecting people who invest in stocks, bonds, and derivatives. Requires publicly traded companies to disclose all relevant financial information to investors. Tasks include: -Registering public offerings of debt or equity securities -Setting financial disclosure standards for corps -Requiring companies with public securities to file rpts -Regulating mutual funds and investment advisors -Monitoring insider trading/enforcing regulations

Electronic Signatures in Global and National Commerce (E-Sign) Act (2000)

Grants digital signatures the same legal status as handwritten ink signatures. Establishes the legal certainty of e-commerce transactions and provides a measure of confidence around the enforceability of electronic transactions.

Financial Stability Oversight Council (FSOC)

Helps oversee primary federal bank regulators (i.e., OCC, FRB, FDIC); agency created under the Dodd-Frank Act, charged with monitoring systemic risk in financial systems, identifying threats to financial stability, identifying gaps in regulations, facilitating coordination across federal and state agencies, and making recommendations to other regulatory entities.

Foreign Account Tax Compliance Act (FATCA) (2010)

Implemented to address tax noncompliance by US taxpayers with foreign bank accounts. Requires taxpayers to file an annual report of all foreign financial accounts and offshore assets (FBAR)

SEC Regulation G

Implements much of SOX; requires public companies to reconcile pro forma financial information to financial statements, companies that issue earnings releases must file the on Form 8-K, and all off balance sheet arrangements that may have a material current or future effect on the financial statements or liquidity must be included in the management's discussion and analysis section of the financial statements.

Reserve Restrictions

Imposed on the commercial banks operating within the central banks' system to manage the multiplication of deposits; for each unit of deposits, some percentage must be maintained as reserves. To encourage deposits, central banks will lower this rate, to restrict supply central banks will increase this rate

Volcker Rule

Increases the restrictions on certain types of bank investment activities thought to have contributed to the recession of 2009; includes proprietary trading, hedge funds, and private equity businesses. Means a bank cannot trade in the investment markets with the intent of making money, unless it is done on behalf of a customer. A bank can serve as a middleman, but not as a trader for its own benefit. Also provisions for too big to fail.

Commodity Futures Trading Commission (CFTC)

Independent agency with mandates to regulate commodity futures and options markets in the US. As part of Dodd-Frank, works with the SEC to regulate OTC derivatives so that irresponsible practices and excessive risk taking can no longer escape regulatory oversight.

Consumer Financial Protection Bureau (CFPB)

Independent consumer protection entity within the Fed that was created by the Dodd-Frank Act to consolidate and strengthen consumer protection responsibilities and oversee the enforcement of federal laws intended to ensure the fair, equitable, and non-discriminatory access to credit for individuals and communities. Authority to examine and enforce regulations for FIs with assets exceeding $10b.

National Credit Union Administration (NCUA)

Independent federal agency that charters and supervises federal credit unions. Backed by the US government. Operates the National Credit Union Share Insurance Fund (NCUSIF) which insures the savings of accounts holders in all federal credit unions and many state- chartered credit unions.

Deposit Insurance Fund (DIF)

Insured institutions pay a premium into the fund that is based on their level of deposits and risk profile, as determined by the type and mix of assets and liabilities the institution holds. The fund is backed by the full faith and credit of the US government and covers deposits in checking and savings accounts up to a max of $250k per depositor.

Financial Action Task Force (FATF)

International organization with the primary purpose of the development and promotion of policies, at both national and international levels, to combat money laundering and terrorist financing. Monitors members progress on implementing necessary measures, reviews money laundering and terrorist-financing techniques and countermeasures, and promotes the adoption and implementation of appropriate measures globally.

Run on the bank

Large number of depositors demand their deposits back all at once; could force a bank out of business since they lend the majority of deposits out

Financial Industry Regulatory Authority (FINRA)

Largest independent regulator for all securities firms and registered securities representatives doing business in the US. Mission is to provide investor protection and market integrity through effective and efficient regulation, as well as through compliance and technology-based services. Involved in most aspects of the securities business, including: - Registering and educating industry participants - Examining brokerage firms - Writing/enforcing rules related to federal securities laws - Providing trade reporting and other industry utilities -Administering the primary dispute resolution forum for investors and registered firms -Performs market regulation under contract for several exchanges

Payments Systems and Instruments

Legislation Governing __ __ __ __ includes: -Electronic Funds Transfer Act (1978) -Dep. Inst. Deregulation and Monetary Control Act (1980) -Electronic Signatures Act ESIGN (2000) -Check 21 (2003)

Regulation and Supervision

Legislation regarding __ __ __ of Financial Institutions and financial services include: -Federal Reserve Act (1913) -Glass Steagall Act (1933) -Anti-Tying Amendments to Bank Holding Co Act (1970) -Gramm Leach Bliley Act (1999) -Dodd Frank Wall Street Reform and CPA (2010)

Financial Crimes

Legislation relating to __ __, money laundering, and financial disclosure: -Bank Secrecy Act (1970) -Money Laundering Control Act (1986) -US PATRIOT Act (2001) -Sarbanes-Oxley Act (2002) -Red Flags Rule -Foreign Account Tax Compliance Act (2010) -Report of Foreign Bank and Financial Accounts

At-risk assets

Loans and other investments for banks

USA Patriot Act (2001)

Makes foreign banks with accounts in the U.S. Subject to US jurisdiction, prohibits US banks from maintaining correspondent accounts for any foreign she'll banks, prevents US credit card system operators from authorizing foreign banks without attempting to avoid usage by terrorists, and requires KYC

Bank Secrecy Act

Money laundering legislation that requires banks to report large and/or suspicious money transfers.

