United States: Banking & Finance

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This country-specific Q&A provides an overview of the legal framework and key issues surrounding banking and finance law in United States including national authorities, regulation, licenses, organisational requirements, supervision and assets.

This Q&A is part of the global guide to Banking & Finance.

For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/practice-areas/banking-finance/

  1. What are the national authorities for banking regulation, supervision and resolution in the jurisdiction?

    US banking law and regulation is deeply marked by the engagement of both state and federal government in chartering and supervising banking organisations. A patchwork of federal legislation that has developed since 1863 has gradually eroded, but not extirpated, state authority. Thus, the regulation of banks in the US is divided between the federal government and the states. This dual responsibility, sometimes called ‘dual regulation,’ significantly complicates any effort to understand the regulation of banks in the US. Both because federal law is supreme in its area of competence and because of an extraordinary expansion of the scope of the federal regulation of banking that has occurred in response to episodic crises affecting depository institutions, federal law is the most important element of dual regulation.

    There are three federal banking regulators primarily responsible for supervising banking organisations in the US: the Office of the Comptroller of the Currency, an independent division of the US Department of the Treasury (OCC), the Board of Governors of the Federal Reserve System, an independent agency and the central bank of the US (FRB), and the Federal Deposit Insurance Corporation, an independent agency that also is responsible for the insurance of deposits maintained by banking organisations (FDIC).

    The Consumer Financial Protection Bureau (CFPB) was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) with the objective of consolidating within a single agency consumer financial protection authority that had previously been dispersed across multiple financial regulators. The CFPB’s primary functions include issuing and amending regulations to implement various federal consumer financial protection statutes, pursuing enforcement actions under those laws and regulations, and developing consumer education initiatives.

    Bank Regulation
    There are essentially two kinds of commercial banking organisations in the US: national banks, which are chartered by the OCC under federal law, and state banks, which are often chartered by the applicable state banking supervisor under state law. All national banks that accept deposits are required to have deposit insurance from the FDIC and to be members of the Federal Reserve System, which is administered by the FRB. All state banks that accept deposits are required to have deposit insurance from the FDIC. State banks may, with the permission of the FRB, become members of the Federal Reserve System. Other types of depository institutions include mutual and stock-form savings banks, credit unions and savings associations.

    The principal federal supervisor of national banks is the OCC. The OCC has the power both to regulate and to examine the activities of national banks. Although national banks are subject to generally applicable state laws, national bank powers may not be expanded by the states and, because federal law is paramount, many state laws that purport to restrict the exercise of banking power have only limited effect on national banks. The states may not examine the general conduct of banking activities by national banks.

    While the principal regulator of state banks is the appropriate state regulator, each FDIC-insured state bank also has a principal federal regulator. If a state bank is a member of the Federal Reserve System (such banks are referred to as ‘state member banks’), its principal federal regulator is the FRB. If an FDIC-insured state bank is not a member of the Federal Reserve System (such banks, which as a group tend to consist of smaller banking organisations, are called ‘state nonmember banks’), its principal federal regulator is the FDIC.

    National banks and state member banks, as members of the Federal Reserve System, are subject to regulation under the Federal Reserve Act. The Federal Reserve System is comprised of twelve regional Reserve Banks, coordinated by a Board of Governors in Washington, DC. Several provisions of the Federal Reserve Act relating to safety and soundness have been made applicable to state nonmember banks as well.

    All FDIC-insured banks, state or national, are also subject to regulation by the FDIC to the extent necessary to protect the deposit insurance system.

    Bank Holding Company Regulation
    Most larger banking organizations in the US are organised as banking holding companies, in which one or more banks and various permitted nonbank companies are held under a common holding company that is supervised and regulated by the FRB under the Bank Holding Company Act of 1956 (BHC Act).

    Concern about the power of banking and, in particular, its association with general commercial activity has been a continuing popular concern in the US. The BHC Act was enacted to help address concerns with respect to perceived increases in the concentration of financial resources in bank holding company systems, geographic expansion of bank holding companies that appeared to threaten state regulation and local control of financial institutions, and the affiliation of banks with nonbanking companies, which was believed to threaten credit allocation and other unsound and unfair banking practices.

    Any company intending, directly or indirectly, to acquire control of a state or national bank must obtain the prior approval of the FRB under the BHC Act. Furthermore, any company that directly or indirectly controls a bank, must, with few exceptions, obtain approval of the FRB prior to acquiring more than 5% of any nonbanking company, and may acquire only companies that engage only in activities that are so closely related to banking as to be a proper incident thereto. Consequently, any company, including a foreign bank, acquiring a US bank is subject to significant federal regulation of its activities and investments in the US.

