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central bank and trust hutchinson

The Federal Reserve System is the central bank of the United States and limited-purpose trust companies to engage in various activities related to. It took a while, but in 1977, this branch opened. Eventually, Central State Bank's name changed to Central Bank & Trust. In 2018, RCB Holding Co. Central Bank And Trust Co. The address is 700 East 30th Avenue, Hutchinson, US-KS, 67502, US. Other Entity Names, Central State Bank.

Central bank and trust hutchinson -

Jack and Janet AyresGetting to know Earl McVicker

Earl McVicker has just completed a term as vice chairman of the foundation's board of trustees. Earl graduated from K-State's College of Agriculture in 1971 and earned a graduate degree in banking from the University of Colorado in 1975. He is chairman, president and CEO of Central Financial Corporation and its subsidiary, Central Bank and Trust Co. of Hutchinson, Kan., and currently sits on the board of Community First National Bank in Manhattan, Kan. Previous appointments include chairman of the American Bankers Association (ABA) and the ABA Community Bankers Council, president and chairman of the Kansas Bankers Association, and president of the K-State Alumni Association board. He and his wife Molly live in Hutchinson, Kan., have three adult children, and are members of the KSU Foundation President's Club and lifetime members of the K-State Alumni Association.

What has serving on the KSU Foundation board of directors meant to you? Do you have any favorite memories?
Serving on the board of the KSU Foundation has allowed me to observe all aspects of the foundation —fundraising, investments, stewardship and its financial contributions to the university through scholarships and other university needs. It has given me a greater understanding of the needs of the university and how the foundation serves as an essential supporter of the university. The most enjoyable part has been observing the positive impact the foundation has had on the university and the students. The most memorable event was the celebration of the success of the Changing Lives Campaign.

How did your experience at K-State influence you in your professional life? Why is K-State important to you?
My experience at K-State influenced all aspects of my life. I met Molly, my wife of 41 years, on Halloween night when we were freshmen. She has been a very positive influence on my personal and professional life. K-State was where I built the base for my professional career — it's a family with a culture of caring.

Why is philanthropy important?
Philanthropy is about providing support, financial and otherwise, to those with needs. We have all benefitted from the contributions of others. It is important that continue this philosophy by giving our own time and resources.

In the years you've served on the board and in other roles with the foundation, what is something your colleagues may not have learned about you?
I was the valedictorian of my eighth grade class. I was also the only student in my class in a one-room grade school in Ness County. Many folks only see me as banker in a suit; however, on evenings and weekends, I am usually in boots and jeans and am most comfortable on a horse, my Harley-Davidson or in my farm pickup.

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Источник: https://www.ksufoundation.org/making-a-difference/1111_earlmcvicker.html

Richard Chambers

ABOUT Richard

Richard is a wealth management consultant for Commerce Trust Company. He facilitates the introduction of our prospective clients to a comprehensive service team which includes private banking, investment management, trust administration, and financial planning. Richard provides an integrated and seamless experience as we partner with clients to meet their long-term goals and objectives.     

Prior to joining Commerce Trust Company, he was a Senior Vice President and Senior Trust Officer in Bank of America’s Private Bank (formerly U.S. Trust) in Wichita, Kansas; a Senior Vice President and Manager of the Trust and Investment Divisions of Central Bank and Trust Co. in Hutchinson, Kansas; and a Vice President and Relationship Manager with BANK IV, Boatmen’s and NationsBank, all in Wichita. Before entering banking, he was a practicing attorney in Wichita, whose practice focused on trusts and estates, tax, and employee benefits.         

Richard earned a Bachelor of Business Administration degree in economics, with Special Distinction, from the University of Oklahoma; a Juris Doctor degree from the University of Kansas; and a Master of Laws in taxation from the University of Missouri-Kansas City.     

 
Richard is active in his community and profession, serving on the Board and as a Past President of the Wichita Estate Planning Council, and on the Wichita Catholic Diocese Planned Giving Advisory Council. He previously served on the Boards of the Wichita Symphony Orchestra, Hutchinson/Reno County Chamber of Commerce, TECH Foundation and Hospice of Reno County. He was also Past President of the Rotary Club of Hutchinson, and a Past Advisory Trust Committee member and faculty member for the Kansas and Nebraska Schools of Banking. Richard enjoys watching his favorite sports teams—K-State football and basketball, Kansas City Royals and Chiefs, and the St. Louis Blues. He also enjoys family game and movie nights with my wife and two children.  

Источник: https://www.commercetrustcompany.com/contact-us/our-team/a-g/richard-chambers

Central Bank and Trust Co.

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700 E 30th Ave, Hutchinson, KS, 67502

(620) 663-0617

Category:Banks

Website:centralbank-kansas.com

Email: N/A

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Map of Central Bank and Trust Co. in Hutchinson, KS

700 E 30th Ave
Hutchinson, KS, 67502

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Hours of Operation
  • Monday 8:00 AM - 5:00 PM
  • Tuesday 8:00 AM - 5:00 PM
  • Wednesday 8:00 AM - 5:00 PM
  • Thursday 8:00 AM - 5:00 PM
  • Friday 8:00 AM - 5:00 PM
  • Saturday Closed
  • Sunday Closed
Reviews & Discussion

12 visits to Central Bank and Trust Co. Hutchinson on 30th Ave

Источник: https://banks.cmac.ws/central-bank-and-trust-co/50025/

Central Bank and Trust Co.

5 Branch Locations

Not Yet Rated

About Central Bank and Trust Co.

Central Bank and Trust Co. was established on April 22, 1915. Headquartered in Hutchinson, KS, it has assets in the amount of $264,981,000. Its customers are served from 5 locations. Deposits in Central Bank and Trust Co. are insured by FDIC.

Established On:
April 22, 1915
FDIC Certificate Number:
11772
Total Assets:
$264,981,000
Deposit Insurance:
FDIC
Community Bank:
Yes
Asset Concentration:
Commercial Lending Specialization
Institution Class:
Commercial bank, state charter and Fed nonmember, supervised by the FDIC

5 Central Bank and Trust Co. Branch Locations

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Источник: https://www.branchspot.com/central-bank-and-trust-co/
USA

The banking industry has long been one of the most highly regulated industries in the United States, based on the “special” role that banks play in taking deposits, allocating credit, and operating the payments system.

This chapter provides an overview of the current U.S. bank regulatory framework at the federal level.  The United States has what is called a “dual banking system”, meaning that U.S. banks can be chartered by one of the 50 states or at the federal level.  However, whether state or federally chartered, a bank will have at least one federal supervisor.

Most banks in the United States are owned by bank holding companies (“BHCs”), which are generally prohibited from owning or controlling entities other than banks or companies engaged in activities that are “closely related to banking”.  For BHCs that elect to be treated as financial holding companies (“FHCs”), the standard is “activities that are financial in nature or complementary to a financial activity”.  A foreign banking organisation (“FBO”) may establish a banking presence in the United States through a branch or agency or by establishing or acquiring a U.S. bank or Edge Act Corporation subsidiary.

Over the past several years, many regulatory initiatives in the United States have derived from the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), which was a vast set of reforms enacted in 2010 in response to the financial crisis of 2007–2009.  Many provisions of the Dodd-Frank Act focus on the largest financial institutions, those with $50bn or more in total assets, due to their perceived role in causing the financial crisis and the perception of such institutions as “too big to fail”.  More recently, legislation passed by Congress and regulatory initiatives undertaken by U.S. federal regulatory entities have repealed or revised certain provisions of the Dodd-Frank Act, with several initiatives being focused on “tailoring” regulatory and supervisory requirements (such as capital, liquidity, risk management, and resolution planning) based on the size and risk profiles of banking organisations (“tailoring rules”).

The United States has a complex regulatory framework that features a myriad of federal regulatory agencies having often overlapping responsibility for banking regulation.  A brief description of the relevant bank regulatory agencies follows:

  • The Board of Governors of the Federal Reserve System (“Federal Reserve”)

The Federal Reserve System is the central bank of the United States and conducts U.S. monetary policy.  In addition, the Federal Reserve supervises BHCs, FHCs, state-chartered banks that are members of the Federal Reserve System, the U.S. activities of FBOs, and systemically important financial institutions (“SIFIs”) designated by the FSOC (as described below).

  • The Federal Deposit Insurance Corporation (“FDIC”)

The FDIC is the primary regulator for state-chartered banks that are not members of the Federal Reserve System as well as state-chartered thrifts.  The FDIC also insures bank and thrift deposits and has receivership powers over FDIC-insured banks and certain other institutions.

  • The Office of the Comptroller of the Currency (“OCC”)

The OCC is an independent bureau of the U.S. Department of the Treasury led by the Comptroller of the Currency that charters, regulates, and supervises all national banks and federal savings associations as well as federal branches and agencies of foreign banks (although most FBOs operate through state-licensed branches).

  • The Consumer Financial Protection Bureau (“CFPB”)

The CFPB has primary authority to develop consumer protection regulations applicable to both banks and non-banks, and to enforce compliance with such laws by banks with $10bn or more in assets and their affiliates, as well as by certain non-banks.

  • The Financial Stability Oversight Council (“FSOC”)

The FSOC is chaired by the Secretary of the Treasury and comprises the heads of eight financial regulators and one independent member with insurance experience.  Notably, the FSOC is empowered to designate systemically important non-bank financial institutions (generally referred to as non-bank SIFIs) for supervision by the Federal Reserve.  However, no such institutions are currently designated by the FSOC. 

Primary federal banking statutes

  • The National Bank Act (1863) created the basic framework for the U.S. banking system and the chartering of national banks.
  • The Federal Reserve Act, enacted in 1914, created the Federal Reserve System.
  • The Banking Act of 1933 generally separated commercial banks from investment banks and created the system of federal deposit insurance.
  • The Federal Deposit Insurance Act (“FDI Act”) consolidated prior FDIC legislation into one act and authorised the FDIC to act as the receiver of failed banks.  Section 18(c) of the FDI Act, commonly called the Bank Merger Act, subjects proposed mergers involving FDIC-insured depository institutions to prior regulatory approval.  Section 7(j) of the FDI Act, commonly called the Change in Bank Control Act, subjects certain acquisitions of FDIC-insured institutions to prior regulatory approval.
  • The Bank Holding Company Act of 1956 (“BHC Act”) requires Federal Reserve approval for a company to acquire a bank (and thereby become a BHC) and requires BHCs to obtain prior Federal Reserve approval to acquire an interest in additional banks and certain non-bank companies.
  • The act commonly known as the Bank Secrecy Act (“BSA”) (1970) requires all financial institutions, including banks, to establish a risk-based system of internal controls to prevent money laundering and terrorist financing.
  • The International Banking Act of 1978 (“IBA”) establishes the framework for federal supervision of foreign banks operating in the United States.
  • The Gramm-Leach-Bliley Act (“GLB Act”) (1999) generally repealed the provisions of the Banking Act of 1933 that separated investment banks from commercial banks (the Glass-Steagall Act) and authorised the creation of FHCs.
  • The Dodd-Frank Act (2010) has been the greatest legislative overhaul of financial services regulation in the United States since the 1930s and made significant changes to the U.S. bank regulatory framework.
  • The Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRCPA”) (2018) relaxed the regulatory requirements imposed by Dodd-Frank for all but the very largest banks, those with $250bn or more in total assets.

COVID-19 pandemic

Beginning in March 2020, the Novel Coronavirus (“COVID-19”) pandemic impeded much economic activity in the United States and globally.  In response, the U.S. federal and state governments, including banking and financial regulators, implemented certain legislative and regulatory actions to mitigate the impact of the COVID-19 pandemic on the economy and the financial system.  Such actions included mandatory forbearance on loans, regulatory relief with respect to bank capital and liquidity requirements, establishment of liquidity facilities similar to those employed during the 2008 financial crisis, and the extension of certain compliance deadlines.

Political change

U.S. banking regulators have frequently implemented a more stringent (“super equivalent”) version of rules that are part of the post-financial crisis regulatory agenda established by the Dodd-Frank Act and by international standard-setting groups such as the Group of Twenty, the Basel Committee on Banking Supervision (“Basel Committee”) and the Financial Stability Board.  During the Trump Administration, this trend toward super equivalent rules was curtailed, and efforts became more focused on tailoring and adding transparency to regulatory requirements.  For example, EGRRCPA tailored certain provisions of the Dodd-Frank Act and generally reduced regulatory requirements for banks holding less than $250bn in total consolidated assets.

With the election of President Joseph R. Biden, Jr. and Democratic control of Congress in 2020, there will be new regulatory and enforcement priorities for the financial services and financial technology (“fintech”) industries.  As President, Mr. Biden will have several opportunities to nominate federal financial regulatory agency heads and other officials for key posts.  The agendas for U.S. financial regulatory agencies will change in 2021 to reflect the priorities of the Biden Administration.  Key themes include supporting the U.S. economic recovery, advancing racial justice and equity, combatting climate change, and enhancing consumer protection.  However, major financial regulatory legislative initiatives are not expected to be a top priority of the new Administration.

With respect to climate change, the Federal Reserve stated in December 2020 that it formally joined the Network of Central Banks and Supervisors for Greening the Financial System, a global peer group that is addressing the climate’s impact on the financial services industry.  The Federal Reserve also announced the creation of a committee to better understand the risks that climate change may pose to the financial system.

Addressing innovation

Another area of increasing regulatory focus is the potential licensing of fintech companies.  Some states, such as Wyoming, have issued limited-purpose bank charters to such companies.  The OCC is also considering granting special purpose federal bank charters to fintech companies.  The grant of such special purpose federal charters would allow fintech companies to comply with a single set of national standards, rather than having to comply with the regulations of multiple states.  In 2017, the OCC adopted a new rule creating a formal receivership process for uninsured special purpose national banks.  In July 2018, the OCC issued a supplement to its Licensing Manual explaining how it would apply its existing standards to fintech companies applying for special purpose national bank charters.  State regulatory authorities have challenged (with some success so far) the OCC’s authority to issue such charters.  These challenges are pending as of February 2021. 

Another area of emerging regulation involves cryptocurrency activities.  In July 2020 and January 2021, the OCC published letters clarifying national banks’ and federal savings associations’ authority to: (i) provide cryptocurrency custody services for customers; and (ii) participate in independent node verification networks and use stablecoins to conduct payment activities and other bank-permissible functions, respectively.  The OCC and certain states (including New York) have also chartered limited-purpose trust companies to engage in various activities related to cryptocurrency.  Such trust companies generally are limited to fiduciary activities and may not accept deposits and are not FDIC-insured.  Anti-money laundering (“AML”) laws are also being revised to address cryptocurrency activities.

The proliferation of technologies employing Artificial Intelligence (“AI”) is leading to increased regulatory scrutiny of such technology.  AI is most prominently used by banks and fintech companies in: (i) underwriting loans; and (ii) monitoring for and detecting suspicious activity related to money laundering or otherwise fraudulent activity.  While AI adds efficiency and efficacy with respect to these processes, it may also lead to bias or “digital redlining” (in the case of loan underwriting), or materially significant failures with respect to monitoring and detection (in the case of AML monitoring).

Cybersecurity

Cybersecurity has also been an area of increasing focus, and the U.S. federal banking agencies have issued potential standards for comment.  Moreover, under rules that took effect in 2019, the New York State Department of Financial Services (“NYSDFS”) now requires banks, insurance companies, and other NYSDFS-regulated institutions to adopt a cybersecurity programme that meets certain minimum standards.

Control under the BHC Act

The concept of control is of significant importance under the BHC Act because it determines (among other things) whether a company controls a bank and thus becomes a BHC subject to the limitations and requirements of the BHC Act and to Federal Reserve prudential supervision.  In addition to statutory bright-line thresholds of control, a company (the “investor”) has control over another company (the “target”) if the investor company directly or indirectly exercises a “controlling influence” over the management or policies of the target company.  In 2020, the Federal Reserve issued a final rule that was intended to codify Federal Reserve practice in applying this “controlling influence” prong of control.  The key feature of the final rule is a series of rebuttable presumptions of control based on tiered levels of ownership of voting securities and other relationships (e.g., directorships, governance rights, and business relationships) between the investor and target companies.

Industrial banks and their parent companies

Industrial banks and industrial loan companies (collectively, “ILCs”) are state-chartered insured depository institutions that are “banks” for purposes of the FDI Act but not the BHC Act.  As a result, their parent companies are not subject to the limitations of the BHC Act or prudential supervision by the Federal Reserve.  For several years, there had been a moratorium on transferring control of existing ILCs or obtaining deposit insurance for new ILCs.  The moratorium ended with certain FDIC approvals for deposit insurance for new ILCs.  In late 2020, the FDIC adopted a final rule that imposes certain conditions and requirements on newly chartered or acquired ILCs and their parent companies.

The board of directors and senior management of a banking organisation are responsible for ensuring that the institution’s internal controls operate effectively in order to ensure the safety and soundness of the institution.  Improving bank governance and increasing the role and responsibilities of boards of directors and the risk-management function of banking organisations have been key areas of focus for U.S. banking regulators.

Board of directors

Generally, U.S. corporate law requires that boards of directors exercise a fiduciary duty of loyalty and duty of care to the corporation and its shareholders.  Boards of directors of banking organisations must perform these duties, with a focus on preserving the safety and soundness of the bank.  State and federal law also impose various citizenship, residency, independence, and expertise requirements on bank boards of directors.

While many regulations make it clear that the board’s role is to oversee and delegate to management, bank boards of directors also have significant responsibilities for overseeing and approving many of the actions taken by the institution under a variety of statutes, regulations, and supervisory guidance.  For example, boards of directors are required to approve an institution’s resolution plan, various risk tolerance levels and policies and procedures for stress testing.  In August 2017, the Federal Reserve Board requested public comment on a proposed new rule aimed at clarifying and narrowing the respective responsibilities of boards of directors and management, with the purpose of allowing boards of directors to focus their time and energy on their core responsibilities.  The proposal remains pending.

Boards of directors themselves have also recently become subject to additional prescriptive requirements regarding their structure and composition.  For example, the OCC has adopted “heightened standards” applicable to large national banks that require a bank’s board of directors to include two independent members and impose specific requirements on the board regarding recruitment and succession planning.

Risk management

Risk management is a critical function within banking organisations, and the function has been subject to increasingly prescriptive regulation because risk-management failures were perceived to be a significant cause of the financial crisis.

Banks subject to the OCC’s heightened standards guidelines are required to have one or more Chief Risk Executives who report directly to the CEO and have unrestricted access to the board and its committees to escalate risks.  Such banks also must have a written risk-governance framework, a risk-appetite statement, and a strategic plan that is reviewed and approved by the board or the board’s risk committee.

U.S. BHCs with total consolidated assets of $50bn or more must establish a risk-management framework, designate a Chief Risk Officer (“CRO”), and establish a board-level risk committee with at least one independent member and one risk-management expert.

FBOs also must maintain a U.S. risk committee, and larger FBOs are also required to appoint a U.S. CRO who is employed and located in the United States and reports directly to the U.S. risk committee and the global CRO or equivalent officials.  The tailoring rules eliminated the U.S. risk-committee requirement for FBOs with less than $50bn in total consolidated assets and require only those FBOs with $100bn in total consolidated assets and $50bn of combined U.S. assets to appoint a U.S. CRO. 

More recently, Federal Reserve and OCC enforcement actions have emphasised a renewed focus on risk management and expectations around board oversight over risk management.

Internal and external audit

The internal audit function within banking organisations generally is responsible for ensuring that the bank complies with its own policies and procedures and those required by law and regulation.  In the United States, internal audit must be positioned within the institution in a way that ensures impartiality and sufficient independence.

Internal audit must maintain a detailed risk assessment methodology, an audit plan, audit programme, and audit report.  The frequency of the internal audit review must be consistent with the nature, complexity, and risk of the institution’s activities.  The audit committee is responsible for overseeing the internal audit function.  The composition of the audit committee has similar requirements to that of the risk committee, depending on the size of the institution and supervising federal regulator.

FDIC regulations impose specific independent audit committee requirements on depository institutions that vary by the size of the institution, with institutions having total assets of more than $3bn subject to the most stringent requirements. 

The OCC heightened standards guidelines additionally require that the audit function of banks subject to the guidelines be led by a Chief Audit Executive who must be one level below the CEO, have unfettered access to the board, and report regularly to the audit committee of the board.

U.S. regulators also expect the internal audit function of foreign banks to cover their U.S. activities and offices, including U.S. representative offices.