Commercial bank

Most common type of FI; accepts deposits from both consumers and businesses and the lends some portion of those deposits to other consumers and businesses

Bank Regulatory Agencies

Oversee federally chartered banks: Office of the Comptroller of the Currency (OCC) - Federal Board of Governors of the FRS - Federal Federal Deposit Insurance Corporation (FDIC) - Federal Financial Stability Oversight Council (FSOB) - Federal Oversee specific depository FIs or financial services: Consumer Financial Protection Bureau (CFPB) - specific Office of Foreign Assets Control (OFAC) - specific Financial Crimes Enforcement Network (FinCEN), - specific National Credit Union Administration - specific State banking boards and commissions, - specific Department of Justice (DOJ) - specific Securities and Exchange Commission (SEC) - specific Commodity Futures Trading Commission (CFTC) - specific Financial Indsutry Regulatory Authority (FINRA) - specific

Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act)

Passed in the wake of the Recession of 2009 and significantly changed the regulatory framework for financial activities in the US.

Glass-Steagall Act (Banking Act of 1933)

Passed to address major issues and problems with the financial services industry stemming from the Great Depression. Including: - Prohibited commercial banks from underwriting securities except government issues -Prohibited securities firms from engaging in bank-like activities -Required the Fed to establish interest rate ceilings on all types of accounts and prohibit the payment of interest on demand deposit accounts -Created the FDIC

Bank regulators

Primary job is to monitor credit and liquidity risks relating to potential bank failures and to implement safeguards that can help to reduce the overall risk of systemic failure. This oversight results in restriction on the banks' actions in order to manage the overall riskiness of the financial system and reduce the impact of potential bank failures.

Sarbaines-Oxley Act (SOX) (2002)

Primary purpose is to improve disclosure and financial reporting in the wake of a series of dramatic financial scandals between the years 2000 and 2002. Brought about numerous changes to SEC rules and regulations and created the Public Accounting Oversight Board (PCAOB). Requires publicly traded firms to: -Disclose the code of ethics in 10K -Disclose if audit committee has a financial expert on 10K -Establish/maintain internal controls for financial repting -Require audit committees to pre-approve all audit and non-audit services provided by the auditor -Be briefed by auditors on the company's accounting

Anti-tying Amendments to the Bank Holding Company Act (1970)

Prohibits tying in financial services, in an effort to increase competition and remove unfair banking practices.

Check Clearing for the 21st Century (Check 21) Act (2003)

Provided the basis for electronic clearing of checks by allowing the substitution of a copy or image of a check for the original document in the clearing process.

Federal Reserve Act

Provided the foundation for the current banking system; requires all banks with a national charter granted by the OCC to become Reserve banks, and thus become subject to Fed regulation, supervision, and reserve requirements. Also empowered the Fed to create a national check collection and settlement system through member banks.

Herstatt Risk

Refers to foreign exchange settlement risk, especially between bank counterparties. Developed as a result of a large bank failure in the 1970's, and resulted in the G10 forming a standing committee (BCBS) under the sponsorship of the BIS.

Impairment capital rules

Related to managing the safety and soundness of the banking system; Regulatory agencies will monitor the quality of the loan and investment portfolios of the banks closely and will generally place restrictions on how much can be loaned or invested in a particular company or industry sector. Limits the chances that the failure of one large client and the resulting defaults on its loans could lead to a bank's failure.

GLB - Gramm-Leach-Bliley Act of 1999

Removed the barriers among the functions of commercial banking, investment banking, and insurance, allowing FIs a broader range of products and more direct competition.

Glass-Steagall Act of 1933

Required legally that the functions of commercial lending and deposit taking, securities underwriting, mortgage origination, and insurance underwriting be carried out by separate FIs.

IRS Form 8300

Required to be completed by any trade or business or that receives $10,000 or more in cash to identify from whom the cash was received, on whose behalf the transaction was conducted, a description of the transaction, and the method of payment.

The Red Flags Rule

Requires FIs and creditors to develop and implement written identity theft prevention programs, as part of the Fair and Accurate Credit Transactions Act of 2003 (FACT). The programs must provide for the identification and response to patterns, practices, or specific activities "red flags" that could indicate identity theft.

