Chapter 2
Government Policies and Regulation
Chapter Objectives
1. Describe the regulatory environment in which financial services companies compete.
2. Describe the goals and functions of depository institutions.
3. Evaluate how the regulation of depository institutions impacts their safety and soundness .
4. Outline how the Federal Reserve maintains monetary stability.
5. Examine how regulation of financial institutions impacts the efficiency and competitiveness of the
financial system.
Key Concepts
1. Historically, commercial banks have been regulated more than firms in any other industry. The close
supervision by regulators follows from the use of deposit insurance whereby for qualifying deposits,
the owners’ funds are insured by the Federal Deposit Insurance Corporation. Any failure required
that the owner receive the full amount of the insured deposit.
2. The primary objectives of regulation are to:
a. Ensure the safety and soundness of the financial system
b. Provide and efficient and competitive financial system
c. Maintain monetary stability and the integrity of the payments system
d. Protect consumers of financial services from abuses
3. The supervision of financial institutions (both depository and non-depository) is done by a variety of
entities, including the Federal Reserve, the FDIC, the OCC, the OTS, the NCUA, and the various state
banking boards. Responsibility for oversight often overlaps across the various agencies.
4. The limit federal deposit insurance has been increased to $250,000 per depositor through the end of
2013. Because of the increase in bank failures, the Deposit Insurance Fund is below its goal of 1.25%
of deposits.
5. Depository financial institutions are highly regulated in the products and services they can o?er.
Some of the allowed are activities include:
Branching
Consulting and financial advice
Corporate governance
Correspondent service
Finder activities
Leasing
Lending
Payment services