Compensation

In the mid-1990s, the U.S. federal banking agencies adopted standards prohibiting compensation arrangements that were excessive or could lead to a material financial loss.  After the financial crisis, new legislation introduced significant restrictions on compensation for senior executive officers of firms that received certain forms of government assistance, including limits on bonuses, clawback requirements, and various governance requirements.

The U.S. federal banking agencies issued guidance on sound incentive compensation policies in 2010 that applies to all banking organisations supervised by the agencies and is structured around three key principles: (i) balance between risks and results; (ii) risk controls; and (iii) strong corporate governance. 

A proposed rule from 2016 that would generally prohibit the use of incentive compensation programmes that encourage inappropriate and excessive risk-taking for financial institutions with more than $50bn in total consolidated assets has not yet been finalised.

Intermediate holding company (“IHC”) requirement

Implementing a major change in the U.S. regulation of foreign banks, the Federal Reserve required FBOs with $50bn or more in U.S. non-branch or non-agency assets to establish an IHC by July 1, 2016.  The IHC must hold an FBO’s U.S. BHC and bank subsidiaries and substantially all other U.S. non-bank subsidiaries.  The IHC is subject to, with limited exceptions, the enhanced prudential standards applicable to U.S. BHCs.  In some cases, the Federal Reserve permits an FBO to establish more than one IHC to hold its U.S. subsidiaries.  The tailoring rules did not change the $50bn threshold that triggers the requirement to form an IHC, but less stringent prudential standards apply to the IHC if the FBO has combined U.S. assets of less than $100bn.

Resolution plans and related matters

Under the Dodd-Frank Act, large BHCs and FBOs with total global consolidated assets of $50bn or more, and non-bank financial companies designated by the FSOC as SIFIs, were required to develop, maintain, and file a resolution plan (so-called “living will”) with the Federal Reserve and the FDIC.  The resolution plan must detail the firm’s strategy for rapid and orderly resolution in the event of material financial distress or failure under the U.S. Bankruptcy Code.  Firms that do not submit credible plans are subject to the imposition of stricter regulatory requirements.  Since the enactment of Dodd-Frank, firms have been through several rounds of resolution plans.  EGRRCPA and subsequent rulemaking raised the thresholds at which the resolution plan requirement applies and generally aligned the precise requirements with the categories used for the application of other enhanced prudential standards.  Under the new rules, global systemically important banks (“GSIBs”) would be subject to the strictest rule, which requires filing a resolution plan every two years, alternating between full plans and targeted plans.  FBOs with more than $250bn of consolidated assets are subject to some level of resolution plan requirement.  BHCs with less than $100bn of consolidated assets, and certain BHCs with less than $250bn of consolidated assets, are no longer subject to resolution plan requirements.

In addition, FDIC-insured depository institutions (“IDIs”) with $50bn or more in total assets have been required to submit a separate resolution plan to the FDIC under regulations administered only by the FDIC.  In April 2019, the FDIC issued an advance notice of proposed rulemaking (“ANPR”) that aims to revisit the resolution planning requirements for IDIs of $50bn or more in assets.  Specifically, the ANPR focuses on ensuring that the appropriate scope, content, and frequency of resolution plans for various types of banks are tailored to each bank’s size, complexity, and level of risk.  As of February 2021, no proposed amendments have been issued.  The FDIC had placed a moratorium on the submission of IDI resolution plans until the rulemaking process was complete.  With the rulemaking process not completed, in January 2021 the FDIC lifted the moratorium.  However, no IDI will be required to submit a resolution plan without at least 12-months’ advance notice provided to the IDI.

In 2016, the OCC issued guidelines for recovery planning by certain banks (and federal branches of FBOs) with $50bn or more in total assets. 

The U.S. banking agencies have issued substantially similar rules that require global systemically important institutions (including the U.S. operations of systemically important FBOs) to amend certain qualified financial contracts (“QFCs”) to prohibit the immediate termination of such contracts and the exercise of certain other default rights by counterparties if the firm enters bankruptcy or a special resolution proceeding.  In 2020, the OCC provided by order an exception from the express recognition requirements of the QFC stay rule for non-U.S. subsidiaries of national banks with respect to “non-U.S. non-linked contracts” as defined in the order.

U.S. banks and BHCs have long been subject to risk-based capital requirements (“U.S. Capital Framework”) based on standards adopted by the Basel Committee (“Basel Framework”), which includes both advanced approaches and standardised methodologies. 

U.S. banking organisations with $250bn in total consolidated assets, or $10bn in on-balance-sheet foreign exposure, had been subject to the advanced approaches methodology as well as a capital floor established under the standardised approach.  Under the tailoring rules adopted by the three U.S. federal banking agencies effective December 31, 2019, only banking organisations with $700bn or more in total consolidated assets or $75bn or more in cross-jurisdictional activity are subject to the advanced approaches methodology.  Other banking organisations are generally subject only to the standardised approach.  U.S. top-tier BHC subsidiaries of FBOs are generally subject to minimum U.S. capital requirements, although they may elect to use the U.S. standardised approach to calculate their risk-based and leverage capital ratios regardless of their size. 

Acting pursuant to EGRRCPA, the U.S. federal banking agencies have adopted an optional Community Bank Leverage Ratio (“CBLR”) framework that generally permits smaller banking organisations to opt out of the risk-based capital framework.  The CBLR framework is generally available to a banking organisation with a leverage ratio greater than 9%, less than $10bn in average total consolidated assets, off-balance-sheet exposures of 25% or less of total consolidated assets, and trading assets plus trading liabilities of 5% or less of total consolidated assets.

Components of capital

The Basel Framework and the U.S. Capital Framework emphasise the importance of common equity Tier 1 capital (“CET1”), set standards for instruments to qualify as CET1, additional Tier 1, and Tier 2 capital, and phase out the qualification of certain hybrid instruments from inclusion as capital. 

Minimum capital ratios

The U.S. Capital Framework sets forth the minimum risk-based capital ratios for CET1 (4.5%), Tier 1 capital (6%), and total capital (8%).  In addition, banks must hold a capital conservation buffer in the form of CET1 of at least 2.5%.  For larger BHCs and IHCs, beginning in 2020, the Federal Reserve uses the results of stress tests to set the capital conservation buffer, which may result in a requirement larger than 2.5%.  An institution that fails to maintain capital in excess of the buffer will be restricted in its ability to make capital distributions or pay discretionary executive bonuses.  The U.S. regulators are also authorised to impose an additional countercyclical capital buffer of up to 2.5%.  No such buffer has been imposed.

GSIB Surcharge

The eight largest U.S. banking organisations, which are GSIBs, are subject to an additional capital surcharge (“GSIB Surcharge”).  The amount of the GSIB Surcharge is the higher of two measures that each bank must calculate.  The calculations take into account a firm’s size, interconnectedness, substitutability, complexity, cross-jurisdictional activity and, under one method, reliance on short-term wholesale funding instead of substitutability.

Risk-weighted assets

Although the U.S. Capital Framework is largely consistent with the Basel Framework, one important difference arises from the absence of the use of external credit ratings for the risk-weighting of assets in the U.S. Capital Framework due to the prohibition in Section 939A of the Dodd-Frank Act on the use of external credit ratings.  More generally, comparability of risk-weighting of assets across institutions and jurisdictions has become a matter of significant regulatory attention.  In addition, in 2019, the U.S. federal banking agencies adopted the Standardised Approach to Counterparty Credit Risk in calculating the exposure in derivative contracts.  The rule has a mandatory compliance date of January 1, 2022.

Market risk capital charge

The U.S. Capital Framework also includes a market risk capital charge (implementing the Basel II.5 Framework (introduced in July 2009)) for assets held in the trading book that applies to banks and BHCs with significant trading positions.  Unlike the Basel II.5 Framework, the U.S. rules do not rely on credit ratings to determine specific capital requirements for certain instruments.  The Basel Committee adopted a revised capital requirement for market risk framework in January 2016 to ensure standardisation and promote consistent implementation globally.  Key features include a revised boundary between the trading and banking book, a revised standardised and internal models approach for market risk, and incorporation of the risk of market illiquidity.  In January 2019, the Basel Committee issued revised standards, which will come into effect in January 2023.  U.S. regulators have not issued proposed regulations to implement the framework in the United States.

Leverage ratio

U.S. banking organisations have long been subject to a minimum leverage ratio.  The U.S. Capital Framework includes two separate leverage requirements.  The 4% minimum leverage ratio requirement represents a continuation of a ratio that has been in place for years (in general, Tier 1 capital divided by average consolidated assets, less deductions).  The other applies only to large banking organisations subject to the advanced approaches methodologies and is based on the 3% supplementary leverage ratio in the Basel Framework, which includes certain off-balance-sheet exposures in the calculation of required capital. 

In addition, the largest U.S. banking organisations (those with at least $700bn in total assets or $10tn in assets under custody) are subject to an “enhanced” supplementary leverage ratio.  Covered BHCs that do not maintain a ratio of at least 5% are subject to limitations on capital distributions and discretionary bonus payments, while depository institutions are required to maintain a ratio of at least 6% under the prompt corrective action framework (described below).  In October 2019, the U.S. federal banking agencies finalised a rule that tailors the enhanced supplemental leverage ratio requirements to the specific business activities and risk profiles of each firm, with the effect of relaxing the enhanced supplemental leverage ratio requirement.

Consequences of capital ratios

The U.S. prudential bank regulatory framework has several components based on an institution’s capital ratios.  For example, in order for a U.S. BHC to qualify as an FHC, it must meet a well-capitalised standard.  Similarly, FBOs that seek FHC status must demonstrate that they meet comparable standards under their home country’s capital requirements.  Capital levels also form the basis for the level of deposit insurance premiums payable to the FDIC by depository institutions, the ability of depository institutions to accept brokered deposits, qualification of banking organisations for streamlined processing of applications to make acquisitions or engage in new businesses, as well as other filings with bank supervisors under various laws and regulations.  Capital levels also form the basis for the prompt corrective action framework applicable to depository institutions (which provides for early supervisory intervention in a depository institution as its capital levels decline).

Stress testing and capital planning

Stress testing is a key supervisory technique used by U.S. federal banking regulators and in many cases constitutes the binding constraint on large banking organisations.  The quantitative results from the supervisory stress tests are used as part of the Federal Reserve’s analysis under the Comprehensive Capital Analysis and Review (“CCAR”).  The tailoring rules revised the stress testing and CCAR requirements so as to reduce the compliance burden on firms in lower-risk categories.  Under this revised regime, U.S. BHCs and IHCs are required to run company-run stress tests and supervisory stress tests either annually or biannually, depending on the applicable category of standards under the tailoring rules.  The Federal Reserve’s tailoring rules eliminated the company-run stress test requirement for FBOs with less than $50bn in total consolidated assets.

The CCAR is an annual exercise the Federal Reserve undertakes at the largest U.S. BHCs to evaluate a firm’s capital planning processes and capital adequacy, including planned capital distributions, to ensure the firm has sufficient capital in times of stress.  The Federal Reserve can object to a firm’s capital plan on either a quantitative basis (i.e., a firm’s projected capital ratio under a confidential stressed scenario would not meet minimum requirements) or a qualitative one (i.e., inadequate capital planning process).  In recent years, the Federal Reserve has primarily objected to firms’ capital plans for qualitative reasons.  There were 34 firms subject to the CCAR process in 2020, with 19 of them subject to the qualitative assessment.

In 2020, the Federal Reserve conducted additional stress tests to assess the resilience of firms under a range of plausible downside scenarios stemming from the economic conditions caused by the COVID-19 pandemic.  The results of that additional stress test were released in December 2020 and showed that firms would experience substantial losses and lower revenues under two separate hypothetical recessions, but could continue lending to creditworthy businesses and households.

TLAC

U.S. GSIBs and certain U.S. IHCs of non-U.S. GSIBs are required to comply with other capital-related requirements, including “clean” holding company requirements (relating to short-term debt and derivatives).  These requirements are aimed at improving the prospects for the orderly resolution of such an institution.  The rule includes an external long-term debt (“LTD”) requirement and a related total loss-absorbing capacity (“TLAC”) requirement applicable to the top-tier holding company of a U.S. GSIB and an internal LTD and related TLAC requirement applicable to U.S. IHCs.  LTD issued on or prior to December 31, 2016 was grandfathered from provisions of the rule that prohibit certain contractual provisions. 

Liquidity

Liquidity has become a key focus of U.S. (and international) regulators in recent years and has become subject to detailed regulations setting quantitative standards in a manner analogous to the risk-based capital regime.  The U.S. Liquidity Coverage Ratio (“U.S. LCR”), like that released by the Basel Committee, requires firms to hold a prescribed ratio of high-quality liquid assets to withstand a 30-day stress scenario.  In 2014, the U.S. agencies finalised the U.S. LCR, which included a “full” approach for the largest banks that exceed $250bn in consolidated assets or $10bn in on-balance-sheet foreign exposure and a more limited, “modified” approach for smaller BHCs that exceed $50bn in consolidated assets.  Under the tailoring rules, banking organisations with between $250bn and $700bn in total consolidated assets are subject to the full daily LCR requirement only if their average short-term wholesale funding profile exceeds certain thresholds.  IHCs are subject to LCR requirements based on their own risk profile rather than the combined U.S. operations of the FBO.  The Federal Reserve has stated that it may develop and propose a quantitative LCR-based liquidity requirement applicable to the U.S. branches and agencies of an FBO.

Institutions subject to the U.S. LCR must publicly disclose their LCR on a quarterly basis in a direct and prominent manner.

In 2020, the U.S. federal banking agencies finalised a net stable funding ratio (“NSFR”) rule to implement the final standard previously released by the Basel Committee.  Generally, the NSFR requires covered firms to hold a specified ratio of high-quality liquid assets sufficient to cover the outflows of a one-year stress scenario.  The final rule will be effective on July 1, 2021.  Holding companies and any covered non-bank companies regulated by the Federal Reserve will be required to publicly disclose their NSFR levels semi-annually beginning in 2023.

Regulators have also addressed liquidity in the U.S. by requiring certain firms to conduct liquidity stress tests. 

Deposit-taking activities

As a general matter under U.S. federal and state banking law, deposit-taking is limited to duly chartered banks, savings associations, and credit unions.  Properly licensed non-U.S. banks also have the same general authority to accept customer deposits as U.S. banks, except that non-U.S. banks (other than several grandfathered branch offices) that wish to accept retail deposits must establish a separately chartered U.S. bank subsidiary.

Virtually all U.S. commercial banks are required to be insured by the FDIC.  Deposits are generally insured up to $250,000 per depositor in each ownership capacity (such as in an individual account and a joint account).  Except for grandfathered offices, U.S. branch offices of non-U.S. banks are not eligible for FDIC insurance.  Funds on deposit in a non-U.S. branch office of a U.S. bank are not treated as FDIC-insured deposits.  Also, they are not entitled to the benefits of the depositor preference provisions of the FDI Act unless such deposits are by their terms dually payable at an office of the bank inside the United States.  The FDIC requires FDIC-insured institutions with more than 2 million deposit accounts to maintain complete and accurate data on each depositor and to implement information technology systems capable of calculating the amount of insured money for depositors within 24 hours of a failure.  Longer periods are permitted for certain deposit accounts with “pass-through” deposit insurance coverage, including trust and brokered deposits.  Brokered deposits are a matter of supervisory concern, and a bank’s reliance on brokered deposits can have a number of adverse supervisory consequences.  In 2020, the FDIC issued a final rule that makes several changes to brokered deposit rules in order to modernise its framework and adapt to the introduction of fintech companies into the industry.

Consumer deposit accounts are subject to CFPB regulations that require banking organisations to make disclosures regarding interest rates and fees and certain other terms and conditions associated with such accounts. 

Deposit accounts are also subject to Federal Reserve regulations regarding funds availability and the collection of cheques.  In recent years, fees associated with various types of overdraft protection products have generated significant litigation and regulatory attention.

In addition, banks are generally subject to reserve requirements with respect to their transaction accounts.  Accounts that are not transaction accounts, such as money market deposit accounts, have limitations on the number of certain types of withdrawals or payments that can be made from such an account in any one month.  In 2020, the Federal Reserve reduced reserve requirement ratios to 0%, effectively eliminating reserve requirements for depository institutions.

Lending activities

The lending activities of banks are subject to prudential and consumer protection requirements.  Banks are generally limited to extending credit to one person in an amount not exceeding 15% of the bank’s capital.  Banking laws generally permit banks to extend credit equal to an additional 10% of capital if the credit is secured by readily marketable collateral.  Lending limits also now generally include credit exposure arising from derivative transactions and, in the case of national banks and U.S. offices of non-U.S. banks, securities financing transactions.  The lending limits applicable to the U.S. offices of non-U.S. banks are based on the capital of the parent bank. 

BHCs and non-U.S. banks with $250bn or more in total consolidated assets, including IHCs with $50bn or more in total consolidated assets, are subject to single-counterparty credit limits (“SCCL”) under rules originally adopted in 2018.  FBOs can meet limits applicable to their combined U.S. operations by certifying that they meet home country SCCL standards.  The exact requirements applicable to IHCs are based on their size.  The effective date of the rules for FBOs has been extended to July 1, 2021, or January 1, 2022, depending on the characteristics of the FBO.   

Bank loans to insiders are subject to limitations and other requirements under Regulation O of the Federal Reserve.

Banks are also required to hold reserves against potential loan losses, and the United States is generally transitioning from an incurred loss method to a current expected credit loss method.

Lending to consumers is generally subject to a number of U.S. federal and state consumer protection statutes that require the disclosure of interest rates, other loan charges, and other terms and conditions related to the making and the repayment of an extension of credit.  A more recent rule requires creditors to make a reasonable, good faith determination of a consumer’s ability to repay any consumer credit transaction secured by a dwelling. 

A significant issue in recent years has been whether a loan that is valid when made remains valid in the hands of an assignee, which may be subject to different rules, including usury limits, than the original lender.  This was an issue in a 2015 case, Madden v. Midland Funding.  A related issue is whether an originator of a loan that immediately assigns the loan to a purchaser is the “true lender” in the transaction.  Both the FDIC and the OCC issued final rules in 2020 that confirmed the principle that a loan that is “valid when made” is enforceable by any subsequent assignee.  The OCC also issued a final rule generally establishing that a national bank is a “true lender” if, as of the date of origination, it: (i) is named as the lender in the loan agreement; or (ii) funds the loan.  In addition, if, as of the date of origination, one bank is named as the lender in the loan agreement for a loan and another bank funds that loan, the bank that is named as the lender in the loan agreement makes the loan.  Lastly, the rule requires that the true lender bank retain the compliance obligations associated with the origination of that loan, which aims to address certain industry concerns regarding “rent-a-charter” arrangements.  These rulemakings are the subject of ongoing litigation.

Banking organisations are generally required under the Community Reinvestment Act (“CRA”) to meet the credit needs of the communities in which they operate, including low- and moderate-income neighbourhoods.  The Home Mortgage Disclosure Act requires banks (and certain non-bank lenders) located in metropolitan areas to collect and report data about their residential mortgage lending activities (e.g., loan applications, approvals, and denials).  In December 2019, the FDIC and the OCC published a set of proposed rules that amend the agencies regulations under the CRA.  The Federal Reserve did not join that proposal.  In May 2020, the OCC issued a final rule on the CRA that will only apply to national banks and thrifts.  The Federal Reserve issued an ANPR relating to the CRA in September 2020, and comments were due by February 16, 2021.

Anti-tying statutes generally prohibit a bank from extending credit (or providing other services) to any person on the condition that the person also obtain some other product or service (other than certain traditional bank products) from the bank or an affiliate. 

Leveraged lending and commercial real estate lending are additional areas of particular supervisory focus, and interagency guidance has been released with respect to both activities.  In December 2020, the U.S. Government Accountability Office (“GAO”) issued a report noting that banking regulators had not found that leveraged lending poses a threat to financial stability.  The GAO nevertheless recommended that Congress expand the FSOC’s designation authority to address activities that involve many regulators, such as leveraged lending.

Volcker Rule

The Volcker Rule is a complex rule that prohibits banking entities from engaging in proprietary trading activities and from sponsoring or investing in, or having certain relationships with, hedge funds and private equity funds (“covered funds”), subject to certain exceptions and exemptions, and generally requires banking entities to adopt an appropriate compliance programme.  

Banking entities are generally defined to include IDIs, BHCs, FBOs that are treated as BHCs under the IBA (which includes a non-U.S. bank that operates a U.S. branch or agency office), and any subsidiary or affiliate of any of these entities.

