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8.2 Regulation of Financial Institutions

PLEASE NOTE: This book is currently in draft form; material is not final.

Learning Objective

  1. Describe the main regulatory acts for US markets and institutions.

Financial institutions face different regulations depending upon where they operate. Some countries, particularly those with communist ties, heavily control banks and who can invest and how. As the largest markets and most of the largest banks (as of this writing) are located in the USA, we will focus on the key regulations governing these bodies.

The Glass-Steagall Act of 1933Imposed banking reforms on relationships between investment and commercial banks and established the FDIC., in addition to separating investment from commercial banks, also established the Federal Deposit Insurance Corporation (FDIC), which insures deposits made by consumers at commercial banks. On the one hand, banks so insured benefit from the added perceived security, since depositors are confident that their money is secured by the government. This gives the FDIC, and thus the government, the ability to monitor insured banks and close those deemed unsound.

The Securities Act of 1933Limited affiliations between commercial and investment banks. and Securities Exchange Act of 1934Further regulated financial markets and established the SEC. created regulations governing the sale of securities (such as what can be promised and who can advise) and established the Securities and Exchange Commission (SEC)Federal agency responsible for regulating securities and enforcing federal securities laws. to enforce securities laws.

The Dodd-Frank Wall Street Reform and Consumer Protection ActChanged American financial regulatory environment by improving accountability and transparency. passed into law in July 2010 and gave the task to many government oversight agencies (FDIC, SEC, etc.) to enact more regulations. Certain provisions of Dodd-Frank are still being worked out legislatively (especially regarding the “Volker rule”, which regulates risky speculative trading by commercial banks). As the fallout from the latest crisis continues to be felt and understood, the nature of government regulation is bound to change.

Key Takeaway

  • Regulation is constantly changing, and a financial manager should monitor regulations that affect his or her business.


  1. On the whole, do you think that regulations are beneficial or a hindrance to financial institutions?