    Data concerning regulated bank holding companies, banks and affiliates in the US is available from the National Information Center:

    https://www.ffiec.gov/nicpubweb/nicweb/nichome.aspx

  2. Which type of activities trigger the requirement of a banking licence?

    While each state has the power to determine what ‘banking activities’ may only be conducted by a bank, at heart two activities are central to what constitutes banking activities. The first, and perhaps the most important, is the power to accept deposits subject to payment by check or order. At heart, commercial banking in the US consists of accepting deposits and making commercial loans, although not all deposit-taking banks (depository institutions) make commercial loans. The second is the power to exercise fiduciary powers, such as acting as trustee. While the term ‘bank’ technically covers both kinds of organizations, organisations that engage in only fiduciary activities and do not accept deposits are commonly referred to as nondepository trust companies. While most banks make ‘commercial’ and ‘consumer’ loans, lending is not a necessary marker of what it means to be a bank and many states regulate commercial lending as a standalone business only very lightly and it is generally not separately regulated at the federal level.

  3. Does the regulatory regime know different licenses for different banking services?

    While each state offers slightly different features as part of its regulation of banking, under federal law banks may be chartered to engage in accepting deposits and engaging in fiduciary activities. There are also some more specialised licenses, including savings and loan associations, which historically have focused on residential mortgage lending and credit unions, which are non-profit member organisations.

  4. Does a banking license automatically permit certain other activities, e.g., broker dealer activities, payment services, issuance of e-money?

    Banks have broad powers to engage in activities incidental to banking, including lending, discounting commercial paper and other financial assets, furnishing payment services, and providing advisory, transaction and settlement processing services. A bank with fiduciary authority may act as a trustee or personal representative of decedents.

    While banks broadly have the power to act as custodians of securities and to provide advice with respect to investments in securities, they have only a limited authority to engage in the activity of effecting transactions in securities. The limitation on the combination of securities activities and banking were first adopted by the Glass-Steagall Act, which constituted part of the Banking Act of 1933. While key provisions of the Glass-Steagall Act have since been repealed, banks are still prohibited from engaging directly or indirectly (with limited exceptions through a separate fully-licensed broker-dealer subsidiary) in dealing in, or underwriting (as part of public offerings), securities other than certain federal and state government and quasi-government securities. Other securities-related activities are permitted subject only to fairly significant limitations.

  5. What is the general application process for bank licenses and what is the average timing?

    The application process for a bank license depends on the type of bank charter and which federal or state agencies are involved in the application. Generally, bank charter applications take approximately six months to be approved. The approval process for banks is detailed, with chartering agencies generally looking at financial pro formas, the qualification and character of proposed management and directors, the bank’s business plan, capital adequacy, convenience and needs to the communities to be served and other factors. If a de novo institution wishes to engage in trust activities, it often must separately apply for trust powers. State banks that wish to be members of the Federal Reserve System must apply to the FRB for such membership. Depository institutions also must apply to the FDIC for deposit insurance. Deposit insurance has proved a nearly insuperable obstacle to new depository institution applications in recent years, although the FDIC approved seven applications during 2017, which hopefully marks a long-term change in policy.

  6. Is mere cross-border activity permissible? If yes, what are the requirements?

    The FRB has primary federal authority over the international operations of US banks and operations in the US of foreign banks.

    With the prior approval of the FRB, a national bank or state member bank may invest in foreign banks or other entities through which the bank may engage in activities that constitute the customary conduct of a banking business abroad. The FDIC must approve such activities for state nonmember banks.

    With the prior approval of the FRB and either an applicable state regulator or the OCC, a foreign bank may establish a branch, agency or commercial lending subsidiary in the US. A foreign bank that has a branch, agency or commercial lending subsidiary in the US is treated, for some purposes (including the acquisition of nonbanking activities in the US) as a bank holding company subject to the BHC Act.

  7. What legal entities can operate as banks? What legal forms are generally used to operate as banks?

    Banks themselves are the legal entities, most commonly in the form of corporations or similar associations. As described above, an organiser or organisers of a bank may select a specific type of bank charter, and the bank is organised in corporate form as that type of institution.

  8. What are the organisational requirements for banks, including with respect to corporate governance?

    Banks are subject to corporate governance requirements similar to other corporations, though the specific requirements applicable to a given bank depend on its charter. Banking organisations are required to establish and maintain internal policies and processes sufficient to identify, measure and assess potential operational, legal, compliance and financial risks, including without limitation, asset quality, earnings, liquidity, cash flow and other elements of capital and liquidity positions. Consolidated oversight and risk management on a company-wide basis is expected, though there are some limitations on the supervision or management of separate legal entities.