The ban on proprietary trading essentially prohibits a banking entity from trading as principal in most financial instruments for short-term gain.  Exemptions are permitted for (among other activities) underwriting, market-making, hedging and, for FBOs, activities conducted solely outside of the United States.

Covered funds are generally issuers that would be considered investment companies under the Investment Company Act of 1940 but for the exemptions under Section 3(c)(1) or 3(c)(7) of such Act.  Exceptions are available for (among other activities) traditional asset management activities and, for FBOs, activities conducted solely outside the United States.  One apparently unintended consequence of the Volcker Rule is that foreign funds that have no U.S. investors but are controlled by FBOs (“foreign excluded funds”) are treated as banking entities that are subject to the Volcker Rule.  The U.S. regulatory agencies provided temporary relief to such funds until July 21, 2021, and such relief was made permanent in 2020 through amendments to the regulations that implement the Volcker Rule for funds that are operated as part of a bona fide asset management business.

EGRRCPA exempts banks from the Volcker Rule that do not have and are not controlled by companies that have: (i) more than $10bn in total consolidated assets; and (ii) trading assets and liabilities of more than 5% of total consolidated assets.  EGRRCPA also relaxed certain naming restrictions that applied to covered funds sponsored or advised by a banking entity.  In 2019, U.S. agencies adopted regulatory changes to the Volcker Rule that, among other things, limit the application of a comprehensive compliance programme to banks with $10bn or more in trading assets and liabilities, while requiring smaller banks to incorporate the Volcker Rule into the general compliance policies.  The revised framework also presumes compliance for banking entities with less than $1bn in trading assets and liabilities, absent an agency finding to the contrary.  The revisions also expand the exemption for foreign banking entities’ activities outside the United States.  Furthermore, the revisions create a presumption of compliance for trading desks engaged in market-making and underwriting activity that establish, implement, and enforce internal limits that are designed not to exceed the reasonable expected near-term demand of customer, clients, or counterparties. 

Other restrictions on activities

The National Bank Act limits the activities of national banks to those specifically authorised by statute, which includes activities incidental to the business of banking.  State banks are subject to state laws, and their activities conducted in a principal capacity are also limited to those permissible for national banks under federal law, unless the FDIC specifically approves the activity.  The activities of a U.S. branch of a foreign bank are basically subject to the same limits that apply to a U.S. bank.  In 2020, the OCC revised its licensing and activities regulations that govern numerous activities of national banks, including chartering of banks, establishment of subsidiaries, corporate governance, mergers, dividends, derivatives activities, and other matters.  These revisions take effect in 2021.

Bank transactions with affiliates are subject to qualitative and quantitative limits under Sections 23A and 23B of the Federal Reserve Act.

The BHC Act generally restricts BHCs and FHCs from engaging directly or indirectly in non-financial activities.  BHCs that successfully elect to be treated as FHCs may engage in a broader range of activities than BHCs that do not make such an election, such as securities underwriting, merchant banking, and insurance underwriting.  FBOs are generally treated as BHCs or FHCs with respect to the activities of their non-banking subsidiaries.  In addition, an FBO that meets the requirements of a qualifying FBO may engage in a broad range of banking and non-banking activities outside the United States. 

Complaints

Consumers can submit complaints about banks (and other consumer product providers) online through the CFPB’s website.  Banks are generally required to respond to complaints and are expected to resolve most complaints within 60 days.  The CFPB publishes a database of (non-personal) complaint information.

Privacy

The GLB Act established a federal framework regarding the privacy of customer information and generally limits the sharing of non-public personal information.  In November 2020, the CFPB issued an ANPR to solicit comments and information to assist the CFPB in developing regulations to implement Section 1033 of the Dodd-Frank Act, which provides for consumer access to financial records.  Comments were due by February 4, 2021.

Investment services

Banks with trust powers are generally permitted to provide fiduciary services and investment advisory services to clients.  Banks also have limited authority to provide specified securities brokerage services to clients.  Full-service brokerage services are typically provided by a broker-dealer affiliate or subsidiary of a bank.  One of the more significant issues affecting broker-dealers in the United States is the promulgation of Regulation Best Interest (“Reg BI”) by the Securities and Exchange Commission (“SEC”), which broker-dealers were required to comply with by June 30, 2020 (despite the disruption caused by the COVID-19 pandemic).  Earlier, the Department of Labor (“DOL”) had adopted a rule that would have subjected many investment recommendations related to individual retirement accounts to ERISA fiduciary standards and remedies.  That rule was successfully challenged in court in 2018.  Subsequently, the SEC adopted Reg BI, which imposes a higher standard of care (and other attendant obligations) on U.S. broker-dealers in certain circumstances.  Reg BI consists of four prongs that broker-dealers must meet to discharge their obligation under the rule: (i) fulfil the standard of care (i.e., act in the best interest of “retail customers” when making “recommendations”); (ii) make certain disclosures; (iii) mitigate or eliminate conflicts of interest; and (iv) enhance compliance programmes.  As part of this rulemaking, the SEC also adopted new rules requiring broker-dealers, as well as investment advisers, to provide a brief relationship summary, known as Form CRS, to retail investors.  In the wake of Reg BI, the DOL finalised a revised version of its fiduciary rule in December 2020, which is intended to work in harmony with the Reg BI obligations in applicable circumstances.

Proprietary trading activities

Subject to the limitations of the Volcker Rule, banks generally have the authority to engage in proprietary investment or trading with respect to a range of financial instruments, subject to certain limitations.  For example, banks are typically confined to purchasing securities that qualify as investment securities under specified criteria.  Banks also generally are not authorised to underwrite or deal in securities, subject to certain exceptions.  However, subject to the Volcker Rule, FHCs generally may engage in such activities through broker-dealer subsidiaries.

Money laundering

Banks are subject to extensive and evolving obligations under AML laws and economic sanctions requirements.  Basic AML requirements include know-your-customer (and know-your-customer’s-customer) obligations, suspicious activity reporting, and currency transaction reporting.  Compliance with U.S. requirements has proved to be an ongoing challenge for banking organisations, particularly for non-U.S. banks.  Deficiencies can result not only in administrative sanctions, but criminal proceedings involving law enforcement authorities.  Recent enforcement actions have required banking organisations to dismiss certain specified personnel identified as responsible for compliance deficiencies.  State laws may also apply.  In 2016, the NYSDFS adopted an anti-terrorism and AML regulation that imposes various detailed requirements on the transaction monitoring and filtering programmes of New York-regulated institutions.  In December 2018, the U.S. federal banking agencies and the Financial Crimes Enforcement Network (“FinCEN”) issued guidance to the effect that banks should use innovative technology for AML purposes.  In October 2020, FinCEN and the Federal Reserve proposed a rule that would amend the recordkeeping and travel rule regulations under the BSA, which requires financial institutions to collect, retain, and transmit certain information related to funds transfers and transmittals of funds.  The proposed rule would lower the applicable threshold for collecting and retaining information from $3,000 to $250 for international transactions, while maintaining the $3,000 threshold for domestic transactions.  The proposed rule would also further clarify that those regulations apply to transactions above the applicable threshold involving convertible virtual currencies (“CVCs”), as well as transactions involving digital assets with legal tender status (“LTDA”).  In addition, FinCEN proposed a rule in December 2020 outlining new requirements for certain transactions involving CVC or LTDA.  Under the proposed rule, banks and money services businesses would be required to submit reports, keep records, and verify the identity of customers in relation to transactions above certain thresholds involving CVC/LTDA wallets not hosted by a financial institution, or CVC/LTDA wallets hosted by a financial institution in certain jurisdictions identified by FinCEN. 

In January 2021, the National Defense Authorization Act, which contains a sweeping overhaul of the BSA and other requirements under U.S. AML laws, was signed into law.  It represents the most significant set of BSA/AML reforms since the USA PATRIOT Act (2001).  A major focus of the National Defense Authorization Act is to modernise the U.S. BSA/AML regime to respond to new and emerging threats, to improve coordination and information sharing among various governmental agencies, and to fundamentally alter existing practices relating to the collection and reporting of beneficial ownership information.  Among other things, the law requires FinCEN to establish a non-public database of beneficial ownership information that is required to be collected.  Financial institutions may request reported beneficial ownership information from FinCEN to facilitate their own customer due diligence, provided the reporting company whose information is sought provides consent.  

Outsourcing

Banks often rely on third parties to deliver various products to their customers and otherwise support their daily operations.  While such arrangements are generally permissible, recent regulatory guidance has highlighted the need for banks to carefully manage the risks (including reputational) associated with such outsourcing relationships.

Enforcement actions

U.S. regulators have principally directed enforcement actions at institutions and not individuals at those institutions.  However, along with a renewed focus on governance and management, U.S. regulators are now placing more emphasis on the need to hold individuals accountable for their wrongdoing.  For example, in 2015, the U.S. Department of Justice issued guidance to bolster its ability to pursue individuals in corporate cases.  Under the guidance, cooperation credit for corporations requires that the corporation provide information to the Department of Justice about the role of individual employees in the misconduct, and prosecutors are instructed not to release culpable individuals from civil or criminal liability as part of the resolution of a matter with the corporation. 

More generally, enforcement actions aimed at AML compliance and improper sales incentives (relating, especially, to cross-marketing activities) are expected in 2020 and beyond.  In early 2020, the OCC issued significant enforcement actions against several former executives of a large U.S. bank related to systemic sales practices misconduct.  Most significant was a $400m civil money penalty assessed by the OCC and the Federal Reserve against an institution for deficiencies in enterprise-wide risk management, compliance risk management, data governance, and internal controls.

Supervisory guidance

Banking agencies often issue supervisory guidance that addresses a particular practice, such as leveraged lending.  The banking agencies have recently sought to clarify the role of guidance in the supervision and enforcement context.  A related issue is whether guidance amounts to a regulation that is subject to Congressional review, which means that Congress could possibly overturn it.  The U.S. federal banking agencies issued a statement in September 2018 that interagency guidance is not binding such that failure to comply with such guidance in itself should not be cited as a violation of law, and proposed a rule in October 2020 that would generally confirm the September 2018 statement.

Banking regulation in the United States remains an evolving and complex area as regulations and supervisory guidance implementing the Dodd-Frank Act and other post-crisis reforms are implemented and amended and the industry adjusts to the impact of COVID-19.  Navigating the U.S. regulatory framework requires not only a deep understanding of the complexity and nuances of U.S. banking laws but an alert eye to ongoing developments.  In addition, some of the requirements being imposed on the U.S. operations of non-U.S. banks (such as the IHC requirement) are now being replicated outside the United States, thereby impacting the overseas activities of U.S. banking organisations.

Acknowledgments

The authors would like to acknowledge Le-el Sinai and Caitlin Hutchinson Maddox, associates at Shearman & Sterling, for their assistance in preparing this chapter.

Источник: https://www.globallegalinsights.com/practice-areas/banking-and-finance-laws-and-regulations/usa

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Banking Laws and Regulations 2021

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Jack and Janet AyresGetting to know Earl McVicker

Earl McVicker has just completed a term as vice chairman of the foundation's board of trustees. Earl graduated from K-State's College of Agriculture in 1971 and earned a graduate degree in banking from the University of Colorado in 1975. He is chairman, president and CEO of Central Financial Corporation and its subsidiary, Central Bank and Trust Co. of Hutchinson, Kan., and currently sits on the board of Community First National Bank in Manhattan, Kan. Previous appointments include chairman of the American Bankers Association (ABA) and the ABA Community Bankers Council, president and chairman of the Kansas Bankers Association, and president of the K-State Alumni Association board. He and his wife Molly live in Hutchinson, Kan., have three adult children, and are members of the KSU Foundation President's Club and lifetime members of the K-State Alumni Association.

What has serving on the KSU Foundation board of directors meant to you? Do you have any favorite memories?
Serving on the board of the KSU Foundation has allowed me to observe all aspects of the foundation —fundraising, investments, stewardship and its financial contributions to the university through scholarships and other university needs. It has given me a greater understanding of the needs of the university and how the foundation serves as an essential supporter of the university. The most enjoyable part has been observing the positive impact the foundation has had on the university and the students. The most memorable event was the celebration of the success of the Changing Lives Campaign.

How did your experience at K-State influence you in your professional life? Why is K-State important to you?
My experience at K-State influenced all aspects of my life. I met Molly, my wife of 41 years, on Halloween night when we were freshmen. She has been a very positive influence on my personal and professional life. K-State was where I built the base for my professional career — it's a family with a culture of caring.

Why is philanthropy important?
Philanthropy is about providing support, financial and otherwise, to those with needs. We have all benefitted from the contributions of others. It is important that continue this philosophy by giving our own time and resources.

In the years you've served on the board and in other roles with the foundation, what is something your colleagues may not have learned about you?
I was the valedictorian of my eighth grade class. I was also the only student in my class in a one-room grade school in Ness County. Many folks only see me as banker in a suit; however, on evenings and weekends, I am usually in boots and jeans and am most comfortable on a horse, my Harley-Davidson or in my farm pickup.

Back to current issue.

Источник: https://www.ksufoundation.org/making-a-difference/1111_earlmcvicker.html

CENTRAL BANK OF DENVER, N.A., Petitioner, v. FIRST INTERSTATE BANK OF DENVER, N.A. and Jack K. Naber.

511 U.S. 164
114 S.Ct. 1439
128 L.Ed.2d 119

CENTRAL BANK OF DENVER, N.A., Petitioner,
v.
FIRST INTERSTATE BANK OF DENVER, N.A. and Jack K. Naber.

No. 92-854.

Supreme Court of the United States

Argued Nov. 30, 1993.

Decided April 19, 1994.

Syllabus*

As this Court has interpreted it, § 10(b) of the Securities Exchange Act of 1934 imposes private civil liability on those who commit a manipulative or deceptive act in connection with the purchase or sale of securities. Following a public building authority's default on certain bonds secured by landowner assessment liens, respondents, as purchasers of the bonds, filed suit against the authority, the bonds' underwriters, the developer of the land in question, and petitioner bank, as the indenture trustee for the bond issues. Respondents alleged that the first three defendants had violated § 10(b) in connection with the sale of the bonds, and that petitioner was "secondarily liable under § 10(b) for its conduct in aiding and abetting the [other defendants'] fraud." The District Court granted summary judgment to petitioner, but the Court of Appeals reversed in light of Circuit precedent allowing private aiding and abetting actions under § 10(b).

Held: A private plaintiff may not maintain an aiding and abetting suit under § 10(b). Pp. ____.

(a) This case is resolved by the statutory text, which governs what conduct is covered by § 10(b). See, e.g., Ernst & Ernst v. Hochfelder,425 U.S. 185, 197, 199, 96 S.Ct. 1375, 1383, 1384, 47 L.Ed.2d 668. That text—which makes it "unlawful for any person, directly or indirectly, . . . [t]o use or employ, in connection with the purchase or sale of any security . . ., any manipulative or deceptive device or contrivance"—prohibits only the making of a material misstatement (or omission) or the commission of a manipulative act, and does not reach those who aid and abet a violation. The "directly or indirectly" phrase does not cover aiding and abetting, since liability for aiding and abetting would extend beyond persons who engage, even indirectly, in a proscribed activity to include those who merely give some degree of aid to violators, and since the "directly or indirectly" language is used in numerous 1934 Act provisions in a way that does not impose aiding and abetting liability. Pp. ____.

(b) Even if the § 10(b) text did not answer the question at issue, the same result would be reached by inferring how the 1934 Congress would have addressed the question had it expressly included a § 10(b) private right of action in the 1934 Act. See Musick, Peeler & Garrett v. Employers Ins. of Wausau, 508 U.S. ----, ----, 113 S.Ct. 2085, ----, 124 L.Ed.2d 194. None of the express private causes of action in the federal securities laws imposes liability on aiders and abettors. It thus can be inferred that Congress likely would not have attached such liability to a private § 10(b) cause of action. See id., at ----, 113 S.Ct., at ----. Pp. ____.

(c) Contrary to respondents' contention, the statutory silence cannot be interpreted as tantamount to an explicit congressional intent to impose § 10(b) aiding and abetting liability. Congress has not enacted a general civil aiding and abetting tort liability statute, but has instead taken a statute-by-statute approach to such liability. Nor did it provide for aiding and abetting liability in any of the private causes of action in the 1933 and 1934 securities Acts, but mandated it only in provisions enforceable in actions brought by the Securities and Exchange Commission (SEC). Pp. ____.

(d) The parties' competing arguments based on other post-1934 legislative developments—respondents' contentions that congressional acquiescence in their position is demonstrated by 1983 and 1988 committee reports making oblique references to § 10(b) aiding and abetting liability and by Congress' failure to enact a provision denying such liability after the lower courts began interpreting § 10(b) to include it, and petitioner's assertion that Congress' failure to pass 1957, 1958, and 1960 bills expressly creating such liability reveals an intent not to cover it—deserve little weight in the interpretive process, would not point to a definitive answer in any event, and are therefore rejected. Pp. ____.

(e) The SEC's various policy arguments in support of the aiding and abetting cause of action—e.g., that the cause of action deters secondary actors from contributing to fraudulent activities and ensures that defrauded plaintiffs are made whole—cannot override the Court's interpretation of the Act's text and structure because such arguments do not show that adherence to the text and structure would lead to a result so bizarre that Congress could not have intended it. Demarest v. Manspeaker,498 U.S. 184, 191, 111 S.Ct. 599, 604, 112 L.Ed.2d 608 (1991). It is far from clear that Congress in 1934 would have decided that the statutory purposes of fair dealing and efficiency in the securities markets would be furthered by the imposition of private aider and abettor liability, in light of the uncertainty and unpredictability of the rules for determining such liability, the potential for excessive litigation arising therefrom, and the resulting difficulties and costs that would be experienced by client companies and investors. Pp. ____.

(f) The Court rejects the suggestion that a private civil § 10(b) aiding and abetting cause of action may be based on 18 U.S.C. § 2, a general aiding and abetting statute applicable to all federal criminal offenses. The logical consequence of the SEC's approach would be the implication of a civil damages cause of action for every criminal statute passed for the benefit of some particular class of persons. That would work a significant and unacceptable shift in settled interpretive principles. P. ____.

969 F.2d 891, reversed.

KENNEDY, J., delivered the opinion of the Court, in which REHNQUIST, C.J., and O'CONNOR, SCALIA, and THOMAS, JJ., joined. STEVENS, J., filed a dissenting opinion, in which BLACKMUN, SOUTER, and GINSBURG, JJ., joined.

Tucker K. Trautman, Denver, CO, for petitioner.

Miles M. Gersh, Denver, CO, for respondents.

Edwin S. Kneedler, Washington, DC, for U.S. as amicus curiae, by special leave of the Court.

Justice KENNEDY delivered the opinion of the Court.

1

As we have interpreted it, § 10(b) of the Securities Exchange Act of 1934 imposes private civil liability on those who commit a manipulative or deceptive act in connection with the purchase or sale of securities. In this case, we must answer a question reserved in two earlier decisions: whether private civil liability under § 10(b) extends as well to those who do not engage in the manipulative or deceptive practice but who aid and abet the violation. See Herman & MacLean v. Huddleston,459 U.S. 375, 379, n. 5, 103 S.Ct. 683, 685, n. 5, 74 L.Ed.2d 548 (1983); Ernst & Ernst v. Hochfelder,425 U.S. 185, 191-192, n. 7, 96 S.Ct. 1375, 1380-1381, n. 7, 47 L.Ed.2d 668 (1976).

2

* In 1986 and 1988, the Colorado Springs-Stetson Hills Public Building Authority (Authority) issued a total of $26 million in bonds to finance public improvements at Stetson Hills, a planned residential and commercial development in Colorado Springs. Petitioner Central Bank served as indenture trustee for the bond issues.

3

The bonds were secured by landowner assessment liens, which covered about 250 acres for the 1986 bond issue and about 272 acres for the 1988 bond issue. The bond covenants required that the land subject to the liens be worth at least 160% of the bonds' outstanding principal and interest. The covenants required AmWest Development, the developer of Stetson Hills, to give Central Bank an annual report containing evidence that the 160% test was met.

4

In January 1988, AmWest provided Central Bank an updated appraisal of the land securing the 1986 bonds and of the land proposed to secure the 1988 bonds. The 1988 appraisal showed land values almost unchanged from the 1986 appraisal. Soon afterwards, Central Bank received a letter from the senior underwriter for the 1986 bonds. Noting that property values were declining in Colorado Springs and that Central Bank was operating on an appraisal over 16 months old, the underwriter expressed concern that the 160% test was not being met.

