Many people have said that we would never design our current regulatory system as it is if we were starting from scratch. But our current system has evolved with the country, and changed with the country’s needs.
The states were the first governments to charter banks in the United States. The Federal government chartered the First and Second Banks of the United States in the early 19th century. These were the first national banks, and performed functions similar to today’s Federal Reserve System. From 1837, when the Second Bank’s charter expired, to 1863, there were no national banks and no federal regulators.
The National Bank Act of 1863 created the Office of the Comptroller of the Currency, and authorized it to charter national banks. The original purpose of both the OCC and national banks was to circulate a universal currency, thus making tax collection easier and helping to finance the Civil War. The dual banking systern took shape in the late 19th century, as states reformed their chartering policies and regulatory systems in response to the National Bank Act.
A series of money shortages early in the 20th century made it clear that the country needed some central authority to monitor and control the money supply. The Federal Reserve Act of 1913 established this authority through a network of twelve Federal Reserve Banks, overseen by a Board of Governors. The Federal Reserve System had regulatory authority over all its member banks; this was the first time a federal agency had direct authority over state-chartered banks, although state bank membership in the Federal Reserve was voluntary.
The FDIC was created by the Banking Act of 1933, in response to the avalanche of bank failures that followed the stock market crash of 1929. The FDIC originally insured deposits up to $5,000. The 1933 Banking Act required all state-chartered banks to join the Federal Reserve within a certain period of time or lose their deposit insurance, but this requirement was eventually repealed. The FDIC established its own standards for state nonmember bank acceptance into the fund.
Bank holding companies were new corporate entities that began appearing in the 1940s. The banks were all regulated, but no one regulated the holding company subsidiaries that weren’t banks, and no one watched the flow of resources among affiliates within the holding company. The Bank Holding Company Act of 1956 gave the Federal Reserve regulatory responsibility for these companies, while leaving the supervision of banks within holding companies in the hands of their traditional regulators.
In 1989, the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) expanded the FDIC’s supervisory and enforcement authority, and extended its responsibilities to include savings and loans as the administrator of the new Savings Association Insurance Fund (SAIF).
Most recently, 1991’s FDICIA expanded the authority of federal regulators to intervene in troubled institutions. FDICIA also mandated specific enforcement actions for unhealthy institutions, the first time such provisions had been included in federal statutes.