Regulatory Issues in Financial Services Research Paper Starter

Regulatory Issues in Financial Services

(Research Starters)

This article will provide an overview of the regulatory issues in financial services. The article provides an introduction to financial services, which includes a history of the financial services industry, an explanation of the market share of the industry and descriptions of the major types of services offered by financial providers. In addition, this article also explains the most significant legislative regulations that have been enacted to govern the financial services industry, including a summary of the historical statutes that laid the framework for the modern finance and banking industries: The Sarbanes-Oxley Act of 2002, The Glass-Steagall Act, the Gramm-Leach-Bliley Act, and the Dodd-Frank Act. Further, the regulatory bodies that oversee the financial services industry are also described, including the Federal Reserve Board, the Securities and Exchange Commission, the Federal Deposit Insurance Corporation and the various self-regulatory organizations. Finally, the regulation of financial providers includes requirements for financial institutions to enter, expand or exit the market and to appropriately manage the risks inherent in the financial services industry; this article includes a brief description of each of these factors.

Keywords Charter; Commercial Bank; Credit Union; Depression; Federal Deposit Insurance Corporation; Federal Reserve Board; Investment Bank; Redlining; Savings & Loan Associations; Thrift Bank

Finance: Regulatory Issues in Financial Services


Financial services have been the focus of significant attention and legislation throughout the history of the United States. Even in the formation of the fledgling republic, many important legislative battles were waged over issues concerning the regulation of the financial industry. In the years following the Great Depression, the legislators of the New Deal created a regulatory framework that would govern the banking, securities and financial services industries. This shaped the nature and the practices of the financial services industry for over fifty years.

Recently, however, significant changes have taken place in the financial services industry. These changes have stemmed from technological advances, changing practices in financial services and new developments in governmental oversight. Their net effect has been to render obsolete many of the laws and regulations governing the industry, even as major statutes have been enacted in recent years that have transformed the financial services industry.

The following sections provide an overview of the financial services industry and introduce some of the most significant legislation that governs financial services providers today.

Introduction to Financial Services

Financial services refers to the duties and benefits related to money management and investment services that are provided by institutions within the finance industry, such as commercial banks, investment banks, insurance companies, credit card companies and stock brokerages. Financial services is the largest industry in the world in terms of earnings. In addition, the financial services industry is constantly changing as new technology and regulatory reforms have led to the transformation of financial institutions and significant developments in the services they provide.

The Gramm-Leach-Bliley Act of 1999 broke down some of the barriers that separated commercial and investment banking, and eliminated some of the restrictions that prevented full affiliation between securities firms and insurance underwriting activities. With the expansion of the services that financial institutions may now provide, many institutions that were formally considered banks, insurance companies or brokerage houses transformed their service offerings by introducing the provision of a full slate of financial services. For instance, companies that once exclusively dealt in insurance may now provide investment options such as certificates of deposit ("CDs") and investment brokerage accounts. Also, institutions that once offered only basic banking services now provide a full line of brokerage products, while companies that once focused only on brokerage accounts have expanded their offerings to include bank accounts and loans.

The following sections provide a more detailed explanation of the history of financial services, the market share of financial services providers and the types of services typically offered by financial services institutions.

History of Financial Services

During the 1970s, the banking industry remained balkanized, in that most states restricted the ability of out-of-state banks to open branches in their states, and all states prevented out-of-state bank holding companies from buying their banks. Thus, rather than the large, nationally integrated banking system of today, there were thousands of banks throughout the United States, although most of them were small, local offices. Beginning in the 1970s, banking deregulation drastically changed the banking landscape. Banks could begin to open branches across state lines, and out-of-state bank holding companies could purchase banks anywhere. These changes accelerated during the 1980s, and were completed in the middle of the 1990s with federal legislation allowing banks to operate nationwide. While some regulatory constraints remain in that banks may not hold more than 10 percent of deposits nationally, the banking system in the United States has become increasingly open and integrated (Strahan, 2006).

In addition to changes in banking deregulation, legislative changes began to allow investment companies to provide consumers with basic banking services. Thus, although most Americans conducted routine checking and savings business at local banks, bank assets began to decline as consumers began to take advantage of new alternatives to conventional ways of banking, such as CDs and money market funds, which yielded higher interest. As a result of these changes, the mid-1980s saw a significant increase in the number of bank failures.

To stay competitive, banks found loopholes in the Glass-Steagall Banking Act of 1933, the reigning legislative regime that governed the banking industry and restricted the services that banks could provide, and began to offer services outside of traditional banking activities by creating mortgage and financing subsidiaries and developing conveniences such as debit cards and automatic teller machines (ATMs). By the mid-1990s, the banking and financial services industries were no longer clearly defined. Finally, a wave of recent mergers and acquisitions among financial institutions has created powerhouse financial services companies that offer consumers an even greater range of services across a range of industries, including banking, insurance and investment management.