5

Central Bank asked its in-house appraiser to review the updated 1988 appraisal. The in-house appraiser decided that the values listed in the appraisal appeared optimistic considering the local real estate market. He suggested that Central Bank retain an outside appraiser to conduct an independent review of the 1988 appraisal. After an exchange of letters between Central Bank and AmWest in early 1988, Central Bank agreed to delay independent review of the appraisal until the end of the year, six months after the June 1988 closing on the bond issue. Before the independent review was complete, however, the Authority defaulted on the 1988 bonds.

6

Respondents First Interstate and Jack Naber had purchased $2.1 million of the 1988 bonds. After the default, respondents sued the Authority, the 1988 underwriter, a junior underwriter, an AmWest director, and Central Bank for violations of § 10(b) of the Securities Exchange Act of 1934. The complaint alleged that the Authority, the underwriter defendants, and the AmWest director had violated § 10(b). The complaint also alleged that Central Bank was "secondarily liable under § 10(b) for its conduct in aiding and abetting the fraud." App. 26.

7

The United States District Court for the District of Colorado granted summary judgment to Central Bank. The United States Court of Appeals for the Tenth Circuit reversed. First Interstate Bank of Denver, N.A. v. Pring,969 F.2d 891 (1992).

8

The Court of Appeals first set forth the elements of the § 10(b) aiding and abetting cause of action in the Tenth Circuit: (1) a primary violation of § 10(b); (2) recklessness by the aider and abettor as to the existence of the primary violation; and (3) substantial assistance given to the primary violator by the aider and abettor. Id., at 898-903.

9

Applying that standard, the Court of Appeals found that Central Bank was aware of concerns about the accuracy of the 1988 appraisal. Central Bank knew both that the sale of the 1988 bonds was imminent and that purchasers were using the 1988 appraisal to evaluate the collateral for the bonds. Under those circumstances, the court said, Central Bank's awareness of the alleged inadequacies of the updated, but almost unchanged, 1988 appraisal could support a finding of extreme departure from standards of ordinary care. The court thus found that respondents had established a genuine issue of material fact regarding the recklessness element of aiding and abetting liability. Id., at 904. On the separate question whether Central Bank rendered substantial assistance to the primary violators, the Court of Appeals found that a reasonable trier of fact could conclude that Central Bank had rendered substantial assistance by delaying the independent review of the appraisal. Ibid.

10

Like the Court of Appeals in this case, other federal courts have allowed private aiding and abetting actions under § 10(b). The first and leading case to impose the liability was Brennan v. Midwestern Life Ins. Co., 259 F.Supp. 673 (ND Ind.1966), aff'd, 417 F.2d 147 (CA7 1969), cert. denied, 397 U.S. 989, 90 S.Ct. 1122, 25 L.Ed.2d 397 (1970). The court reasoned that "[i]n the absence of a clear legislative expression to the contrary, the statute must be flexibly applied so as to implement its policies and purposes." 259 F.Supp., at 680-681. Since 1966, numerous courts have taken the same position. See, e.g., Cleary v. Perfectune, Inc.,700 F.2d 774, 777 (CA1 1983); Kerbs v. Fall River Industries, Inc.,502 F.2d 731, 740 (CA10 (1974)).

11

After our decisions in Santa Fe Industries, Inc. v. Green,430 U.S. 462, 97 S.Ct. 1292, 51 L.Ed.2d 480 (1977), and Ernst & Ernst v. Hochfelder,425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976), where we paid close attention to the statutory text in defining the scope of conduct prohibited by § 10(b), courts and commentators began to question whether aiding and abetting liability under § 10(b) was still available. Professor Fischel opined that the "theory of secondary liability [under § 10(b) was] no longer viable in light of recent Supreme Court decisions strictly interpreting the federal securities laws." Fischel, Secondary Liability under Section 10(b) of the Securities Act of 1934, 69 Calif.L.Rev. 80, 82 (1981). In 1981, the District Court for the Eastern District of Michigan found it "doubtful that a claim for 'aiding and abetting' . . . will continue to exist under § 10(b)." Benoay v. Decker, 517 F.Supp. 490, 495, aff'd, 735 F.2d 1363 (CA6 1984). The same year, the Ninth Circuit stated that the "status of aiding and abetting as a basis for liability under the securities laws [wa]s in some doubt." Little v. Valley National Bank of Arizona,650 F.2d 218, 220, n. 3 (1981). The Ninth Circuit later noted that "[a]iding and abetting and other 'add-on' theories of liability have been justified by reference to the broad policy objectives of the securities acts. . . . The Supreme Court has rejected this justification for an expansive reading of the statutes and instead prescribed a strict statutory construction approach to determining liability under the acts." SEC v. Seaboard Corp.,677 F.2d 1301, 1311, n. 12 (1982). The Fifth Circuit has stated: "[I]t is now apparent that open-ended readings of the duty stated by Rule 10b-5 threaten to rearrange the congressional scheme. The added layer of liability . . . for aiding and abetting . . . is particularly problematic. . . . There is a powerful argument that . . . aider and abettor liability should not be enforceable by private parties pursuing an implied right of action." Akin v. Q-L Investments, Inc.,959 F.2d 521, 525 (1992). Indeed, the Seventh Circuit has held that the defendant must have committed a manipulative or deceptive act to be liable under § 10(b), a requirement that in effect forecloses liability on those who do no more than aid or abet a 10b-5 violation. See, e.g., Barker v. Henderson, Franklin, Starnes & Holt,797 F.2d 490, 495 (1986).

12

We granted certiorari to resolve the continuing confusion over the existence and scope of the § 10(b) aiding and abetting action. 508 U.S. ----, 113 S.Ct. 2927, 124 L.Ed.2d 678 (1993).

II

13

In the wake of the 1929 stock market crash and in response to reports of widespread abuses in the securities industry, the 73d Congress enacted two landmark pieces of securities legislation: the Securities Act of 1933 (1933 Act) and the Securities Exchange Act of 1934 (1934 Act). 48 Stat. 74, as amended, 15 U.S.C. § 77aet seq.;48 Stat. 881, 15 U.S.C. § 78aet seq. The 1933 Act regulates initial distributions of securities, and the 1934 Act for the most part regulates post-distribution trading. Blue Chip Stamps v. Manor Drug Stores,421 U.S. 723, 752, 95 S.Ct. 1917, 1933, 44 L.Ed.2d 539 (1975). Together, the Acts "embrace a fundamental purpose . . . to substitute a philosophy of full disclosure for the philosophy of caveat emptor." Affiliated Ute Citizens of Utah v. United States,406 U.S. 128, 151, 92 S.Ct. 1456, 1471, 31 L.Ed.2d 741 (1972) (internal quotation marks omitted).

14

The 1933 and 1934 Acts create an extensive scheme of civil liability. The Securities and Exchange Commission (SEC) may bring administrative actions and injunctive proceedings to enforce a variety of statutory prohibitions. Private plaintiffs may sue under the express private rights of action contained in the Acts. They may also sue under private rights of action we have found to be implied by the terms of § 10(b) and § 14(a) of the 1934 Act. Superintendent of Ins. of New York v. Bankers Life & Casualty Co.,404 U.S. 6, 13, n. 9, 92 S.Ct. 165, 169, n. 9, 30 L.Ed.2d 128 (1971) (§ 10(b)); J.I. Case Co. v. Borak,377 U.S. 426, 430-435, 84 S.Ct. 1555, 1559-1561, 12 L.Ed.2d 423 (1964) (§ 14(a)). This case concerns the most familiar private cause of action: the one we have found to be implied by § 10(b), the general antifraud provision of the 1934 Act. Section 10(b) states:

15

"It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange —

17

"(b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe." 15 U.S.C. § 78j.

18

Rule 10b-5, adopted by the SEC in 1942, casts the proscription in similar terms:

19

"It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

20

"(a) To employ any device, scheme, or artifice to defraud, "(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

21

"(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,

23

In our cases addressing § 10(b) and Rule 10b-5, we have confronted two main issues. First, we have determined the scope of conduct prohibited by § 10(b). See, e.g., Dirks v. SEC,463 U.S. 646, 103 S.Ct. 3255, 77 L.Ed.2d 911 (1983); Aaron v. SEC,446 U.S. 680, 100 S.Ct. 1945, 64 L.Ed.2d 611 (1980); Chiarella v. United States,445 U.S. 222, 100 S.Ct. 1108, 63 L.Ed.2d 348 (1980); Santa Fe Industries Inc. v. Green,430 U.S. 462, 97 S.Ct. 1292, 51 L.Ed.2d 480 (1977); Ernst & Ernst v. Hochfelder,425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976). Second, in cases where the defendant has committed a violation of § 10(b), we have decided questions about the elements of the 10b-5 private liability scheme: for example, whether there is a right to contribution, what the statute of limitations is, whether there is a reliance requirement, and whether there is an in pari delicto defense. See Musick, Peeler & Garrett v. Employers Ins. of Wausau, 508 U.S. ----, 113 S.Ct. 2085, 124 L.Ed.2d 194 (1993); Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson,501 U.S. 350, 111 S.Ct. 2773, 115 L.Ed.2d 321 (1991); Basic Inc. v. Levinson,485 U.S. 224, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988); Bateman Eichler, Hill Richards, Inc. v. Berner,472 U.S. 299, 105 S.Ct. 2622, 86 L.Ed.2d 215 (1985); see also Blue Chip Stamps, supra; Schlick v. Penn-Dixie Cement Corp.,507 F.2d 374 (CA2 1974); cf. Virginia Bankshares, Inc. v. Sandberg,501 U.S. 1083, 111 S.Ct. 2749, 115 L.Ed.2d 929 (1991) (§ 14); Schreiber v. Burlington Northern, Inc.,472 U.S. 1, 105 S.Ct. 2458, 86 L.Ed.2d 1 (1985) (same).

24

The latter issue, determining the elements of the 10b-5 private liability scheme, has posed difficulty because Congress did not create a private § 10(b) cause of action and had no occasion to provide guidance about the elements of a private liability scheme. We thus have had "to infer how the 1934 Congress would have addressed the issue[s] had the 10b-5 action been included as an express provision in the 1934 Act." Musick, Peeler, supra, at ----, 113 S.Ct., at 2090.

25

With respect, however, to the first issue, the scope of conduct prohibited by § 10(b), the text of the statute controls our decision. In § 10(b), Congress prohibited manipulative or deceptive acts in connection with the purchase or sale of securities. It envisioned that the SEC would enforce the statutory prohibition through administrative and injunctive actions. Of course, a private plaintiff now may bring suit against violators of § 10(b). But the private plaintiff may not bring a 10b-5 suit against a defendant for acts not prohibited by the text of § 10(b). To the contrary, our cases considering the scope of conduct prohibited by § 10(b) in private suits have emphasized adherence to the statutory language, " '[t]he starting point in every case involving construction of a statute.' " Ernst & Ernst, supra,425 U.S., at 197, 96 S.Ct., at 1383 (quoting Blue Chip Stamps,421 U.S., at 756, 95 S.Ct., at 1935 (Powell, J., concurring)); see Chiarella, supra,445 U.S. at 226, 100 S.Ct., at 1113; Santa Fe Industries, supra,430 U.S., at 472, 97 S.Ct., at 1300. We have refused to allow 10b-5 challenges to conduct not prohibited by the text of the statute.

26

In Ernst & Ernst, we considered whether negligent acts could violate § 10(b). We first noted that "the words 'manipulative' or 'deceptive' used in conjunction with 'device or contrivance' strongly suggest that § 10(b) was intended to proscribe knowing or intentional misconduct." 425 U.S., at 197, 96 S.Ct., at 1383. The SEC argued that the broad congressional purposes behind the Act—to protect investors from false and misleading practices that might injure them—suggested that § 10(b) should also reach negligent conduct. Id., at 198, 96 S.Ct., at 1383. We rejected that argument, concluding that the SEC's interpretation would "add a gloss to the operative language of the statute quite different from its commonly accepted meaning." Id., at 199, 96 S.Ct., at 1383.

27

In Santa Fe Industries, another case involving "the reach and coverage of § 10(b)," 430 U.S., at 464, 97 S.Ct., at 1296, we considered whether § 10(b) "reached breaches of fiduciary duty by a majority against minority shareholders without any charge of misrepresentation or lack of disclosure." Id.,430 U.S. at 470, 97 S.Ct., at 1299 (internal quotation marks omitted). We held that it did not, reaffirming our decision in Ernst & Ernst and emphasizing that the "language of § 10(b) gives no indication that Congress meant to prohibit any conduct not involving manipulation or deception." Id., at 473, 97 S.Ct., at 1300.

28

Later, in Chiarella, we considered whether § 10(b) is violated when a person trades securities without disclosing inside information. We held that § 10(b) is not violated under those circumstances unless the trader has an independent duty of disclosure. In reaching our conclusion, we noted that "not every instance of financial unfairness constitutes fraudulent activity under § 10(b)." 445 U.S., at 232, 100 S.Ct., at 1116-1117. We stated that "the 1934 Act cannot be read more broadly than its language and the statutory scheme reasonably permit," and we found "no basis for applying . . . a new and different theory of liability" in that case. Id., at 234, 100 S.Ct., at 1118 (internal quotation marks omitted). "Section 10(b) is aptly described as a catchall provision, but what it catches must be fraud. When an allegation of fraud is based upon nondisclosure, there can be no fraud absent a duty to speak." Id., at 234-235, 100 S.Ct., at 1118.

29

Adherence to the text in defining the conduct covered by § 10(b) is consistent with our decisions interpreting other provisions of the securities Acts. In Pinter v. Dahl,486 U.S. 622, 108 S.Ct. 2063, 100 L.Ed.2d 658 (1988), for example, we interpreted the word "seller" in § 12(l ) of the 1934 Act by "look[ing] first at the language of § 12(l )." Id., at 641, 108 S.Ct., at 2075. Ruling that a seller is one who solicits securities sales for financial gain, we rejected the broader contention, "grounded in tort doctrine," that persons who participate in the sale can also be deemed sellers. Id., at 649, 108 S.Ct., at 2079. We found "no support in the statutory language or legislative history for expansion of § 12(1)," id., at 650, 108 S.Ct., at 2080, and stated that "[t]he ascertainment of congressional intent with respect to the scope of liability created by a particular section of the Securities Act must rest primarily on the language of that section." Id. at 653, 108 S.Ct., at 2082.

30

Last Term, the Court faced a similar issue, albeit outside the securities context, in a case raising the question whether knowing participation in a breach of fiduciary duty is actionable under ERISA. Mertens v. Hewitt Associates, 508 U.S. ----, 113 S.Ct. 2063, 124 L.Ed.2d 161 (1993). The petitioner in Mertens said that the knowing participation cause of action had been available in the common law of trusts and should be available under ERISA. We rejected that argument and noted that no provision in ERISA "explicitly require[d] [nonfiduciaries] to avoid participation (knowing or unknowing) in a fiduciary's breach of fiduciary duty." Id., at ----, 113 S.Ct., at 2067. While plaintiffs had a remedy against nonfiduciaries at common law, that was because "nonfiduciaries had a duty to the beneficiaries not to assist in the fiduciary's breach." Id., at ----, n. 5, 113 S.Ct., at 2068, n. 5. No comparable duty was set forth in ERISA.

31

Our consideration of statutory duties, especially in cases interpreting § 10(b), establishes that the statutory text controls the definition of conduct covered by § 10(b). That bodes ill for respondents, for "the language of Section 10(b) does not in terms mention aiding and abetting." Brief for SEC as Amicus Curiae 8 (hereinafter Brief for SEC). To overcome this problem, respondents and the SEC suggest (or hint at) the novel argument that the use of the phrase "directly or indirectly" in the text of § 10(b) covers aiding and abetting. See Brief for Respondents 15 ("Inclusion of those who act 'indirectly' suggests a legislative purpose fully consistent with the prohibition of aiding and abetting"); Brief for SEC 8 ("[W]e think that when read in context [§ 10(b) ] is broad enough to encompass liability for such 'indirect' violations").

32

The federal courts have not relied on the "directly or indirectly" language when imposing aiding and abetting liability under § 10(b), and with good reason. There is a basic flaw with this interpretation. According to respondents and the SEC, the "directly or indirectly" language shows that "Congress . . . intended to reach all persons who engage, even if only indirectly, in proscribed activities connected with securities transactions." Brief for SEC 8. The problem, of course, is that aiding and abetting liability extends beyond persons who engage, even indirectly, in a proscribed activity; aiding and abetting liability reaches persons who do not engage in the proscribed activities at all, but who give a degree of aid to those who do. A further problem with respondents' interpretation of the "directly or indirectly" language is posed by the numerous provisions of the 1934 Act that use the term in a way that does not impose aiding and abetting liability. See § 7(f)(2)(C), 15 U.S.C. § 78g(f)(2)(C) (direct or indirect ownership of stock); § 9(b)(2)-(3), 15 U.S.C. § 78i(b)(2)-(3) (direct or indirect interest in put, call, straddle, option, or privilege); § 13(d)(1), 15 U.S.C. § 78m(d)(1) (direct or indirect ownership); § 16(a), 15 U.S.C. § 78p(a) (direct or indirect ownership); § 20, 15 U.S.C. § 78t (direct or indirect control of person violating Act). In short, respondents' interpretation of the "directly or indirectly" language fails to support their suggestion that the text of § 10(b) itself prohibits aiding and abetting. See 5B A. Jacobs, Litigation and Practice Under Rule 10b-5 § 40.07, p. 2-465 (rev. 1993).

33

Congress knew how to impose aiding and abetting liability when it chose to do so. See, e.g., Act of Mar. 4, 1909, § 332, 35 Stat. 1152, as amended, 18 U.S.C. § 2 (general criminal aiding and abetting statute); Packers and Stockyards Act, 1921, ch. 64, § 202, 42 Stat. 161, as amended, 7 U.S.C. § 192(g) (civil aiding and abetting provision); see generally infra, at 16-20. If, as respondents seem to say, Congress intended to impose aiding and abetting liability, we presume it would have used the words "aid" and "abet" in the statutory text. But it did not. Cf. Pinter v. Dahl,486 U.S., at 650, 108 S.Ct., at 2080 ("When Congress wished to create such liability, it had little trouble doing so"); Blue Chip Stamps,421 U.S., at 734, 95 S.Ct., at 1925 ("When Congress wished to provide a remedy to those who neither purchase nor sell securities, it had little trouble in doing so expressly").

34

We reach the uncontroversial conclusion, accepted even by those courts recognizing a § 10(b) aiding and abetting cause of action, that the text of the 1934 Act does not itself reach those who aid and abet a § 10(b) violation. Unlike those courts, however, we think that conclusion resolves the case. It is inconsistent with settled methodology in § 10(b) cases to extend liability beyond the scope of conduct prohibited by the statutory text. To be sure, aiding and abetting a wrongdoer ought to be actionable in certain instances. Cf. Restatement (Second) of Torts § 876(b) (1977). The issue, however, is not whether imposing private civil liability on aiders and abettors is good policy but whether aiding and abetting is covered by the statute.

35

As in earlier cases considering conduct prohibited by § 10(b), we again conclude that the statute prohibits only the making of a material misstatement (or omission) or the commission of a manipulative act. See Santa Fe Industries,430 U.S., at 473, 97 S.Ct., at 1301 ("language of § 10(b) gives no indication that Congress meant to prohibit any conduct not involving manipulation or deception"); Ernst& Ernst,425 U.S., at 214, 96 S.Ct., at 1391 ("When a statute speaks so specifically in terms of manipulation and deception . . ., we are quite unwilling to extend the scope of the statute"). The proscription does not include giving aid to a person who commits a manipulative or deceptive act. We cannot amend the statute to create liability for acts that are not themselves manipulative or deceptive within the meaning of the statute.

III

36

Because this case concerns the conduct prohibited by § 10(b), the statute itself resolves the case, but even if it did not, we would reach the same result. When the text of § 10(b) does not resolve a particular issue, we attempt to infer "how the 1934 Congress would have addressed the issue had the 10b-5 action been included as an express provision in the 1934 Act." Musick, Peeler, 508 U.S., at ----, 113 S.Ct., at 2090. For that inquiry, we use the express causes of action in the securities Acts as the primary model for the § 10(b) action. The reason is evident: Had the 73d Congress enacted a private § 10(b) right of action, it likely would have designed it in a manner similar to the other private rights of action in the securities Acts. See Musick, Peeler, 508 U.S., at ---- - ----, 113 S.Ct., at 2089-2092.