  9. Do any restrictions on remuneration policies apply?

    The Dodd-Frank Act prohibits incentive-based payment arrangements that encourage inappropriate risks by certain financial institutions. The US federal banking agencies have proposed a rule to implement these limitations, which has not yet been finalized. There are also restrictions, in connection with failed financial institutions, on the operation of “golden parachute” plans, in which the former senior management benefits from certain kinds of financial arrangements established by the failed institution. Other limitations on compensation apply in certain other contexts as well, depending on the bank charter and the activities or person in question.

  10. Has the jurisdiction implemented the Basel III framework with respect to regulatory capital? Are there any major deviations, e.g., with respect to certain categories of banks?

    Yes, the US has implemented the Basel III framework with respect to regulatory capital. The Basel Committee on Banking Supervision assessed the US Basel III regulations and stated in its December 2014 report that it regards the US regulations implementing the Basel III framework to be largely compliant overall (though some deviations were identified).

    BCBS, Regulatory Consistency Assessment Programme (RCAP) Assessment of Basel III regulations – United States of America (December 2014)

  11. Are there any requirements with respect to the leverage ratio?

    US federally-chartered banks must maintain a leverage ratio of at least 4 percent. Large, internationally active banking organisations—generally those with at least $250 billion in total consolidated assets or at least $10 billion in total on-balance sheet foreign exposure—are also subject to a supplementary leverage ratio of 3 percent. Bank holding companies with more than $700 billion in consolidated total assets or more than $10 trillion in assets under custody must meet an enhanced supplementary leverage ratio that is 2 percentage points greater than the supplementary leverage ratio.

  12. What liquidity requirements apply? Has the jurisdiction implemented the Basel III liquidity requirements, including regarding LCR and NSFR?

    The US has implemented Liquidity Coverage Ratio requirements applicable to large banking organisations. In 2016, the US federal banking regulators proposed a rule to implement Net Stable Funding Ratio requirements, which has not been adopted.

  13. Do banks have to publish their financial statements?

    Every national bank, state member bank, insured state nonmember bank and savings association is required to file quarterly Consolidated Reports of Condition and Income (Call Reports). Certain Call Report data are available to the public, though several items on the Call Reports are confidential and may not be available to the public. Reports submitted by US banks can be obtained from the following site:

    https://cdr.ffiec.gov/public/ManageFacsimiles.aspx

  14. Does consolidated supervision of a bank exist in the jurisdiction? If so, what are the consequences?

    The BHC Act provides for the FRB to supervise all domestic bank holding companies on a consolidated basis, encompassing the parent company and all subsidiaries, which allows the FRB to understand the organisation’s structure, activities, resources and risks and address deficiencies more efficiently. Under the International Banking Act of 1978, the FRB is also responsible for the overall supervision of US operations of foreign banking institutions with a US banking presence (including institutions that meet the definition of “qualifying foreign banking organisations,” the bulk of whose banking operations are conducted offshore). Consolidated supervision means not only that the FRB views the organisations it regulates comprehensively, but that subject organisations are charged to maintain comprehensive oversight and management of their aggregate risk exposures and identify concentrations quickly and accurately at the bank group level, across business lines and between legal entities. In the case of banks that are not part of bank holding companies, the bank and all of its subsidiaries are subject to consolidated supervision by their primary federal regulator.

  15. What reporting and/or approval requirements apply to the acquisition of shareholdings in, or control of, banks?

    There are no reporting or approval requirements that apply to the acquisition of shareholdings in banks, unless such a shareholding constitutes ‘control.’ If a company seeks to acquire ‘control’ of a bank, it must be approved by the FRB under the BHC Act. If an individual (or group of persons acting together in concert) seeks to acquire ‘control’ of a bank without the use of an intervening corporate entity, it must be approved by the principal regulator(s) of the bank under the Change in Bank Control Act or similar state laws.

    With some variation among laws, ‘control’ of a bank generally means ownership, control or power to vote (whether individually, or as a part of group) 25% or more of the outstanding shares of any class of the bank’s voting securities or the power, directly or indirectly, to direct the management or policies of the bank, although in some cases a “control” may be deemed to arise through a small shareholding.

  16. Does the regulatory regime impose conditions for eligible owners of banks (e.g., with respect to major participations)?

    As stated in response to Question 15, only shareholders that will have ‘control’ of a bank must be approved. When approving applications for shareholders to acquire ‘control’ of a bank, the appropriate bank regulatory agency or agencies will review certain factors, such as (i) competitive factors; (ii) financial condition of the person(s) or company seeking to acquire control of the bank; (iii) competence, experience and integrity of the acquiring person(s) or company; and (iv) other information necessary to determine if there is risk to depositors or the FDIC’s Deposit Insurance Fund if the person(s) or company obtains control of the bank.

  17. Are there specific restrictions on foreign shareholdings in banks?

    No. If a foreign (or any other) shareholder will obtain ‘control’ of a US bank, approval is required under the BHC Act or Change in Bank Control Act, as applicable. See our response to Question 15.