Although growth and profit continued in the 1980’s, the financial services industry also experienced significant losses. On October 19, 1987, the New York Stock Exchange closed with the largest single-day drop in its history, losing 508.32 points, or almost one-fourth of its value. Another significant event in the financial services industry was the failure of hundreds of savings and loan (S&L) institutions in the mid-1980s. One reason for the S&L failures stemmed from the debt burden carried due to low-interest mortgages offered in the 1970s when inflation and interest was high. A government bailout costing billions of dollars was implemented to pay the insured depositors of failed institutions.

Finally, the financial services industry experienced significant losses in the wake of the attacks on New York City on September 11, 2001. The World Trade Center, which was destroyed in the attacks, had held many banks, insurance companies, brokerages and securities firms. Many of these companies lost personnel and important documents and records. The months following these events saw a further contraction in an already sluggishh American economy. The events of 9/11 prompted the financial service industry to once again reevaluate its service offerings, and many of these institutions introduced more comprehensive electronic and virtual financial services. This trend will likely continue into the future.

Market Share

As a result of the regulatory changes to the banking sector during the mid 1970s to 1990s, banks became larger and better diversified. For example, the share of assets held by banks rose dramatically, and banks became not only bigger but also more geographically diverse. For instance, throughout most of the 1970s, only 10 percent of the banking-system assets in most states were owned by organizations with operations outside the state. By the mid 1990s, this figure had risen to about 65 percent, as reform allowed bank holding companies to buy banks across the country (Strahan, 2006).

The changes in bank regulations not only altered the size and geographical scope of banks, but also increased their efficiency. Banking deregulation increased competition among banks and bank holding companies, and this competition drove financial institutions to improve their efficiency while offering higher quality customer service and lower priced bank services (Strahan, 2006).

Today, the financial services industry constitutes the largest group of companies in the world in terms of earnings, although other industries log greater numbers in terms of total revenue or numbers of employees. The financial services industry remains extremely competitive, as no single financial institution dominates the market share, but rather a number of top companies continue to jostle for market superiority. Despite this fragmentation, financial service companies remain some of the most profitable companies in the world, and the financial services industry continues to grow exponentially.

Types of Services Offered

Financial institutions now offer a wide range of financial services. The major types of financial services are deposits and transfers, savings and checking accounts, short-term borrowing, long-term borrowing, insurance, investment services and credit and debit cards. This range of services allows financial services institutions to compete and keep more of the business of their customers in-house, since consumers are able to obtain a wide range of services from the same institution. In addition, these institutions are able to lure customers from other institutions by offering better rates on the same host of services. The following sections will explain the types of services that are typically offered by financial services providers in more detail.


The transfer of funds with negotiable instruments, such as checks, is one of the most useful of financial services. Transfers by check provide parties with control over the amounts and timing of the transactions and with a record that can be used as evidence of payments or other transfers. Funds may also be deposited or transferred electronically, which is often less expensive than paper check transfers, in that electronic deposits and transfers are typically completed almost instantaneously. Finally, funds may also be deposited or transferred by telephone, through the use of an ATM or through a wire service.


Most banks offer checking and savings accounts for their customers. These accounts allow individuals to store their income and savings in accounts that are federally insured up to a certain dollar amount and provide convenient access to the funds through withdrawals and checking services. In addition, many of these accounts offer interest rates that, while generally minimal, allow consumers to incur some interest on the money they have deposited with the financial institution. In turn, financial institutions such as banks and credit unions pool these deposits to use as assets that enable them to extend loans and mortgages, and borrowers pay the financial institution a return on the money in the form of interest payments.

Short-Term Borrowing

Short-term borrowing consists of consumer loans that individuals may borrow or debt that is incurred by businesses through borrowing and lending in commercial paper. Consumer loans are smaller loans that individuals may borrow from banks, credit unions and finance companies. The amounts lent and repayment terms are tailored to the demands of the borrower and the concerns of the lender. These loans may be secured by an individual's assets or they may be unsecured if the financial history of an individual borrower is exceptionally strong. Because borrowers and lenders benefit from a reasonably close, personal relationship in that borrowers are typically customers of the financial institution, lenders are able to offer some flexibility in the amounts, repayment schedules and other terms of the loans.

Commercial paper functions essentially as an alternative to a bank line of credit. Once a business becomes large enough and maintains a high enough credit rating, then it may use commercial paper as a cheaper alternative to obtaining short-term funds using a bank line of credit. Commercial paper also permits borrowers and lenders to avoid the costs of certain federal regulations regarding borrowing and lending through banks and other financial institutions....

(The entire section is 5870 words.)