37

In Musick, Peeler, for example, we recognized a right to contribution under § 10(b). We held that the express rights of contribution contained in §§ 9 and 18 of the Acts were "important . . . feature[s] of the federal securities laws and that consistency required us to adopt a like contribution rule for the right of action existing under Rule 10b-5." 508 U.S., at ----, 113 S.Ct., at 2091. In Basic Inc. v. Levinson,485 U.S. 224, 243, 108 S.Ct. 978, 989, 99 L.Ed.2d 194 (1988), we decided that a plaintiff in a 10b-5 action must prove that he relied on the defendant's misrepresentation in order to recover damages. In so holding, we stated that the "analogous express right of action"—§ 18(a) of the 1934 Act—"includes a reliance requirement." Ibid. And in Blue Chip Stamps, we held that a 10b-5 plaintiff must have purchased or sold the security to recover damages for the defendant's misrepresentation. We said that "[t]he principal express private nonderivative civil remedies, created by Congress contemporaneously with the passage of § 10(b) . . . are by their terms expressly limited to purchasers or sellers of securities." 421 U.S., at 735-736, 95 S.Ct., at 1925.

38

Following that analysis here, we look to the express private causes of action in the 1933 and 1934 Acts. See, e.g., Musick, Peeler, supra, 508 U.S. at ---- - ----, 113 S.Ct., at 2089-2092; Blue Chip Stamps, supra,421 U.S. at 735-736, 95 S.Ct., at 1925-1926. In the 1933 Act, § 11 prohibits false statements or omissions of material fact in registration statements; it identifies the various categories of defendants subject to liability for a violation, but that list does not include aiders and abettors. 15 U.S.C. § 77k. Section 12 prohibits the sale of unregistered, nonexempt securities as well as the sale of securities by means of a material misstatement or omission; and it limits liability to those who offer or sell the security. 15 U.S.C. § 77l. In the 1934 Act, § 9 prohibits any person from engaging in manipulative practices such as wash sales, matched orders, and the like. 15 U.S.C. § 78i. Section 16 prohibits short-swing trading by owners, directors, and officers. 15 U.S.C. § 78p. Section 18 prohibits any person from making misleading statements in reports filed with the SEC. 15 U.S.C. § 78r. And § 20A, added in 1988, prohibits any person from engaging in insider trading. 15 U.S.C. § 78t-1.

39

This survey of the express causes of action in the securities Acts reveals that each (like § 10(b)) specifies the conduct for which defendants may be held liable. Some of the express causes of action specify categories of defendants who may be liable; others (like § 10(b)) state only that "any person" who commits one of the prohibited acts may be held liable. The important point for present purposes, however, is that none of the express causes of action in the 1934 Act further imposes liability on one who aids or abets a violation. Cf. 7 U.S.C. § 25(a)(1) (1988 ed. and Supp. IV) (Commodity Exchange Act's private civil aiding and abetting provision).

40

From the fact that Congress did not attach private aiding and abetting liability to any of the express causes of action in the securities Acts, we can infer that Congress likely would not have attached aiding and abetting liability to § 10(b) had it provided a private § 10(b) cause of action. See Musick, Peeler, 508 U.S., at ----, 113 S.Ct., at 2091 ("[C]onsistency requires us to adopt a like contribution rule for the right of action existing under Rule 10b-5"). There is no reason to think that Congress would have attached aiding and abetting liability only to § 10(b) and not to any of the express private rights of action in the Act. In Blue Chip Stamps, we noted that it would be "anomalous to impute to Congress an intention to expand the plaintiff class for a judicially implied cause of action beyond the bounds it delineated for comparable express causes of action." 421 U.S., at 736, 95 S.Ct., at 1925-1926. Here, it would be just as anomalous to impute to Congress an intention in effect to expand the defendant class for 10b-5 actions beyond the bounds delineated for comparable express causes of action.

41

Our reasoning is confirmed by the fact that respondents' argument would impose 10b-5 aiding and abetting liability when at least one element critical for recovery under 10b-5 is absent: reliance. A plaintiff must show reliance on the defendant's misstatement or omission to recover under 10b-5. Basic Inc. v. Levinson, supra,485 U.S., at 243, 108 S.Ct., at 989-990. Were we to allow the aiding and abetting action proposed in this case, the defendant could be liable without any showing that the plaintiff relied upon the aider and abettor's statements or actions. See also Chiarella,445 U.S., at 228, 100 S.Ct., at 1114 (omission actionable only where duty to disclose arises from specific relationship between two parties). Allowing plaintiffs to circumvent the reliance requirement would disregard the careful limits on 10b-5 recovery mandated by our earlier cases.

IV

42

Respondents make further arguments for imposition of § 10(b) aiding and abetting liability, none of which leads us to a different answer.

A.

43

The text does not support their point, but respondents and some amici invoke a broad-based notion of congressional intent. They say that Congress legislated with an understanding of general principles of tort law and that aiding and abetting liability was "well established in both civil and criminal actions by 1934." Brief for SEC 10. Thus, "Congress intended to include" aiding and abetting liability in the 1934 Act. Id., at 11. A brief history of aiding and abetting liability serves to dispose of this argument.

44

Aiding and abetting is an ancient criminal law doctrine. See United States v. Peoni,100 F.2d 401, 402 (CA2 1938); 1 M. Hale, Pleas of the Crown 615 (1736). Though there is no federal common law of crimes, Congress in 1909 enacted what is now 18 U.S.C. § 2, a general aiding and abetting statute applicable to all federal criminal offenses. Act of Mar. 4, 1909, § 332, 35 Stat. 1152. The statute decrees that those who provide knowing aid to persons committing federal crimes, with the intent to facilitate the crime, are themselves committing a crime. Nye & Nissen v. United States,336 U.S. 613, 619, 69 S.Ct. 766, 769-770, 93 L.Ed. 919 (1949).

45

The Restatement of Torts, under a concert of action principle, accepts a doctrine with rough similarity to criminal aiding and abetting. An actor is liable for harm resulting to a third person from the tortious conduct of another "if he . . . knows that the other's conduct constitutes a breach of duty and gives substantial assistance or encouragement to the other. . . ." Restatement (Second) of Torts § 876(b) (1977); see also W. Keeton, D. Dobbs, R. Keeton, & D. Owen, Prosser and Keeton on Law of Torts 322-324 (5th ed. 1984). The doctrine has been at best uncertain in application, however. As the Court of Appeals for the District of Columbia Circuit noted in a comprehensive opinion on the subject, the leading cases applying this doctrine are statutory securities cases, with the common-law precedents "largely confined to isolated acts of adolescents in rural society." Halberstam v. Welch,705 F.2d 472, 489 (1983). Indeed, in some States, it is still unclear whether there is aiding and abetting tort liability of the kind set forth in § 876(b) of the Restatement. See, e.g., FDIC v. S. Prawer & Co., 829 F.Supp. 453, 457 (Maine 1993) (in Maine, "[i]t is clear . . . that aiding and abetting liability did not exist under the common law, but was entirely a creature of statute"); In re Asbestos School Litigation, 1991 WL 137128, *3, 1991 U.S.Dist.LEXIS 10471, *34 (E.D.Pa.1991) (cause of action under Restatement § 876 "has not yet been applied as a basis for liability" by Pennsylvania courts); Meadow Limited Partnership v. Heritage Savings and Loan Assn., 639 F.Supp. 643, 653 (E.D.Va.1986) (aiding and abetting tort based on Restatement § 876 "not expressly recognized by the state courts of the Commonwealth" of Virginia); Sloane v. Fauque, 239 Mont. 383, 385, 784 P.2d 895, 896 (1989) (aiding and abetting tort liability is issue "of first impression in Montana").

46

More to the point, Congress has not enacted a general civil aiding and abetting statute—either for suits by the Government (when the Government sues for civil penalties or injunctive relief) or for suits by private parties. Thus, when Congress enacts a statute under which a person may sue and recover damages from a private defendant for the defendant's violation of some statutory norm, there is no general presumption that the plaintiff may also sue aiders and abettors. See, e.g., Electronic Laboratory Supply Co. v. Cullen,977 F.2d 798, 805-806 (CA3 1992).

47

Congress instead has taken a statute-by-statute approach to civil aiding and abetting liability. For example, the Internal Revenue Code contains a full section governing aiding and abetting liability, complete with description of scienter and the penalties attached. 26 U.S.C. § 6701 (1988 ed. and Supp. IV). The Commodity Exchange Act contains an explicit aiding and abetting provision that applies to private suits brought under that Act. 7 U.S.C. § 25(a)(1); see also, e.g.,12 U.S.C. § 93(b)(8) (1988 ed. and Supp. IV) (National Bank Act defines violations to include "aiding and abetting"); 12 U.S.C. § 504(h) (1988 ed. and Supp. IV) (Federal Reserve Act defines violations to include "aiding and abetting"); Packers and Stockyards Act, 1921, ch. 64, § 202, 42 Stat. 161, 7 U.S.C. § 192(g) (civil aiding and abetting provision). Indeed, various provisions of the securities laws prohibit aiding and abetting, although violations are enforceable only in actions brought by the SEC. See, e.g.,15 U.S.C. § 78o (b)(4)(E) (1988 ed. and Supp. IV) (SEC may proceed against brokers and dealers who aid and abet a violation of the securities laws); Insider Trader Sanctions Act of 1984, Pub.L. 98-376, 98 Stat. 1264 (civil penalty provision added in 1984 applicable to those who aid and abet insider trading violations); 15 U.S.C. § 78u-2 (1988 ed., Supp. IV) (civil penalty provision added in 1990 applicable to brokers and dealers who aid and abet various violations of the Act).

48

With this background in mind, we think respondents' argument based on implicit congressional intent can be taken in one of three ways. First, respondents might be saying that aiding and abetting should attach to all federal civil statutes, even laws that do not contain an explicit aiding and abetting provision. But neither respondents nor their amici cite, and we have not found, any precedent for that vast expansion of federal law. It does not appear Congress was operating on that assumption in 1934, or since then, given that it has been quite explicit in imposing civil aiding and abetting liability in other instances. We decline to recognize such a comprehensive rule with no expression of congressional direction to do so.

49

Second, on a more narrow ground, respondents' congressional intent argument might be interpreted to suggest that the 73d Congress intended to include aiding and abetting only in § 10(b). But nothing in the text or history of § 10(b) even implies that aiding and abetting was covered by the statutory prohibition on manipulative and deceptive conduct.

50

Third, respondents' congressional intent argument might be construed as a contention that the 73d Congress intended to impose aiding and abetting liability for all of the express causes of action contained in the 1934 Act—and thus would have imposed aiding and abetting liability in § 10(b) actions had it enacted a private § 10(b) right of action. As we have explained, however, none of the express private causes of action in the Act imposes aiding and abetting liability, and there is no evidence that Congress intended that liability for the express causes of action.

51

Even assuming, moreover, a deeply rooted background of aiding and abetting tort liability, it does not follow that Congress intended to apply that kind of liability to the private causes of action in the securities Acts. Cf. Mertens, 508 U.S., at ----, 113 S.Ct., at 2067 (omission of knowing participation liability in ERISA "appears all the more deliberate in light of the fact that 'knowing participation' liability on the part of both cotrustees and third persons was well established under the common law of trusts"). In addition, Congress did not overlook secondary liability when it created the private rights of action in the 1934 Act. Section 20 of the 1934 Act imposes liability on "controlling persons"—persons who "contro[l] any person liable under any provision of this chapter or of any rule or regulation thereunder." 15 U.S.C. § 78t(a). This suggests that "[w]hen Congress wished to create such [secondary] liability, it had little trouble doing so." Pinter v. Dahl,486 U.S., at 650, 108 S.Ct., at 2080; cf. Touche Ross & Co. v. Redington,442 U.S. 560, 572, 99 S.Ct. 2479, 2487, 61 L.Ed.2d 82 (1979) ("Obviously, then, when Congress wished to provide a private damages remedy, it knew how to do so and did so expressly"); see also Fischel, 69 Calif.L.Rev., at 96-98. Aiding and abetting is "a method by which courts create secondary liability" in persons other than the violator of the statute. Pinter v. Dahl, supra,486 U.S. at 648, n. 24, 108 S.Ct., at 2079, n. 24. The fact that Congress chose to impose some forms of secondary liability, but not others, indicates a deliberate congressional choice with which the courts should not interfere.

52

We note that the 1929 Uniform Sale of Securities Act contained a private aiding and abetting cause of action. And at the time Congress passed the 1934 Act, the blue sky laws of 11 States and the Territory of Hawaii provided a private right of action against those who aided a fraudulent or illegal sale of securities. See Abrams, The Scope of Liability Under Section 12 of the Securities Act of 1933: "Participation" and the Pertinent Legislative Materials, 15 Ford.Urb.L.J. 877, 945, and n. 423 (1987) (listing provisions). Congress enacted the 1933 and 1934 Acts against this backdrop, but did not provide for aiding and abetting liability in any of the private causes of action it authorized.

53

In sum, it is not plausible to interpret the statutory silence as tantamount to an implicit congressional intent to impose § 10(b) aiding and abetting liability.

B

54

When Congress reenacts statutory language that has been given a consistent judicial construction, we often adhere to that construction in interpreting the reenacted statutory language. See, e.g., Keene Corp. v. United States, 508 U.S. ----, ----, 113 S.Ct. 2035, 2043, 124 L.Ed.2d 118 (1993); Pierce v. Underwood,487 U.S. 552, 567, 108 S.Ct. 2541, 2551, 101 L.Ed.2d 490 (1988); Lorillard v. Pons,434 U.S. 575, 580-581, 98 S.Ct. 866, 870, 55 L.Ed.2d 40 (1978). Congress has not reenacted the language of § 10(b) since 1934, however, so we need not determine whether the other conditions for applying the reenactment doctrine are present. Cf. Fogerty v. Fantasy, Inc., 510 U.S. ----, ---- - ----, 114 S.Ct. 1023, 1030-1033, 127 L.Ed.2d 455 (1994).

55

Nonetheless, the parties advance competing arguments based on other post-1934 legislative developments to support their differing interpretations of § 10(b). Respondents note that 1983 and 1988 committee reports, which make oblique references to aiding and abetting liability, show that those Congresses interpreted § 10(b) to cover aiding and abetting. H.R.Rep. No. 100-910, pp. 27-28 (1988); H.R.Rep. No. 355, p. 10 (1983). But "[w]e have observed on more than one occasion that the interpretation given by one Congress (or a committee or Member thereof) to an earlier statute is of little assistance in discerning the meaning of that statute." Public Employees Retirement System v. Betts,492 U.S. 158, 168, 109 S.Ct. 2854, 2861, 106 L.Ed.2d 134 (1989); see Weinberger v. Rossi,456 U.S. 25, 35, 102 S.Ct. 1510, 1517-1518, 71 L.Ed.2d 715 (1982); Consumer Product Safety Comm'n v. GTE Sylvania, Inc.,447 U.S. 102, 118, and n. 13, 100 S.Ct. 2051, 2061, and n. 13, 64 L.Ed.2d 766 (1980).

56

Respondents observe that Congress has amended the securities laws on various occasions since 1966, when courts first began to interpret § 10(b) to cover aiding and abetting, but has done so without providing that aiding and abetting liability is not available under § 10(b). From that, respondents infer that these Congresses, by silence, have acquiesced in the judicial interpretation of § 10(b). We disagree. This Court has reserved the issue of 10b-5 aiding and abetting liability on two previous occasions. Herman & MacLean v. Huddleston,459 U.S., at 379, n. 5, 103 S.Ct., at 685, n. 5; Ernst & Ernst,425 U.S., at 191-192, n. 7, 96 S.Ct., at 1380, n. 7. Furthermore, our observations on the acquiescence doctrine indicate its limitations as an expression of congressional intent. "It does not follow . . . that Congress' failure to overturn a statutory precedent is reason for this Court to adhere to it. It is 'impossible to assert with any degree of assurance that congressional failure to act represents' affirmative congressional approval of the [courts'] statutory interpretation. . . . Congress may legislate, moreover, only through passage of a bill which is approved by both Houses and signed by the President. See U.S. Const. Art. I, § 7, cl. 2. Congressional inaction cannot amend a duly enacted statute." Patterson v. McLean Credit Union,491 U.S. 164, 175, n. 1, 109 S.Ct. 2363, 2371, n. 1, 105 L.Ed.2d 132 (1989) (quoting Johnson v. Transportation Agency, Santa Clara County,480 U.S. 616, 671-672, 107 S.Ct. 1442, 1472-1473, 94 L.Ed.2d 615 (1987) (Scalia, J., dissenting)); see Helvering v. Hallock,309 U.S. 106, 121, 60 S.Ct. 444, 452, 84 L.Ed. 604 (1940) (Frankfurter, J.) ("[W]e walk on quicksand when we try to find in the absence of corrective legislation a controlling legal principle").

57

Central Bank, for its part, points out that in 1957, 1959, and 1960, bills were introduced that would have amended the securities laws to make it "unlawful . . . to aid, abet, counsel, command, induce, or procure the violation of any provision" of the 1934 Act. S. 1179, 86th Cong., 1st Sess. § 22 (1959); see also S. 3770, 86th Cong., 2d Sess. § 20 (1960); S. 2545, 85th Cong., 1st Sess. § 20 (1957). These bills prompted "industry fears that private litigants, not only the SEC, may find in this section a vehicle by which to sue aiders and abettors," and the bills were not passed. SEC Legislation: Hearings before a Subcommittee of the Committee on Banking and Currency on S. 1178, S. 1179, S. 1180, S. 1181, and S. 1182, 86th Cong., 1st Sess. 288, 370 (1959). According to Central Bank, these proposals reveal that those Congresses interpreted § 10(b) not to cover aiding and abetting. We have stated, however, that failed legislative proposals are "a particularly dangerous ground on which to rest an interpretation of a prior statute." Pension Benefit Guaranty Corp. v. LTV Corp.,496 U.S. 633, 650, 110 S.Ct. 2668, 2678, 110 L.Ed.2d 579 (1990). "Congressional inaction lacks persuasive significance because several equally tenable inferences may be drawn from such inaction, including the inference that the existing legislation already incorporated the offered change." Ibid. (internal quotation marks omitted); see United States v. Wise,370 U.S. 405, 411, 82 S.Ct. 1354, 1359, 8 L.Ed.2d 590 (1962).

58

It is true that our cases have not been consistent in rejecting arguments such as these. Compare Flood v. Kuhn,407 U.S. 258, 281-282, 92 S.Ct. 2099, 2111-2112, 32 L.Ed.2d 728 (1972), with Pension Benefit Guaranty Corp., supra,496 U.S., at 650, 110 S.Ct., at 2678; compare Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Curran,456 U.S. 353, 381-382, 102 S.Ct. 1825, 1840-1841, 72 L.Ed.2d 182 (1982), with Aaron v. SEC,446 U.S. 680, 694, n. 11, 100 S.Ct. 1945, 1954, n. 11, 64 L.Ed.2d 611 (1980). As a general matter, however, we have stated that these arguments deserve little weight in the interpretive process. Even were that not the case, the competing arguments here would not point to a definitive answer. We therefore reject them. As we stated last Term, Congress has acknowledged the 10b-5 action without any further attempt to define it. Musick, Peeler, 508 U.S., at ----, 113 S.Ct., at 2089. We find our role limited when the issue is the scope of conduct prohibited by the statute. Id., at ----, 113 S.Ct., at 2088. That issue is our concern here, and we adhere to the statutory text in resolving it.

C

59

The SEC points to various policy arguments in support of the 10b-5 aiding and abetting cause of action. It argues, for example, that the aiding and abetting cause of action deters secondary actors from contributing to fraudulent activities and ensures that defrauded plaintiffs are made whole. Brief for SEC 16-17.

60

Policy considerations cannot override our interpretation of the text and structure of the Act, except to the extent that they may help to show that adherence to the text and structure would lead to a result "so bizarre" that Congress could not have intended it. Demarest v. Manspeaker,498 U.S. 184, 191, 111 S.Ct. 599, 604, 112 L.Ed.2d 608 (1991); cf. Pinter v. Dahl,486 U.S., at 654, 108 S.Ct., at 2082 ("[W]e need not entertain Pinter's policy arguments"); Santa Fe Industries,430 U.S., at 477, 97 S.Ct., at 1303 (language sufficiently clear to be dispositive). That is not the case here.

