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Lessons from the History of the changing Regulatory Perimeter of US Banks

Summary:
Federal Reserve researchers had released an interesting paper in June-21 on the changing regulatory perimeter of US banks. The researchers have released a shorter version of the paper: Banking organizations in the United States have long been subject to two broad categories of regulatory standards. The first is permissive: a “positive” grant of rights and privileges, typically via a charter for a corporate entity, to engage in the business of banking.2 The second is restrictive: a “negative” set of conditions on those rights and privileges, limiting conduct and imposing a program of oversight and enforcement, by which the holder of that charter must abide.3 Together, these requirements form a legal cordon, or “regulatory perimeter,” around the U.S. banking sector. Inside that

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Federal Reserve researchers had released an interesting paper in June-21 on the changing regulatory perimeter of US banks.

The researchers have released a shorter version of the paper:

Banking organizations in the United States have long been subject to two broad categories of regulatory standards. The first is permissive: a “positive” grant of rights and privileges, typically via a charter for a corporate entity, to engage in the business of banking.2 The second is restrictive: a “negative” set of conditions on those rights and privileges, limiting conduct and imposing a program of oversight and enforcement, by which the holder of that charter must abide.3

Together, these requirements form a legal cordon, or “regulatory perimeter,” around the U.S. banking sector. Inside that perimeter are firms, or other legal persons, that can legally conduct a set of banking activities, subject to various forms of regulation and supervision. Outside that perimeter are firms conducting other financial and non-financial activity, under the broad heading of “commerce”—subject to other laws and restrictions, but not to the specific combination of positive grants and negative restrictions of the perimeter. A range of firms lie close to the boundary, blurring the distinctions between the two.

Today’s regulatory perimeter faces a variety of challenges and pressures—from the “unbundling” and “re-bundling” of the traditional banking business; to the growth of stablecoins, stored-value platforms, and other new technologies; to the entry of commercial firms into the financial services space; to the advent of new financial services charters, with new uses for old ones. These developments are the topic of substantial current scholarship.4

recent paper in the Finance and Economics Discussion Series (FEDS) attempts to situate these challenges within the broader history of federal banking law and, in so doing, to reveal new insights about the nature of the U.S. regulatory perimeter.5 This FEDS Note describes a handful of lessons that history holds for the perimeter challenges of today.

What are the lessons from this long history:

Lesson 1: The United States has always had a legal perimeter separating “banking” from “commerce.” That perimeter has rarely been clear; it has always been porous; and it has never been static.

Lesson 2: Challenges to the perimeter often follow a common pattern—starting with outside-in pressure, and frequently culminating in crisis.

Lesson 3: The core architecture of the U.S. perimeter is simpler than some current debates suggest.

Lesson 4: Nearly 40 years ago, Congress made an important and enduring shift in regulatory design. Over time, this shift has made the perimeter significantly more complex.

Very interesting paper which shows in pictures how the perimeter has changed. Similar paper is needed for India too!

Amol Agrawal
I am currently pursuing my PhD in economics. I have work-ex of nearly 10 years with most of those years spent figuring economic research in Mumbai’s financial sector.

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