2.2 Key Financial Regulations and Acts

Financial regulations shape the banking industry, protecting consumers and maintaining stability. Key acts like Glass-Steagall and Gramm-Leach-Bliley have defined the scope of banking activities, while Basel Accords set international standards for risk management.

Consumer protection is a major focus, with laws like the Truth in Lending Act and Dodd-Frank reform. These regulations aim to prevent abusive practices, ensure transparency, and safeguard the financial system from systemic risks.

Banking Regulations

Separation and Consolidation of Banking Activities

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• Glass-Steagall Act (1933) separated commercial banking from investment banking activities to prevent conflicts of interest and excessive risk-taking
• Gramm-Leach-Bliley Act (1999) repealed key provisions of the Glass-Steagall Act allowing banks to engage in a wider range of financial activities including securities underwriting and insurance (created "universal banks")
• Gramm-Leach-Bliley Act required financial institutions to disclose their information-sharing practices to customers and safeguard sensitive data

International Banking Standards and Risk Management

• Basel Accords established international standards for bank capital adequacy and risk management
  • Basel I (1988) set minimum capital requirements for banks based on credit risk
  • Basel II (2004) introduced more risk-sensitive capital requirements and supervisory review process
  • Basel III (2010) strengthened bank capital requirements, introduced liquidity standards, and improved risk management practices in response to the 2008 financial crisis
• Basel Accords aim to ensure banks maintain sufficient capital to absorb losses and promote financial stability

Anti-Money Laundering and Financial Crime Prevention

• Bank Secrecy Act (BSA) requires financial institutions to assist U.S. government agencies in detecting and preventing money laundering
  • Mandates reporting of suspicious activities (SARs) and currency transactions over $10,000
  • Requires banks to implement customer identification programs (CIP) and perform due diligence on customers
• Anti-Money Laundering (AML) regulations build upon the BSA to combat financial crimes such as terrorist financing and drug trafficking
  • USA PATRIOT Act (2001) expanded AML requirements for financial institutions including enhanced customer due diligence and information sharing with law enforcement
  • Financial Crimes Enforcement Network (FinCEN) oversees and enforces BSA/AML compliance

Consumer Protection

Truth in Lending and Fair Credit Reporting

• Truth in Lending Act (TILA) promotes informed use of consumer credit by requiring lenders to disclose key terms and costs (annual percentage rate, finance charges, etc.)
  • Gives consumers the right to cancel certain credit transactions within three days
  • Regulates advertising of credit terms to prevent deception
• Fair Credit Reporting Act (FCRA) regulates the collection, dissemination, and use of consumer credit information
  • Gives consumers the right to access their credit reports, dispute inaccurate information, and be notified if information is used against them
  • Requires consumer reporting agencies to follow reasonable procedures to ensure accuracy and protect privacy of credit information

Comprehensive Financial Reform and Consumer Advocacy

• Dodd-Frank Wall Street Reform and Consumer Protection Act (2010) enacted sweeping financial regulatory reform in response to the 2008 financial crisis
  • Created the Consumer Financial Protection Bureau (CFPB) to regulate consumer financial products and services
  • Prohibited unfair, deceptive or abusive acts and practices (UDAAP) by financial institutions
  • Established the Volcker Rule to restrict banks from proprietary trading and certain investments
  • Enhanced regulation of systemically important financial institutions (SIFIs) to prevent "too big to fail" scenarios
• Dodd-Frank aimed to promote financial stability, improve accountability and transparency, and protect consumers from abusive practices

Financial Reporting and Governance

Corporate Responsibility and Accounting Oversight

• Sarbanes-Oxley Act (SOX) of 2002 enhanced corporate responsibility, financial disclosures, and combat accounting fraud in response to high-profile corporate scandals (Enron, WorldCom)
  • Established the Public Company Accounting Oversight Board (PCAOB) to oversee audits of public companies
  • Required corporate executives to certify accuracy of financial reports and face criminal penalties for fraudulent financial statements
  • Mandated auditor independence by prohibiting certain non-audit services and requiring audit partner rotation
  • Strengthened internal control requirements over financial reporting (Section 404)
• SOX aimed to restore investor confidence in capital markets by improving the accuracy and reliability of corporate financial disclosures