61

Extending the 10b-5 cause of action to aiders and abettors no doubt makes the civil remedy more far-reaching, but it does not follow that the objectives of the statute are better served. Secondary liability for aiders and abettors exacts costs that may disserve the goals of fair dealing and efficiency in the securities markets.

62

As an initial matter, the rules for determining aiding and abetting liability are unclear, in "an area that demands certainty and predictability." Pinter v. Dahl,486 U.S., at 652, 108 S.Ct., at 2081. That leads to the undesirable result of decisions "made on an ad hoc basis, offering little predictive value" to those who provide services to participants in the securities business. Ibid. "[S]uch a shifting and highly fact-oriented disposition of the issue of who may [be liable for] a damages claim for violation of Rule 10b-5" is not a "satisfactory basis for a rule of liability imposed on the conduct of business transactions." Blue Chip Stamps,421 U.S., at 755, 95 S.Ct., at 1934; see also Virginia Bankshares, 501 U.S., at ----, 111 S.Ct., at 2754 ("The issues would be hazy, their litigation protracted, and their resolution unreliable. Given a choice, we would reject any theory . . . that raised such prospects"). Because of the uncertainty of the governing rules, entities subject to secondary liability as aiders and abettors may find it prudent and necessary, as a business judgment, to abandon substantial defenses and to pay settlements in order to avoid the expense and risk of going to trial.

63

In addition, "litigation under Rule 10b-5 presents a danger of vexatiousness different in degree and in kind from that which accompanies litigation in general." Blue Chip Stamps, supra,421 U.S., at 739, 95 S.Ct., at 1927; see Virginia Bankshares, 501 U.S., at ----, 111 S.Ct., at ----; S.Rep. No. 792, 73d Cong., 2d Sess., p. 21 (1934) (attorney's fees provision is protection against strike suits). Litigation under 10b-5 thus requires secondary actors to expend large sums even for pretrial defense and the negotiation of settlements. See 138 Cong.Rec. S12605 (Aug. 12, 1992) (remarks of Sen. Sanford) (asserting that in 83% of 10b-5 cases major accounting firms pay $8 in legal fees for every $1 paid in claims).

64

This uncertainty and excessive litigation can have ripple effects. For example, newer and smaller companies may find it difficult to obtain advice from professionals. A professional may fear that a newer or smaller company may not survive and that business failure would generate securities litigation against the professional, among others. In addition, the increased costs incurred by professionals because of the litigation and settlement costs under 10b-5 may be passed on to their client companies, and in turn incurred by the company's investors, the intended beneficiaries of the statute. See Winter, Paying Lawyers, Empowering Prosecutors, and Protecting Managers: Raising the Cost of Capital in America, 42 Duke L.J. 945, 948-966 (1993).

65

We hasten to add that competing policy arguments in favor of aiding and abetting liability can also be advanced. The point here, however, is that it is far from clear that Congress in 1934 would have decided that the statutory purposes would be furthered by the imposition of private aider and abettor liability.

D

66

At oral argument, the SEC suggested that 18 U.S.C. § 2 is "significant" and "very important" in this case. Tr. of Oral Arg. 41, 43. At the outset, we note that this contention is inconsistent with the SEC's argument that recklessness is a sufficient scienter for aiding and abetting liability. Criminal aiding and abetting liability under § 2 requires proof that the defendant "in some sort associate[d] himself with the venture, that he participate[d] in it as in something that he wishe[d] to bring about, that he [sought] by his action to make it succeed." Nye & Nissen,336 U.S., at 619, 69 S.Ct., at 770 (internal quotation marks omitted). But recklessness, not intentional wrongdoing, is the theory underlying the aiding and abetting allegations in the case before us.

67

Furthermore, while it is true that an aider and abettor of a criminal violation of any provision of the 1934 Act, including § 10(b), violates 18 U.S.C. § 2, it does not follow that a private civil aiding and abetting cause of action must also exist. We have been quite reluctant to infer a private right of action from a criminal prohibition alone; in Cort v. Ash,422 U.S. 66, 80, 95 S.Ct. 2080, 2089, 45 L.Ed.2d 26 (1975), for example, we refused to infer a private right of action from "a bare criminal statute." And we have not suggested that a private right of action exists for all injuries caused by violations of criminal prohibitions. See Touche Ross,442 U.S., at 568, 99 S.Ct., at 2485 ("question of the existence of a statutory cause of action is, of course, one of statutory construction"). If we were to rely on this reasoning now, we would be obliged to hold that a private right of action exists for every provision of the 1934 Act, for it is a criminal violation to violate any of its provisions. 15 U.S.C. § 78ff. And thus, given 18 U.S.C. § 2, we would also have to hold that a civil aiding and abetting cause of action is available for every provision of the Act. There would be no logical stopping point to this line of reasoning: Every criminal statute passed for the benefit of some particular class of persons would carry with it a concomitant civil damages cause of action.

68

This approach, with its far-reaching consequences, would work a significant shift in settled interpretive principles regarding implied causes of action. See, e.g., Transamerica Mortgage Advisors, Inc. v. Lewis,444 U.S. 11, 100 S.Ct. 242, 62 L.Ed.2d 146 (1979). We are unwilling to reverse course in this case. We decline to rely only on 18 U.S.C. § 2 as the basis for recognizing a private aiding and abetting right of action under § 10(b).

V

69

Because the text of § 10(b) does not prohibit aiding and abetting, we hold that a private plaintiff may not maintain an aiding and abetting suit under § 10(b). The absence of § 10(b) aiding and abetting liability does not mean that secondary actors in the securities markets are always free from liability under the securities Acts. Any person or entity, including a lawyer, accountant, or bank, who employs a manipulative device or makes a material misstatement (or omission) on which a purchaser or seller of securities relies may be liable as a primary violator under 10b-5, assuming all of the requirements for primary liability under Rule 10b-5 are met. See Fischel, 69 Calif.L.Rev., at 107-108. In any complex securities fraud, moreover, there are likely to be multiple violators; in this case, for example, respondents named four defendants as primary violators. App. 24-25.

70

Respondents concede that Central Bank did not commit a manipulative or deceptive act within the meaning of § 10(b). Tr. of Oral Arg. 31. Instead, in the words of the complaint, Central Bank was "secondarily liable under § 10(b) for its conduct in aiding and abetting the fraud." App. 26. Because of our conclusion that there is no private aiding and abetting liability under § 10(b), Central Bank may not be held liable as an aider and abettor. The District Court's grant of summary judgment to Central Bank was proper, and the judgment of the Court of Appeals is

72

Justice STEVENS, with whom Justice BLACKMUN, Justice SOUTER, and Justice GINSBURG join, dissenting.

73

The main themes of the Court's opinion are that the text of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), does not expressly mention aiding and abetting liability, and that Congress knows how to legislate. Both propositions are unexceptionable, but neither is reason to eliminate the private right of action against aiders and abettors of violations of § 10(b) and the Securities and Exchange Commission's Rule 10b-5. Because the majority gives short shrift to a long history of aider and abettor liability under § 10(b) and Rule 10b-5, and because its rationale imperils other well established forms of secondary liability not expressly addressed in the securities laws, I respectfully dissent.

74

In hundreds of judicial and administrative proceedings in every circuit in the federal system, the courts and the SEC have concluded that aiders and abettors are subject to liability under § 10(b) and Rule 10b-5. See 5B A. Jacobs, Litigation and Practice Under Rule 10b-5 § 40.02 (rev. ed. 1993) (citing cases). While we have reserved decision on the legitimacy of the theory in two cases that did not present it, all 11 Courts of Appeals to have considered the question have recognized a private cause of action against aiders and abettors under § 10(b) and Rule 10b-5.1 The early aiding and abetting decisions relied upon principles borrowed from tort law; in those cases, judges closer to the times and climate of the 73d Congress than we concluded that holding aiders and abettors liable was consonant with the 1934 Act's purpose to strengthen the antifraud remedies of the common law.2 One described the aiding and abetting theory, grounded in "general principles of tort law," as a "logical and natural complement" to the private § 10(b) action that furthered the Exchange Act's purpose of "creation and maintenance of a post-issuance securities market that is free from fraudulent practices." Brennan v. Midwestern United Life Ins. Co., 259 F.Supp. 673, 680 (N.D.Ind.1966) (borrowing formulation from the Restatement of Torts § 876(b) (1939)), later opinion, 286 F.Supp. 702 (1968), aff'd, 417 F.2d 147 (CA7 1969), cert. denied, 397 U.S. 989, 90 S.Ct. 1122, 25 L.Ed.2d 397 (1970). See also Pettit v. American Stock Exchange, 217 F.Supp. 21, 28 (SDNY 1963).

75

The Courts of Appeals have usually applied a familiar three-part test for aider and abettor liability, patterned on the Restatement of Torts formulation, that requires (i) the existence of a primary violation of § 10(b) or Rule 10b-5, (ii) the defendant's knowledge of (or recklessness as to) that primary violation, and (iii) "substantial assistance" of the violation by the defendant. See, e.g., Cleary v. Perfectune, Inc.,700 F.2d 774, 776-777 (CA1 1983); IIT, An Int'l Investment Trust v. Cornfeld,619 F.2d 909, 922 (CA2 1980). If indeed there has been "continuing confusion" concerning the private right of action against aiders and abettors, that confusion has not concerned its basic structure, still less its "existence." See ante, at ____. Indeed, in this case, petitioner assumed the existence of a right of action against aiders and abettors, and sought review only of the subsidiary questions whether an indenture trustee could be found liable as an aider and abettor absent a breach of an indenture agreement or other duty under state law, and whether it could be liable as an aider and abettor based only on a showing of recklessness. These questions, it is true, have engendered genuine disagreement in the Courts of Appeals.3 But instead of simply addressing the questions presented by the parties, on which the law really was unsettled, the Court sua sponte directed the parties to address a question on which even the petitioner justifiably thought the law was settled, and reaches out to overturn a most considerable body of precedent.4

76

Many of the observations in the majority's opinion would be persuasive if we were considering whether to recognize a private right of action based upon a securities statute enacted recently. Our approach to implied causes of action, as to other matters of statutory construction, has changed markedly since the Exchange Act's passage in 1934. At that time, and indeed until quite recently, courts regularly assumed, in accord with the traditional common law presumption, that a statute enacted for the benefit of a particular class conferred on members of that class the right to sue violators of that statute.5 Moreover, shortly before the Exchange Act was passed, this Court instructed that such "remedial" legislation should receive "a broader and more liberal interpretation than that to be drawn from mere dictionary definitions of the words employed by Congress." Piedmont & Northern R. Co. v. ICC,286 U.S. 299, 311, 52 S.Ct. 541, 545, 76 L.Ed. 1115 (1932). There is a risk of anachronistic error in applying our current approach to implied causes of action, ante, at ____, to a statute enacted when courts commonly read statutes of this kind broadly to accord with their remedial purposes and regularly approved rights to sue despite statutory silence.

77

Even had § 10(b) not been enacted against a backdrop of liberal construction of remedial statutes and judicial favor toward implied rights of action, I would still disagree with the majority for the simple reason that a "settled construction of an important federal statute should not be disturbed unless and until Congress so decides." Reves v. Ernst & Young,494 U.S. 56, 74, 110 S.Ct. 945, 956, 108 L.Ed.2d 47 (1990) (STEVENS, J., concurring). See Blue Chip Stamps v. Manor Drug Stores,421 U.S. 723, 733, 95 S.Ct. 1917, 1924, 44 L.Ed.2d 539 (1975) (the "longstanding acceptance by the courts" and "Congress' failure to reject" rule announced in landmark Court of Appeals decision favored retention of the rule).6 A policy of respect for consistent judicial and administrative interpretations leaves it to elected representatives to assess settled law and to evaluate the merits and demerits of changing it.7 Even when there is no affirmative evidence of ratification, the Legislature's failure to reject a consistent judicial or administrative construction counsels hesitation from a court asked to invalidate it. Cf. Burnet v. Coronado Oil & Gas Co.,285 U.S. 393, 406, 52 S.Ct. 443, 447, 76 L.Ed. 815 (1932) (Brandeis, J., dissenting). Here, however, the available evidence suggests congressional approval of aider and abettor liability in private § 10(b) actions. In its comprehensive revision of the Exchange Act in 1975, Congress left untouched the sizeable body of case law approving aiding and abetting liability in private actions under § 10(b) and Rule 10b-5.8 The case for

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[WESTm,S.Ct. 1459!]]leaving aiding and abetting liability intact draws further strength from the fact that the SEC itself has consistently understood § 10(b) to impose aider and abettor liability since shortly after the rule's promulgation. See Ernst & Young,494 U.S., at 75, 110 S.Ct., at 956 (STEVENS, J., concurring). In short, one need not agree as an original matter with the many decisions recognizing the private right against aiders and abettors to concede that the right fits comfortably within the statutory scheme, and that it has become a part of the established system of private enforcement. We should leave it to Congress to alter that scheme.

79

The Court would be on firmer footing if it had been shown that aider and abettor liability "detracts from the effectiveness of the 10b-5 implied action or interferes with the effective operation of the securities laws." See Musick, Peeler & Garrett v. Employers Ins. of Wausau, 508 U.S. ----, ----, 113 S.Ct. 2085, 2091, 124 L.Ed.2d 194 (1993). However, the line of decisions recognizing aider and abettor liability suffers from no such infirmities. The language of both § 10(b) and Rule 10b-5 encompasses "any person" who violates the Commission's anti-fraud rules, whether "directly or indirectly"; we have read this "broad" language "not technically and restrictively, but flexibly to effectuate its remedial purposes." Affiliated Ute Citizens of Utah v. United States,406 U.S. 128, 151, 92 S.Ct. 1456, 1471, 31 L.Ed.2d 741 (1972). In light of the encompassing language of § 10(b), and its acknowledged purpose to strengthen the anti-fraud remedies of the common law, it was certainly no wild extrapolation for courts to conclude that aiders and abettors should be subject to the private action under § 10(b).9 Allowing aider and abettor claims in private § 10(b) actions can hardly be said to impose unfair legal duties on those whom Congress has opted to leave unregulated: Aiders and abettors of § 10(b) and Rule 10b-5 violations have always been subject to criminal liability under 18 U.S.C. § 2. See 15 U.S.C. § 78ff (criminal liability for willful violations of securities statutes and rules promulgated under them). Although the Court canvasses policy arguments against aider and abettor liability, ante, at ____, it does not suggest that the aiding and abetting theory has had such deleterious consequences that we should dispense with it on those grounds.10 The agency charged with primary responsibility for enforcing the securities laws does not perceive such drawbacks, and urges retention of the private right to sue aiders and abettors. See Brief for the Securities and Exchange Commission as Amicus Curiae in Support of Respondents 5-17.

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As framed by the Court's order redrafting the questions presented, this case concerns only the existence and scope of aiding and abetting liability in suits brought by private parties under § 10(b) and Rule 10b-5. The majority's rationale, however, sweeps far beyond even those important issues. The majority leaves little doubt that the Exchange Act does not even permit the Commission to pursue aiders and abettors in civil enforcement actions under § 10(b) and Rule 10b-5. See ante, at 12 (finding it dispositive that "the text of the 1934 Act does not itself reach those who aid and abet a § 10(b) violation"). Aiding and abetting liability has a long pedigree in civil proceedings brought by the SEC under § 10(b) and Rule 10b-5, and has become an important part of the Commission's enforcement arsenal.11 Moreover, the majority's approach to aiding and abetting at the very least casts serious doubt, both for private and SEC actions, on other forms of secondary liability that, like the aiding and abetting theory, have long been recognized by the SEC and the courts but are not expressly spelled out in the securities statutes.12 The principle the Court espouses today—that liability may not be imposed on parties who are not within the scope of § 10(b)'s plain language is inconsistent with long-established Commission and judicial precedent.

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As a general principle, I agree, "the creation of new rights ought to be left to legislatures, not courts." Musick, Peeler, 508 U.S., at ----, 113 S.Ct., at 2088. But judicial restraint does not always favor the narrowest possible interpretation of rights derived from federal statutes. While we are now properly reluctant to recognize private rights of action without an instruction from Congress, we should also be reluctant to lop off rights of action that have been recognized for decades, even if the judicial methodology that gave them birth is now out of favor. Caution is particularly appropriate here, because the judicially recognized right in question accords with the longstanding construction of the agency Congress has assigned to enforce the securities laws. Once again the Court has refused to build upon a " 'secure foundation . . . laid by others,' " Patterson v. McLean Credit Union,491 U.S. 164, 222, 109 S.Ct. 2363, 2396, 105 L.Ed.2d 132 (1989) (STEVENS, J., dissenting) (quoting B. Cardozo, The Nature of the Judicial Process 149 (1921)).

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I respectfully dissent.

Источник: https://www.law.cornell.edu/supremecourt/text/511/164

Central Bank and Trust Co.

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700 E 30th Ave, Hutchinson, KS, 67502

(620) 663-0617

Category:Banks

Website:centralbank-kansas.com

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USA

The banking industry has long been one of the most highly regulated industries in the United States, based on the “special” role that banks play in taking deposits, allocating credit, and operating the payments system.

This chapter provides an overview of the current U.S. bank regulatory framework at the federal level.  The United States has what is called a “dual banking system”, meaning that U.S. banks can be chartered by one of the 50 states or at the federal level.  However, whether state or federally chartered, a bank will have at least one federal supervisor.

Most banks in the United States are owned by bank holding companies (“BHCs”), which are generally prohibited from owning or controlling entities other than banks or companies engaged in activities that are “closely related to banking”.  For BHCs that elect to be treated as financial holding companies (“FHCs”), the standard is “activities that are financial in nature or complementary to a financial activity”.  A foreign banking organisation (“FBO”) may establish a banking presence in the United States through a branch or agency or by establishing or acquiring a U.S. bank or Edge Act Corporation subsidiary.

Over the past several years, many regulatory initiatives in the United States have derived from the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), which was a vast set of reforms enacted in 2010 in response to the financial crisis of 2007–2009.  Many provisions of the Dodd-Frank Act focus on the largest financial institutions, those with $50bn or more in total assets, due to their perceived role in causing the financial crisis and the perception of such institutions as “too big to fail”.  More recently, legislation passed by Congress and regulatory initiatives undertaken by U.S. federal regulatory entities have repealed or revised certain provisions of the Dodd-Frank Act, with several initiatives being focused on “tailoring” regulatory and supervisory requirements (such as capital, liquidity, risk management, and resolution planning) based on the size and risk profiles of banking organisations (“tailoring rules”).

The United States has a complex regulatory framework that features a myriad of federal regulatory agencies having often overlapping responsibility for banking regulation.  A brief description of the relevant bank regulatory agencies follows:

  • The Board of Governors of the Federal Reserve System (“Federal Reserve”)

The Federal Reserve System is the central bank of the United States and conducts U.S. monetary policy.  In addition, the Federal Reserve supervises BHCs, FHCs, state-chartered banks that are members of the Federal Reserve System, the U.S. activities of FBOs, and systemically important financial institutions (“SIFIs”) designated by the FSOC (as described below).

  • The Federal Deposit Insurance Corporation (“FDIC”)

The FDIC is the primary regulator for state-chartered banks that are not members of the Federal Reserve System as well as state-chartered thrifts.  The FDIC also insures bank and thrift deposits and has receivership powers over FDIC-insured banks and certain other institutions.

  • The Office of the Comptroller of the Currency (“OCC”)

The OCC is an independent bureau of the U.S. Department of the Treasury led by the Comptroller of the Currency that charters, regulates, and supervises all national banks and federal savings associations as well as federal branches and agencies of foreign banks (although most FBOs operate through state-licensed branches).

  • The Consumer Financial Protection Bureau (“CFPB”)

The CFPB has primary authority to develop consumer protection regulations applicable to both banks and non-banks, and to enforce compliance with such laws by banks with $10bn or more in assets and their affiliates, as well as by certain non-banks.

  • The Financial Stability Oversight Council (“FSOC”)

The FSOC is chaired by the Secretary of the Treasury and comprises the heads of eight financial regulators and one independent member with insurance experience.  Notably, the FSOC is empowered to designate systemically important non-bank financial institutions (generally referred to as non-bank SIFIs) for supervision by the Federal Reserve.  However, no such institutions are currently designated by the FSOC. 