Depository Institution Deregulation and Monetary Control Act (DIDMCA) (1980)

Requires all deposit-taking institutions to maintain reserves at the Fed, makes Fed services such as the discount window and check clearing available to all deposit-taking institutions,mandates the Fed to reduce and/or price payment system float and price previously free Fed services according to the standards of a tax-paying vendor

Tying

Requiring an organization or individual to purchase a product or service in order to be allowed to obtain a second different product. For example, extending credit with the requirement that the borrower obtains other services with the bank.

Department of Justice (DOJ)

Reviews and approves proposed bank mergers and holding company acquisitions to determine their impact on competition as part of antitrust legislation.

International Association of Insurance Supervisors (IAIS)

Standard-setting group that represents insurance regulators and supervisory entities. Helps to ensure the maintenance of efficient, fair, safe, and stable insurance markets, ultimately benefiting and protecting policyholders.

Bank (Depository Institution)

The acceptance of depositors and provision of loans are the primary criteria used to define this type of FI; some cases, may be limited to servicing certain sectors or customer bases, but the deposit/loan criteria are still present. Makes profit by charging a higher rate on the money it lends than it pays for the deposits it accepts. Primary risks include default and liquidity risk.

International Organization of Securities Commissions (IOSCO)

The international standard setter for securities markets. Its membership regulates more than 95% of the world's securities markets, and is the primary international cooperative forum for securities market regulatory agencies.

Financial services industry

The key supplier of products and services used by treasury professionals

Single Euro Payments Area (SEPA)

The name of the European Union payments integration initiative. Focuses on the technical, legal, and commercial barriers to paying and/or receiving euros cross-border within SEPA boundaries. Establishes the minimum standards and common pricing for payments processing within the EU. Overall vision: - Integrating the multitude of existing national euro credit transfer and zero direct debit schemes into a single set of European payment schemes to make the euro a single and fully operational currency. -Creating a single standards for payment cards across national borders aims at ensuring a consistent customer experience when making or accepting payments with cards through the euro area. -Incentivize increased use of electronic payment instruments by standardizing practices while reducing the cost of wholesale cash distribution.

International Financial Markets

The primary regulators and standard setters of __ __ __ work cooperatively to try to better manage FIs internationally. Primary examples include: 1. Central Banks 2. Financial Stability Board (FSB) 3. Bank for International Settlement (BIS) 4. Basel Committee on Banking Supervision (BCBS) 5. European Payments Council (EPC) and Single Euro Payments Area (SEPA) 6. European Securities and Markets Authority (ESMA) 7. International Association of Deposit Insurers (IADI) 8. International Organization of Securities Commissions (IOSCO) 9. Financial Action Task Force (FATF) 10. International Association of Insurance Supervisors (IAIS)

Capital transfer

The transfer of savings to to those who might best use it

Financial institutions

Their primary role in the economy is to provide a mechanism for savers of capital to transfer that capital to those who might best use it

Consumer Protection

This regulator responsibility has a goal of providing acceptable access for consumers to financial services, credit, and financial information. It is designed to protect consumers, who are frequently assumed to lack bargaining power and are therefore considered "vulnerable" when entering into financial transactions. These regulations may also be used to prevent financial discrimination against certain sectors of the population.

Monetary Policy

This regulator responsibility includes the actions taken by the central bank to control the money supply and interest rates in that country. One of the key elements is determining the proper size of the money supply and imposing reserve restrictions on the FIs operating within their systems. Established by using the following techniques: 1. Managing reserve requirements 2. Buying and selling government securities 3. Setting an official interest rate used for lending to financial institutions

Investor Protection

This regulator responsibility is aimed at investment banks or brokerage services and is designed to protect investors who purchase securities through various types of FIs. FIs include investment banks, brokerages, mutual funds, or pension funds as well as banks. Most common types shield investors against abuses such as insider trading, lack of disclosure, outright malfeasance, and breach of fiduciary responsibilities.

Chartering process

This regulator responsibility is the establishment or opening of banks and other depository institutions and the guidelines as to the types of financial services they are allowed to offer. These regulations also typically specific the amount of capital needed to open a bank and may also limit the ownership of banks in a country by foreign entities.

Allocation of Credit

This regulator responsibility may require that a certain percentage of loans be made to specific sectors (i.e., housing or farming), or there may be limits on interest rates, prices, or fees in that sector. The results have significant impacts on the lending policies of banks operating within the country.

Safety and Soundness

This regulator responsibility, managing the __ __ __, includes: 1. Setting of minimal capital levels required of banks operating within the country 2. Ensure proper investment policies and diversification on the part of each bank 3. Some type of deposit insurance for investors funds held by the bank 4. Monitoring and surveillance (on-site examinations, financial statements)

Proprietary trading

Trading securities on the banks own account

Default / liquidity

__ (risk that borrower doesn't repay the loan) and __ (risk that the depositor will withdraw their deposits with little notice) risks could result in the collapse of a bank, depositors losing their money, and potential collapse of the entire banking system.