Banks are only one of several kinds of financial institutions that offer financial services to their patrons. The term “bank” is often used as a collective term to describe any one of the numerous forms of financial institutions. Banks, like most other banklike financial institutions, are established by charters. A charter is official permission from a regulating authority (like a state) to accept deposits and/or to provide financial services. Charters provide the specifics of a bank’s powers and obligations. State and federal governments closely regulate banks and bank accounts. Accounts for customers may be established by national and state financial institutions, all of which are regulated by the law under which they are established.
The federal government regulated and controlled interest rates on bank accounts for many decades. There was a cap on interest rates for savings accounts, and most interest bearing payments-on-demand deposit accounts (e.g. checking accounts) were prohibited. Banks were also prevented from offering money market accounts. But sweeping changes in banking law in the early 1980s transformed the way banks and other financial institutions do business. For example, interest rate controls on savings accounts were eliminated by the Depository Institutions Deregulation Act of 1980 (DIDRA), and the Garn-St Germain Depository Institutions Act and the DIDRA lifted restrictions on checking and money market accounts.
One common and important service offered by banking institutions is the checking accounts. Federal and state laws govern the operation of checking accounts. Article 4 of the Uniform Commercial Code, which has been adopted at least in part by every state, enumerates the rights and obligations between financial institutions and their customers with respect to bank deposits and collections. The five principal sections of Article 4 cover the following:
- general provisions and definitions.
- the actions of one bank in accepting the check of another and those of other banks that handle the check but are not responsible for its final payment
- the actions of the bank responsible for payment of the check
- the relationship between the bank responsible for payment of the check and its customers
- the handling of documentary drafts, which are checks or other types of drafts that will only be honored if certain papers are first presented to the institution responsible for payment of the draft.
Checks are commercial documents called “negotiable instruments.” Negotiable instruments are mainly governed by Article 3 of the Uniform Commercial Code. All states have adopted Article 3 of the Uniform Commercial Code (UCC), with some modifications, as the law governing negotiable instruments. Other types of negotiable instruments include drafts and notes. Drafts are documents ordering some type of payment to be made to a person or an institution. Checks are one kind of draft. Notes are documents promising payment will be made. A mortgage is a kind of note. Money, investment securities, and some forms of payment orders are not considered negotiable instruments under Article 3.
In the Great Depression, banks that could not meet their financial obligations to their customers or their creditors failed (became bankrupt). Because the deposits were not insured, individuals and businesses with money on deposit at the time a bank failed lost whatever was in the account at the time the bank failed. The depression and the banking crisis of the 1930’s gave rise to the development of federal insurance for deposits administered by the Federal Deposit Insurance Corporation (FDIC). The program is funded from premiums paid by member institutions. Under the FDIC, individual bank accounts at insured institutions are protected up to $100,000. Multiple accounts in a single financial institution and belonging to the same customer are combined for purposes of the FDIC limits.
Banks are strictly regulated by three federal agencies. Banks are also subject to regulation by state bank regulators.
The federal agencies are given below:
- Comptroller of the Currency (for national banks)
- Federal Deposit Insurance Corporation
- Federal Reserve Board
States regulate banks through their banking commission or department of banking and finance. An official called the Commissioner or Director or Superintendent of Banks manages the state’s banking commission or department of banking and finance. These state banking authorities may regulate only banks that have been chartered by the state.
The Gramm-Leach-Bliley Act, signed into law on November 12, 1999, is one of the most significant pieces of banking legislation in over fifty years. This law is the result of decades of effort to restructure the U. S. financial system. The Gramm-Leach-Bliley Act is complex and far-reaching, and contains a host of banking and financial services issues. Perhaps the most important feature of the Act is that it permits formal affiliations among banks, securities firms, and insurance companies. With the passage and implementation of these laws, the entire U. S. banking industry has been transformed. The U. S. banking system is innovative, yet it remains one of the safest, most secure systems in the world. It is also one of the most complex.