Primary federal banking statutes

  • The National Bank Act (1863) created the basic framework for the U.S. banking system and the chartering of national banks.
  • The Federal Reserve Act, enacted in 1914, created the Federal Reserve System.
  • The Banking Act of 1933 generally separated commercial banks from investment banks and created the system of federal deposit insurance.
  • The Federal Deposit Insurance Act (“FDI Act”) consolidated prior FDIC legislation into one act and authorised the FDIC to act as the receiver of failed banks.  Section 18(c) of the FDI Act, commonly called the Bank Merger Act, subjects proposed mergers involving FDIC-insured depository institutions to prior regulatory approval.  Section 7(j) of the FDI Act, commonly called the Change in Bank Control Act, subjects certain acquisitions of FDIC-insured institutions to prior regulatory approval.
  • The Bank Holding Company Act of 1956 (“BHC Act”) requires Federal Reserve approval for a company to acquire a bank (and thereby become a BHC) and requires BHCs to obtain prior Federal Reserve approval to acquire an interest in additional banks and certain non-bank companies.
  • The act commonly known as the Bank Secrecy Act (“BSA”) (1970) requires all financial institutions, including banks, to establish a risk-based system of internal controls to prevent money laundering and terrorist financing.
  • The International Banking Act of 1978 (“IBA”) establishes the framework for federal supervision of foreign banks operating in the United States.
  • The Gramm-Leach-Bliley Act (“GLB Act”) (1999) generally repealed the provisions of the Banking Act of 1933 that separated investment banks from commercial banks (the Glass-Steagall Act) and authorised the creation of FHCs.
  • The Dodd-Frank Act (2010) has been the greatest legislative overhaul of financial services regulation in the United States since the 1930s and made significant changes to the U.S. bank regulatory framework.
  • The Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRCPA”) (2018) relaxed the regulatory requirements imposed by Dodd-Frank for all but the very largest banks, those with $250bn or more in total assets.

COVID-19 pandemic

Beginning in March 2020, the Novel Coronavirus (“COVID-19”) pandemic impeded much economic activity in the United States and globally.  In response, the U.S. federal and state governments, including banking and financial regulators, implemented certain legislative and regulatory actions to mitigate the impact of the COVID-19 pandemic on the economy and the financial system.  Such actions included mandatory forbearance on loans, regulatory relief with respect to bank capital and liquidity requirements, establishment of liquidity facilities similar to those employed during the 2008 financial crisis, and the extension of certain compliance deadlines.

Political change

U.S. banking regulators have frequently implemented a more stringent (“super equivalent”) version of rules that are part of the post-financial crisis regulatory agenda established by the Dodd-Frank Act and by international standard-setting groups such as the Group of Twenty, the Basel Committee on Banking Supervision (“Basel Committee”) and the Financial Stability Board.  During the Trump Administration, this trend toward super equivalent rules was curtailed, and efforts became more focused on tailoring and adding transparency to regulatory requirements.  For example, EGRRCPA tailored certain provisions of the Dodd-Frank Act and generally reduced regulatory requirements for banks holding less than $250bn in total consolidated assets.

With the election of President Joseph R. Biden, Jr. and Democratic control of Congress in 2020, there will be new regulatory and enforcement priorities for the financial services and financial technology (“fintech”) industries.  As President, Mr. Biden will have several opportunities to nominate federal financial regulatory agency heads and other officials for key posts.  The agendas for U.S. financial regulatory agencies will change in 2021 to reflect the priorities of the Biden Administration.  Key themes include supporting the U.S. economic recovery, advancing racial justice and equity, combatting climate change, and enhancing consumer protection.  However, major financial regulatory legislative initiatives are not expected to be a top priority of the new Administration.

With respect to climate change, the Federal Reserve stated in December 2020 that it formally joined the Network of Central Banks and Supervisors for Greening the Financial System, a global peer group that is addressing the climate’s impact on the financial services industry.  The Federal Reserve also announced the creation of a committee to better understand the risks that climate change may pose to the financial system.

Addressing innovation

Another area of increasing regulatory focus is the potential licensing of fintech companies.  Some states, such as Wyoming, have issued limited-purpose bank charters to such companies.  The OCC is also considering granting special purpose federal bank charters to fintech companies.  The grant of such special purpose federal charters would allow fintech companies to comply with a single set of national standards, rather than having to comply with the regulations of multiple states.  In 2017, the OCC adopted a new rule creating a formal receivership process for uninsured special purpose national banks.  In July 2018, the OCC issued a supplement to its Licensing Manual explaining how it would apply its existing standards to fintech companies applying for special purpose national bank charters.  State regulatory authorities have challenged (with some success so far) the OCC’s authority to issue such charters.  These challenges are pending as of February 2021. 

Another area of emerging regulation involves cryptocurrency activities.  In July 2020 and January 2021, the OCC published letters clarifying national banks’ and federal savings associations’ authority to: (i) provide cryptocurrency custody services for customers; and (ii) participate in independent node verification networks and use stablecoins to conduct payment activities and other bank-permissible functions, respectively.  The OCC and certain states (including New York) have also chartered limited-purpose trust companies to engage in various activities related to cryptocurrency.  Such trust companies generally are limited to fiduciary activities and may not accept deposits and are not FDIC-insured.  Anti-money laundering (“AML”) laws are also being revised to address cryptocurrency activities.

The proliferation of technologies employing Artificial Intelligence (“AI”) is leading to increased regulatory scrutiny of such technology.  AI is most prominently used by banks and fintech companies in: (i) underwriting loans; and (ii) monitoring for and detecting suspicious activity related to money laundering or otherwise fraudulent activity.  While AI adds efficiency and efficacy with respect to these processes, it may also lead to bias or “digital redlining” (in the case of loan underwriting), or materially significant failures with respect to monitoring and detection (in the case of AML monitoring).

Cybersecurity

Cybersecurity has also been an area of increasing focus, and the U.S. federal banking agencies have issued potential standards for comment.  Moreover, under rules that took effect in 2019, the New York State Department of Financial Services (“NYSDFS”) now requires banks, insurance companies, and other NYSDFS-regulated institutions to adopt a cybersecurity programme that meets certain minimum standards.

Control under the BHC Act

The concept of control is of significant importance under the BHC Act because it determines (among other things) whether a company controls a bank and thus becomes a BHC subject to the limitations and requirements of the BHC Act and to Federal Reserve prudential supervision.  In addition to statutory bright-line thresholds of control, a company (the “investor”) has control over another company (the “target”) if the investor company directly or indirectly exercises a “controlling influence” over the management or policies of the target company.  In 2020, the Federal Reserve issued a final rule that was intended to codify Federal Reserve practice in applying this “controlling influence” prong of control.  The key feature of the final rule is a series of rebuttable presumptions of control based on tiered levels of ownership of voting securities and other relationships (e.g., directorships, governance rights, and business relationships) between the investor and target companies.

Industrial banks and their parent companies

Industrial banks and industrial loan companies (collectively, “ILCs”) are state-chartered insured depository institutions that are “banks” for purposes of the FDI Act but not the BHC Act.  As a result, their parent companies are not subject to the limitations of the BHC Act or prudential supervision by the Federal Reserve.  For several years, there had been a moratorium on transferring control of existing ILCs or obtaining deposit insurance for new ILCs.  The moratorium ended with certain FDIC approvals for deposit insurance for new ILCs.  In late 2020, the FDIC adopted a final rule that imposes certain conditions and requirements on newly chartered or acquired ILCs and their parent companies.

The board of directors and senior management of a banking organisation are responsible for ensuring that the institution’s internal controls operate effectively in order to ensure the safety and soundness of the institution.  Improving bank governance and increasing the role and responsibilities of boards of directors and the risk-management function of banking organisations have been key areas of focus for U.S. banking regulators.

Board of directors

Generally, U.S. corporate law requires that boards of directors exercise a fiduciary duty of loyalty and duty of care to the corporation and its shareholders.  Boards of directors of banking organisations must perform these duties, with a focus on preserving the safety and soundness of the bank.  State and federal law also impose various citizenship, residency, independence, and expertise requirements on bank boards of directors.

While many regulations make it clear that the board’s role is to oversee and delegate to management, bank boards of directors also have significant responsibilities for overseeing and approving many of the actions taken by the institution under a variety of statutes, regulations, and supervisory guidance.  For example, boards of directors are required to approve an institution’s resolution plan, various risk tolerance levels and policies and procedures for stress testing.  In August 2017, the Federal Reserve Board requested public comment on a proposed new rule aimed at clarifying and narrowing the respective responsibilities of boards of directors and management, with the purpose of allowing boards of directors to focus their time and energy on their core responsibilities.  The proposal remains pending.

Boards of directors themselves have also recently become subject to additional prescriptive requirements regarding their structure and composition.  For example, the OCC has adopted “heightened standards” applicable to large national banks that require a bank’s board of directors to include two independent members and impose specific requirements on the board regarding recruitment and succession planning.

Risk management

Risk management is a critical function within banking organisations, and the function has been subject to increasingly prescriptive regulation because risk-management failures were perceived to be a significant cause of the financial crisis.

Banks subject to the OCC’s heightened standards guidelines are required to have one or more Chief Risk Executives who report directly to the CEO and have unrestricted access to the board and its committees to escalate risks.  Such banks also must have a written risk-governance framework, a risk-appetite statement, and a strategic plan that is reviewed and approved by the board or the board’s risk committee.

U.S. BHCs with total consolidated assets of $50bn or more must establish a risk-management framework, designate a Chief Risk Officer (“CRO”), and establish a board-level risk committee with at least one independent member and one risk-management expert.

FBOs also must maintain a U.S. risk committee, and larger FBOs are also required to appoint a U.S. CRO who is employed and located in the United States and reports directly to the U.S. risk committee and the global CRO or equivalent officials.  The tailoring rules eliminated the U.S. risk-committee requirement for FBOs with less than $50bn in total consolidated assets and require only those FBOs with $100bn in total consolidated assets and $50bn of combined U.S. assets to appoint a U.S. CRO. 

More recently, Federal Reserve and OCC enforcement actions have emphasised a renewed focus on risk management and expectations around board oversight over risk management.

Internal and external audit

The internal audit function within banking organisations generally is responsible for ensuring that the bank complies with its own policies and procedures and those required by law and regulation.  In the United States, internal audit must be positioned within the institution in a way that ensures impartiality and sufficient independence.

Internal audit must maintain a detailed risk assessment methodology, an audit plan, audit programme, and audit report.  The frequency of the internal audit review must be consistent with the nature, complexity, and risk of the institution’s activities.  The audit committee is responsible for overseeing the internal audit function.  The composition of the audit committee has similar requirements to that of the risk committee, depending on the size of the institution and supervising federal regulator.

FDIC regulations impose specific independent audit committee requirements on depository institutions that vary by the size of the institution, with institutions having total assets of more than $3bn subject to the most stringent requirements. 

The OCC heightened standards guidelines additionally require that the audit function of banks subject to the guidelines be led by a Chief Audit Executive who must be one level below the CEO, have unfettered access to the board, and report regularly to the audit committee of the board.

U.S. regulators also expect the internal audit function of foreign banks to cover their U.S. activities and offices, including U.S. representative offices.

Compensation

In the mid-1990s, the U.S. federal banking agencies adopted standards prohibiting compensation arrangements that were excessive or could lead to a material financial loss.  After the financial crisis, new legislation introduced significant restrictions on compensation for senior executive officers of firms that received certain forms of government assistance, including limits on bonuses, clawback requirements, and various governance requirements.

The U.S. federal banking agencies issued guidance on sound incentive compensation policies in 2010 that applies to all banking organisations supervised by the agencies and is structured around three key principles: (i) balance between risks and results; (ii) risk controls; and (iii) strong corporate governance. 

A proposed rule from 2016 that would generally prohibit the use of incentive compensation programmes that encourage inappropriate and excessive risk-taking for financial institutions with more than $50bn in total consolidated assets has not yet been finalised.

Intermediate holding company (“IHC”) requirement

Implementing a major change in the U.S. regulation of foreign banks, the Federal Reserve required FBOs with $50bn or more in U.S. non-branch or non-agency assets to establish an IHC by July 1, 2016.  The IHC must hold an FBO’s U.S. BHC and bank subsidiaries and substantially all other U.S. non-bank subsidiaries.  The IHC is subject to, with limited exceptions, the enhanced prudential standards applicable to U.S. BHCs.  In some cases, the Federal Reserve permits an FBO to establish more than one IHC to hold its U.S. subsidiaries.  The tailoring rules did not change the $50bn threshold that triggers the requirement to form an IHC, but less stringent prudential standards apply to the IHC if the FBO has combined U.S. assets of less than $100bn.

Resolution plans and related matters

Under the Dodd-Frank Act, large BHCs and FBOs with total global consolidated assets of $50bn or more, and non-bank financial companies designated by the FSOC as SIFIs, were required to develop, maintain, and file a resolution plan (so-called “living will”) with the Federal Reserve and the FDIC.  The resolution plan must detail the firm’s strategy for rapid and orderly resolution in the event of material financial distress or failure under the U.S. Bankruptcy Code.  Firms that do not submit credible plans are subject to the imposition of stricter regulatory requirements.  Since the enactment of Dodd-Frank, firms have been through several rounds of resolution plans.  EGRRCPA and subsequent rulemaking raised the thresholds at which the resolution plan requirement applies and generally aligned the precise requirements with the categories used for the application of other enhanced prudential standards.  Under the new rules, global systemically important banks (“GSIBs”) would be subject to the strictest rule, which requires filing a resolution plan every two years, alternating between full plans and targeted plans.  FBOs with more than $250bn of consolidated assets are subject to some level of resolution plan requirement.  BHCs with less than $100bn of consolidated assets, and certain BHCs with less than $250bn of consolidated assets, are no longer subject to resolution plan requirements.

In addition, FDIC-insured depository institutions (“IDIs”) with $50bn or more in total assets have been required to submit a separate resolution plan to the FDIC under regulations administered only by the FDIC.  In April 2019, the FDIC issued an advance notice of proposed rulemaking (“ANPR”) that aims to revisit the resolution planning requirements for IDIs of $50bn or more in assets.  Specifically, the ANPR focuses on ensuring that the appropriate scope, content, and frequency of resolution plans for various types of banks are tailored to each bank’s size, complexity, and level of risk.  As of February 2021, no proposed amendments have been issued.  The FDIC had placed a moratorium on the submission of IDI resolution plans until the rulemaking process was complete.  With the rulemaking process not completed, in January 2021 the FDIC lifted the moratorium.  However, no IDI will be required to submit a resolution plan without at least 12-months’ advance notice provided to the IDI.

In 2016, the OCC issued guidelines for recovery planning by certain banks (and federal branches of FBOs) with $50bn or more in total assets. 

The U.S. banking agencies have issued substantially similar rules that require global systemically important institutions (including the U.S. operations of systemically important FBOs) to amend certain qualified financial contracts (“QFCs”) to prohibit the immediate termination of such contracts and the exercise of certain other default rights by counterparties if the firm enters bankruptcy or a special resolution proceeding.  In 2020, the OCC provided by order an exception from the express recognition requirements of the QFC stay rule for non-U.S. subsidiaries of national banks with respect to “non-U.S. non-linked contracts” as defined in the order.

U.S. banks and BHCs have long been subject to risk-based capital requirements (“U.S. Capital Framework”) based on standards adopted by the Basel Committee (“Basel Framework”), which includes both advanced approaches and standardised methodologies. 

U.S. banking organisations with $250bn in total consolidated assets, or $10bn in on-balance-sheet foreign exposure, had been subject to the advanced approaches methodology as well as a capital floor established under the standardised approach.  Under the tailoring rules adopted by the three U.S. federal banking agencies effective December 31, 2019, only banking organisations with $700bn or more in total consolidated assets or $75bn or more in cross-jurisdictional activity are subject to the advanced approaches methodology.  Other banking organisations are generally subject only to the standardised approach.  U.S. top-tier BHC subsidiaries of FBOs are generally subject to minimum U.S. capital requirements, although they may elect to use the U.S. standardised approach to calculate their risk-based and leverage capital ratios regardless of their size. 

Acting pursuant to EGRRCPA, the U.S. federal banking agencies have adopted an optional Community Bank Leverage Ratio (“CBLR”) framework that generally permits smaller banking organisations to opt out of the risk-based capital framework.  The CBLR framework is generally available to a banking organisation with a leverage ratio greater than 9%, less than $10bn in average total consolidated assets, off-balance-sheet exposures of 25% or less of total consolidated assets, and trading assets plus trading liabilities of 5% or less of total consolidated assets.

Components of capital

The Basel Framework and the U.S. Capital Framework emphasise the importance of common equity Tier 1 capital (“CET1”), set standards for instruments to qualify as CET1, additional Tier 1, and Tier 2 capital, and phase out the qualification of certain hybrid instruments from inclusion as capital. 

Minimum capital ratios

The U.S. Capital Framework sets forth the minimum risk-based capital ratios for CET1 (4.5%), Tier 1 capital (6%), and total capital (8%).  In addition, banks must hold a capital conservation buffer in the form of CET1 of at least 2.5%.  For larger BHCs and IHCs, beginning in 2020, the Federal Reserve uses the results of stress tests to set the capital conservation buffer, which may result in a requirement larger than 2.5%.  An institution that fails to maintain capital in excess of the buffer will be restricted in its ability to make capital distributions or pay discretionary executive bonuses.  The U.S. regulators are also authorised to impose an additional countercyclical capital buffer of up to 2.5%.  No such buffer has been imposed.

GSIB Surcharge

The eight largest U.S. banking organisations, which are GSIBs, are subject to an additional capital surcharge (“GSIB Surcharge”).  The amount of the GSIB Surcharge is the higher of two measures that each bank must calculate.  The calculations take into account a firm’s size, interconnectedness, substitutability, complexity, cross-jurisdictional activity and, under one method, reliance on short-term wholesale funding instead of substitutability.

Risk-weighted assets

Although the U.S. Capital Framework is largely consistent with the Basel Framework, one important difference arises from the absence of the use of external credit ratings for the risk-weighting of assets in the U.S. Capital Framework due to the prohibition in Section 939A of the Dodd-Frank Act on the use of external credit ratings.  More generally, comparability of risk-weighting of assets across institutions and jurisdictions has become a matter of significant regulatory attention.  In addition, in 2019, the U.S. federal banking agencies adopted the Standardised Approach to Counterparty Credit Risk in calculating the exposure in derivative contracts.  The rule has a mandatory compliance date of January 1, 2022.

Market risk capital charge

The U.S. Capital Framework also includes a market risk capital charge (implementing the Basel II.5 Framework (introduced in July 2009)) for assets held in the trading book that applies to banks and BHCs with significant trading positions.  Unlike the Basel II.5 Framework, the U.S. rules do not rely on credit ratings to determine specific capital requirements for certain instruments.  The Basel Committee adopted a revised capital requirement for market risk framework in January 2016 to ensure standardisation and promote consistent implementation globally.  Key features include a revised boundary between the trading and banking book, a revised standardised and internal models approach for market risk, and incorporation of the risk of market illiquidity.  In January 2019, the Basel Committee issued revised standards, which will come into effect in January 2023.  U.S. regulators have not issued proposed regulations to implement the framework in the United States.

Leverage ratio

U.S. banking organisations have long been subject to a minimum leverage ratio.  The U.S. Capital Framework includes two separate leverage requirements.  The 4% minimum leverage ratio requirement represents a continuation of a ratio that has been in place for years (in general, Tier 1 capital divided by average consolidated assets, less deductions).  The other applies only to large banking organisations subject to the advanced approaches methodologies and is based on the 3% supplementary leverage ratio in the Basel Framework, which includes certain off-balance-sheet exposures in the calculation of required capital. 

In addition, the largest U.S. banking organisations (those with at least $700bn in total assets or $10tn in assets under custody) are subject to an “enhanced” supplementary leverage ratio.  Covered BHCs that do not maintain a ratio of at least 5% are subject to limitations on capital distributions and discretionary bonus payments, while depository institutions are required to maintain a ratio of at least 6% under the prompt corrective action framework (described below).  In October 2019, the U.S. federal banking agencies finalised a rule that tailors the enhanced supplemental leverage ratio requirements to the specific business activities and risk profiles of each firm, with the effect of relaxing the enhanced supplemental leverage ratio requirement.