  18. Is there a special regime for domestic and/or globally systemically important banks?

    Yes. Large financial institutions generally pose the greatest risk to the financial system due to their size, complexity and interconnectedness, and they are accordingly subject to heightened regulation in the US. The largest and most complex bank holding companies and nonbank financial companies designated by the US Financial Stability Oversight Council as ‘systemically important’ (systemically important financial institutions or SIFIs) are subject to FRB supervision and significantly heightened expectations.

    Institutions with total consolidated assets of at least $50 billion that have not been designated as ‘systemically important’ are subject to some heightened expectations to a lesser degree than institutions that have received the designation. Foreign banking organizations with consolidated US assets in excess of $50 billion (other than as part of their branch or agency) are required to have an intermediate bank holding company that holds their US assets subject to comprehensive US supervision.

  19. What are the sanctions the regulator(s) can order in the case of a violation of banking regulations?

    The different federal and state bank regulatory agencies may take a variety of formal and informal enforcement actions against institutions they supervise and related individuals, which also depend on the nature of the violation. These enforcement actions include, among others, cease and desist orders, written agreements, orders assessing civil money penalties, removal and prohibition orders with respect to natural persons, commitments, board resolutions and memoranda of understanding. The authority of bank regulatory agencies to take such actions is quite broad and is exercised pursuant to an administrative scheme that requires no court involvement.

  20. What is the resolution regime for banks?

    The process for resolving failing depository institutions is different than the process applicable to other businesses. Depository institutions are not subject to general federal bankruptcy laws. Instead, a failing depository institution is subject to receivership (or conservatorship, in very rare cases), and the FDIC will serve as receiver in an administrative proceeding under the provisions of the FDIA. Generally, the FDIC as receiver is expected to maximise the return on the assets of the failed institution and minimise losses to the FDIC’s Deposit Insurance Fund that may result from the failure. The FDIC’s primary goals are to provide depositors with access to their insured deposits quickly and to handle the resolution in the least costly manner. The two basic methods for resolving failing institutions are (1) a purchase and assumption transaction between the FDIC, in its capacity as receiver, and a healthy financial institution in which the healthy financial institution purchases some or all of the assets and assumes some of the liabilities of the failed institution (including insured deposits) or (2) a deposit payoff where the FDIC, as insurer, pays all of the insured depositors of the failed financial institution up to applicable deposit insurance limits.

    Holding companies of depository institutions are usually subject to the general federal bankruptcy laws, with the exception of those designated as SIFIs. These situations are often complicated because the subsidiary depository institution is typically the cause of the holding company’s insolvency, and the holding company and depository institution are subject to different resolution regimes.

    The US supplemented its existing banking organisation insolvency regime to address the insolvency of failing SIFIs under the Orderly Liquidation Authority (OLA) provisions of Title II of the Dodd-Frank Act. The OLA provides an alternative to bankruptcy or other applicable liquidation proceeding, in which the FDIC acts as receiver to carry out the resolution of the various entities within a SIFI organization on a consolidated basis, including non-bank entities, such as insurance companies and broker-dealers (with some special procedures applicable to the latter).

  21. How are client’s assets and cash deposits protected?

    Deposits maintained with US branches of insured depository institutions are insured by the FDIC up to the maximum deposit insurance amount, which is $250,000 per depositor, per FDIC-insured institution, per ownership category. In addition, deposits are treated as a preferred unsecured claim senior to general claims of creditors.

    Except for funds that have been self-deposited, which are deposits treated as described in the previous paragraph, financial assets held with a bank as trustee or custodian in safekeeping are not subject to claims of the bank’s creditors.

  22. Does your jurisdiction know a bail-in tool in bank resolution and which liabilities are covered?

    US law does not provide for a ‘bail-in tool’ with respect to bank resolution.

  23. Is there a requirement for banks to hold gone concern capital (TLAC)?

    The FRB issued a Final Rule in 2017 that requires top-tier US bank holding companies identified by the FRB as US global systemically important banking organisations (G-SIBs) and US intermediate holding companies of foreign G-SIBs with at least $50 billion in consolidated US non-branch or agency assets to maintain minimum ratios of TLAC (generally consisting of Tier 1 capital and eligible long-term debt) and separate eligible long-term debt (among other requirements) by January 1, 2019. TLAC is required to be held by such entities and be available to absorb losses and free resources for key financial subsidiaries in the consolidated organization.

  24. What do you believe to be the biggest threat to the success of the financial sector ?

    Regulatory measures that inhibit the role of banks as providers of liquidity and emergency access to the central bank discount window seem likely to introduce greater brittleness to the US financial system and to increase the cost of liquidity in ways that may ultimately increase the likelihood of future crises.