Consequences of capital ratios

The U.S. prudential bank regulatory framework has several components based on an institution’s capital ratios.  For example, in order for a U.S. BHC to qualify as an FHC, it must meet a well-capitalised standard.  Similarly, FBOs that seek FHC status must demonstrate that they meet comparable standards under their home country’s capital requirements.  Capital levels also form the basis for the level of deposit insurance premiums payable to the FDIC by depository institutions, the ability of depository institutions to accept brokered deposits, qualification of banking organisations for streamlined processing of applications to make acquisitions or engage in new businesses, as well as other filings with bank supervisors under various laws and regulations.  Capital levels also form the basis for the prompt corrective action framework applicable to depository institutions (which provides for early supervisory intervention in a depository institution as its capital levels decline).

Stress testing and capital planning

Stress testing is a key supervisory technique used by U.S. federal banking regulators and in many cases constitutes the binding constraint on large banking organisations.  The quantitative results from the supervisory stress tests are used as part of the Federal Reserve’s analysis under the Comprehensive Capital Analysis and Review (“CCAR”).  The tailoring rules revised the stress testing and CCAR requirements so as to reduce the compliance burden on firms in lower-risk categories.  Under this revised regime, U.S. BHCs and IHCs are required to run company-run stress tests and supervisory stress tests either annually or biannually, depending on the applicable category of standards under the tailoring rules.  The Federal Reserve’s tailoring rules eliminated the company-run stress test requirement for FBOs with less than $50bn in total consolidated assets.

The CCAR is an annual exercise the Federal Reserve undertakes at the largest U.S. BHCs to evaluate a firm’s capital planning processes and capital adequacy, including planned capital distributions, to ensure the firm has sufficient capital in times of stress.  The Federal Reserve can object to a firm’s capital plan on either a quantitative basis (i.e., a firm’s projected capital ratio under a confidential stressed scenario would not meet minimum requirements) or a qualitative one (i.e., inadequate capital planning process).  In recent years, the Federal Reserve has primarily objected to firms’ capital plans for qualitative reasons.  There were 34 firms subject to the CCAR process in 2020, with 19 of them subject to the qualitative assessment.

In 2020, the Federal Reserve conducted additional stress tests to assess the resilience of firms under a range of plausible downside scenarios stemming from the economic conditions caused by the COVID-19 pandemic.  The results of that additional stress test were released in December 2020 and showed that firms would experience substantial losses and lower revenues under two separate hypothetical recessions, but could continue lending to creditworthy businesses and households.

TLAC

U.S. GSIBs and certain U.S. IHCs of non-U.S. GSIBs are required to comply with other capital-related requirements, including “clean” holding company requirements (relating to short-term debt and derivatives).  These requirements are aimed at improving the prospects for the orderly resolution of such an institution.  The rule includes an external long-term debt (“LTD”) requirement and a related total loss-absorbing capacity (“TLAC”) requirement applicable to the top-tier holding company of a U.S. GSIB and an internal LTD and related TLAC requirement applicable to U.S. IHCs.  LTD issued on or prior to December 31, 2016 was grandfathered from provisions of the rule that prohibit certain contractual provisions. 

Liquidity

Liquidity has become a key focus of U.S. (and international) regulators in recent years and has become subject to detailed regulations setting quantitative standards in a manner analogous to the risk-based capital regime.  The U.S. Liquidity Coverage Ratio (“U.S. LCR”), like that released by the Basel Committee, requires firms to hold a prescribed ratio of high-quality liquid assets to withstand a 30-day stress scenario.  In 2014, the U.S. agencies finalised the U.S. LCR, which included a “full” approach for the largest banks that exceed $250bn in consolidated assets or $10bn in on-balance-sheet foreign exposure and a more limited, “modified” approach for smaller BHCs that exceed $50bn in consolidated assets.  Under the tailoring rules, banking organisations with between $250bn and $700bn in total consolidated assets are subject to the full daily LCR requirement only if their average short-term wholesale funding profile exceeds certain thresholds.  IHCs are subject to LCR requirements based on their own risk profile rather than the combined U.S. operations of the FBO.  The Federal Reserve has stated that it may develop and propose a quantitative LCR-based liquidity requirement applicable to the U.S. branches and agencies of an FBO.

Institutions subject to the U.S. LCR must publicly disclose their LCR on a quarterly basis in a direct and prominent manner.

In 2020, the U.S. federal banking agencies finalised a net stable funding ratio (“NSFR”) rule to implement the final standard previously released by the Basel Committee.  Generally, the NSFR requires covered firms to hold a specified ratio of high-quality liquid assets sufficient to cover the outflows of a one-year stress scenario.  The final rule will be effective on July 1, 2021.  Holding companies and any covered non-bank companies regulated by the Federal Reserve will be required to publicly disclose their NSFR levels semi-annually beginning in 2023.

Regulators have also addressed liquidity in the U.S. by requiring certain firms to conduct liquidity stress tests. 

Deposit-taking activities

As a general matter under U.S. federal and state banking law, deposit-taking is limited to duly chartered banks, savings associations, and credit unions.  Properly licensed non-U.S. banks also have the same general authority to accept customer deposits as U.S. banks, except that non-U.S. banks (other than several grandfathered branch offices) that wish to accept retail deposits must establish a separately chartered U.S. bank subsidiary.

Virtually all U.S. commercial banks are required to be insured by the FDIC.  Deposits are generally insured up to $250,000 per depositor in each ownership capacity (such as in an individual account and a joint account).  Except for grandfathered offices, U.S. branch offices of non-U.S. banks are not eligible for FDIC insurance.  Funds on deposit in a non-U.S. branch office of a U.S. bank are not treated as FDIC-insured deposits.  Also, they are not entitled to the benefits of the depositor preference provisions of the FDI Act unless such deposits are by their terms dually payable at an office of the bank inside the United States.  The FDIC requires FDIC-insured institutions with more than 2 million deposit accounts to maintain complete and accurate data on each depositor and to implement information technology systems capable of calculating the amount of insured money for depositors within 24 hours of a failure.  Longer periods are permitted for certain deposit accounts with “pass-through” deposit insurance coverage, including trust and brokered deposits.  Brokered deposits are a matter of supervisory concern, and a bank’s reliance on brokered deposits can have a number of adverse supervisory consequences.  In 2020, the FDIC issued a final rule that makes several changes to brokered deposit rules in order to modernise its framework and adapt to the introduction of fintech companies into the industry.

Consumer deposit accounts are subject to CFPB regulations that require banking organisations to make disclosures regarding interest rates and fees and certain other terms and conditions associated with such accounts. 

Deposit accounts are also subject to Federal Reserve regulations regarding funds availability and the collection of cheques.  In recent years, fees associated with various types of overdraft protection products have generated significant litigation and regulatory attention.

In addition, banks are generally subject to reserve requirements with respect to their transaction accounts.  Accounts that are not transaction accounts, such as money market deposit accounts, have limitations on the number of certain types of withdrawals or payments that can be made from such an account in any one month.  In 2020, the Federal Reserve reduced reserve requirement ratios to 0%, effectively eliminating reserve requirements for depository institutions.

Lending activities

The lending activities of banks are subject to prudential and consumer protection requirements.  Banks are generally limited to extending credit to one person in an amount not exceeding 15% of the bank’s capital.  Banking laws generally permit banks to extend credit equal to an additional 10% of capital if the credit is secured by readily marketable collateral.  Lending limits also now generally include credit exposure arising from derivative transactions and, in the case of national banks and U.S. offices of non-U.S. banks, securities financing transactions.  The lending limits applicable to the U.S. offices of non-U.S. banks are based on the capital of the parent bank. 

BHCs and non-U.S. banks with $250bn or more in total consolidated assets, including IHCs with $50bn or more in total consolidated assets, are subject to single-counterparty credit limits (“SCCL”) under rules originally adopted in 2018.  FBOs can meet limits applicable to their combined U.S. operations by certifying that they meet home country SCCL standards.  The exact requirements applicable to IHCs are based on their size.  The effective date of the rules for FBOs has been extended to July 1, 2021, or January 1, 2022, depending on the characteristics of the FBO.   

Bank loans to insiders are subject to limitations and other requirements under Regulation O of the Federal Reserve.

Banks are also required to hold reserves against potential loan losses, and the United States is generally transitioning from an incurred loss method to a current expected credit loss method.

Lending to consumers is generally subject to a number of U.S. federal and state consumer protection statutes that require the disclosure of interest rates, other loan charges, and other terms and conditions related to the making and the repayment of an extension of credit.  A more recent rule requires creditors to make a reasonable, good faith determination of a consumer’s ability to repay any consumer credit transaction secured by a dwelling. 

A significant issue in recent years has been whether a loan that is valid when made remains valid in the hands of an assignee, which may be subject to different rules, including usury limits, than the original lender.  This was an issue in a 2015 case, Madden v. Midland Funding.  A related issue is whether an originator of a loan that immediately assigns the loan to a purchaser is the “true lender” in the transaction.  Both the FDIC and the OCC issued final rules in 2020 that confirmed the principle that a loan that is “valid when made” is enforceable by any subsequent assignee.  The OCC also issued a final rule generally establishing that a national bank is a “true lender” if, as of the date of origination, it: (i) is named as the lender in the loan agreement; or (ii) funds the loan.  In addition, if, as of the date of origination, one bank is named as the lender in the loan agreement for a loan and another bank funds that loan, the bank that is named as the lender in the loan agreement makes the loan.  Lastly, the rule requires that the true lender bank retain the compliance obligations associated with the origination of that loan, which aims to address certain industry concerns regarding “rent-a-charter” arrangements.  These rulemakings are the subject of ongoing litigation.

Banking organisations are generally required under the Community Reinvestment Act (“CRA”) to meet the credit needs of the communities in which they operate, including low- and moderate-income neighbourhoods.  The Home Mortgage Disclosure Act requires banks (and certain non-bank lenders) located in metropolitan areas to collect and report data about their residential mortgage lending activities (e.g., loan applications, approvals, and denials).  In December 2019, the FDIC and the OCC published a set of proposed rules that amend the agencies regulations under the CRA.  The Federal Reserve did not join that proposal.  In May 2020, the OCC issued a final rule on the CRA that will only apply to national banks and thrifts.  The Federal Reserve issued an ANPR relating to the CRA in September 2020, and comments were due by February 16, 2021.

Anti-tying statutes generally prohibit a bank from extending credit (or providing other services) to any person on the condition that the person also obtain some other product or service (other than certain traditional bank products) from the bank or an affiliate. 

Leveraged lending and commercial real estate lending are additional areas of particular supervisory focus, and interagency guidance has been released with respect to both activities.  In December 2020, the U.S. Government Accountability Office (“GAO”) issued a report noting that banking regulators had not found that leveraged lending poses a threat to financial stability.  The GAO nevertheless recommended that Congress expand the FSOC’s designation authority to address activities that involve many regulators, such as leveraged lending.

Volcker Rule

The Volcker Rule is a complex rule that prohibits banking entities from engaging in proprietary trading activities and from sponsoring or investing in, or having certain relationships with, hedge funds and private equity funds (“covered funds”), subject to certain exceptions and exemptions, and generally requires banking entities to adopt an appropriate compliance programme.  

Banking entities are generally defined to include IDIs, BHCs, FBOs that are treated as BHCs under the IBA (which includes a non-U.S. bank that operates a U.S. branch or agency office), and any subsidiary or affiliate of any of these entities.

The ban on proprietary trading essentially prohibits a banking entity from trading as principal in most financial instruments for short-term gain.  Exemptions are permitted for (among other activities) underwriting, market-making, hedging and, for FBOs, activities conducted solely outside of the United States.

Covered funds are generally issuers that would be considered investment companies under the Investment Company Act of 1940 but for the exemptions under Section 3(c)(1) or 3(c)(7) of such Act.  Exceptions are available for (among other activities) traditional asset management activities and, for FBOs, activities conducted solely outside the United States.  One apparently unintended consequence of the Volcker Rule is that foreign funds that have no U.S. investors but are controlled by FBOs (“foreign excluded funds”) are treated as banking entities that are subject to the Volcker Rule.  The U.S. regulatory agencies provided temporary relief to such funds until July 21, 2021, and such relief was made permanent in 2020 through amendments to the regulations that implement the Volcker Rule for funds that are operated as part of a bona fide asset management business.

EGRRCPA exempts banks from the Volcker Rule that do not have and are not controlled by companies that have: (i) more than $10bn in total consolidated assets; and (ii) trading assets and liabilities of more than 5% of total consolidated assets.  EGRRCPA also relaxed certain naming restrictions that applied to covered funds sponsored or advised by a banking entity.  In 2019, U.S. agencies adopted regulatory changes to the Volcker Rule that, among other things, limit the application of a comprehensive compliance programme to banks with $10bn or more in trading assets and liabilities, while requiring smaller banks to incorporate the Volcker Rule into the general compliance policies.  The revised framework also presumes compliance for banking entities with less than $1bn in trading assets and liabilities, absent an agency finding to the contrary.  The revisions also expand the exemption for foreign banking entities’ activities outside the United States.  Furthermore, the revisions create a presumption of compliance for trading desks engaged in market-making and underwriting activity that establish, implement, and enforce internal limits that are designed not to exceed the reasonable expected near-term demand of customer, clients, or counterparties. 

Other restrictions on activities

The National Bank Act limits the activities of national banks to those specifically authorised by statute, which includes activities incidental to the business of banking.  State banks are subject to state laws, and their activities conducted in a principal capacity are also limited to those permissible for national banks under federal law, unless the FDIC specifically approves the activity.  The activities of a U.S. branch of a foreign bank are basically subject to the same limits that apply to a U.S. bank.  In 2020, the OCC revised its licensing and activities regulations that govern numerous activities of national banks, including chartering of banks, establishment of subsidiaries, corporate governance, mergers, dividends, derivatives activities, and other matters.  These revisions take effect in 2021.

Bank transactions with affiliates are subject to qualitative and quantitative limits under Sections 23A and 23B of the Federal Reserve Act.

The BHC Act generally restricts BHCs and FHCs from engaging directly or indirectly in non-financial activities.  BHCs that successfully elect to be treated as FHCs may engage in a broader range of activities than BHCs that do not make such an election, such as securities underwriting, merchant banking, and insurance underwriting.  FBOs are generally treated as BHCs or FHCs with respect to the activities of their non-banking subsidiaries.  In addition, an FBO that meets the requirements of a qualifying FBO may engage in a broad range of banking and non-banking activities outside the United States. 

Complaints

Consumers can submit complaints about banks (and other consumer product providers) online through the CFPB’s website.  Banks are generally required to respond to complaints and are expected to resolve most complaints within 60 days.  The CFPB publishes a database of (non-personal) complaint information.

Privacy

The GLB Act established a federal framework regarding the privacy of customer information and generally limits the sharing of non-public personal information.  In November 2020, the CFPB issued an ANPR to solicit comments and information to assist the CFPB in developing regulations to implement Section 1033 of the Dodd-Frank Act, which provides for consumer access to financial records.  Comments were due by February 4, 2021.

Investment services

Banks with trust powers are generally permitted to provide fiduciary services and investment advisory services to clients.  Banks also have limited authority to provide specified securities brokerage services to clients.  Full-service brokerage services are typically provided by a broker-dealer affiliate or subsidiary of a bank.  One of the more significant issues affecting broker-dealers in the United States is the promulgation of Regulation Best Interest (“Reg BI”) by the Securities and Exchange Commission (“SEC”), which broker-dealers were required to comply with by June 30, 2020 (despite the disruption caused by the COVID-19 pandemic).  Earlier, the Department of Labor (“DOL”) had adopted a rule that would have subjected many investment recommendations related to individual retirement accounts to ERISA fiduciary standards and remedies.  That rule was successfully challenged in court in 2018.  Subsequently, the SEC adopted Reg BI, which imposes a higher standard of care (and other attendant obligations) on U.S. broker-dealers in certain circumstances.  Reg BI consists of four prongs that broker-dealers must meet to discharge their obligation under the rule: (i) fulfil the standard of care (i.e., act in the best interest of “retail customers” when making “recommendations”); (ii) make certain disclosures; (iii) mitigate or eliminate conflicts of interest; and (iv) enhance compliance programmes.  As part of this rulemaking, the SEC also adopted new rules requiring broker-dealers, as well as investment advisers, to provide a brief relationship summary, known as Form CRS, to retail investors.  In the wake of Reg BI, the DOL finalised a revised version of its fiduciary rule in December 2020, which is intended to work in harmony with the Reg BI obligations in applicable circumstances.

Proprietary trading activities

Subject to the limitations of the Volcker Rule, banks generally have the authority to engage in proprietary investment or trading with respect to a range of financial instruments, subject to certain limitations.  For example, banks are typically confined to purchasing securities that qualify as investment securities under specified criteria.  Banks also generally are not authorised to underwrite or deal in securities, subject to certain exceptions.  However, subject to the Volcker Rule, FHCs generally may engage in such activities through broker-dealer subsidiaries.

Money laundering

Banks are subject to extensive and evolving obligations under AML laws and economic sanctions requirements.  Basic AML requirements include know-your-customer (and know-your-customer’s-customer) obligations, suspicious activity reporting, and currency transaction reporting.  Compliance with U.S. requirements has proved to be an ongoing challenge for banking organisations, particularly for non-U.S. banks.  Deficiencies can result not only in administrative sanctions, but criminal proceedings involving law enforcement authorities.  Recent enforcement actions have required banking organisations to dismiss certain specified personnel identified as responsible for compliance deficiencies.  State laws may also apply.  In 2016, the NYSDFS adopted an anti-terrorism and AML regulation that imposes various detailed requirements on the transaction monitoring and filtering programmes of New York-regulated institutions.  In December 2018, the U.S. federal banking agencies and the Financial Crimes Enforcement Network (“FinCEN”) issued guidance to the effect that banks should use innovative technology for AML purposes.  In October 2020, FinCEN and the Federal Reserve proposed a rule that would amend the recordkeeping and travel rule regulations under the BSA, which requires financial institutions to collect, retain, and transmit certain information related to funds transfers and transmittals of funds.  The proposed rule would lower the applicable threshold for collecting and retaining information from $3,000 to $250 for international transactions, while maintaining the $3,000 threshold for domestic transactions.  The proposed rule would also further clarify that those regulations apply to transactions above the applicable threshold involving convertible virtual currencies (“CVCs”), as well as transactions involving digital assets with legal tender status (“LTDA”).  In addition, FinCEN proposed a rule in December 2020 outlining new requirements for certain transactions involving CVC or LTDA.  Under the proposed rule, banks and money services businesses would be required to submit reports, keep records, and verify the identity of customers in relation to transactions above certain thresholds involving CVC/LTDA wallets not hosted by a financial institution, or CVC/LTDA wallets hosted by a financial institution in certain jurisdictions identified by FinCEN. 

In January 2021, the National Defense Authorization Act, which contains a sweeping overhaul of the BSA and other requirements under U.S. AML laws, was signed into law.  It represents the most significant set of BSA/AML reforms since the USA PATRIOT Act (2001).  A major focus of the National Defense Authorization Act is to modernise the U.S. BSA/AML regime to respond to new and emerging threats, to improve coordination and information sharing among various governmental agencies, and to fundamentally alter existing practices relating to the collection and reporting of beneficial ownership information.  Among other things, the law requires FinCEN to establish a non-public database of beneficial ownership information that is required to be collected.  Financial institutions may request reported beneficial ownership information from FinCEN to facilitate their own customer due diligence, provided the reporting company whose information is sought provides consent.  

Outsourcing

Banks often rely on third parties to deliver various products to their customers and otherwise support their daily operations.  While such arrangements are generally permissible, recent regulatory guidance has highlighted the need for banks to carefully manage the risks (including reputational) associated with such outsourcing relationships.

Enforcement actions

U.S. regulators have principally directed enforcement actions at institutions and not individuals at those institutions.  However, along with a renewed focus on governance and management, U.S. regulators are now placing more emphasis on the need to hold individuals accountable for their wrongdoing.  For example, in 2015, the U.S. Department of Justice issued guidance to bolster its ability to pursue individuals in corporate cases.  Under the guidance, cooperation credit for corporations requires that the corporation provide information to the Department of Justice about the role of individual employees in the misconduct, and prosecutors are instructed not to release culpable individuals from civil or criminal liability as part of the resolution of a matter with the corporation. 

More generally, enforcement actions aimed at AML compliance and improper sales incentives (relating, especially, to cross-marketing activities) are expected in 2020 and beyond.  In early 2020, the OCC issued significant enforcement actions against several former executives of a large U.S. bank related to systemic sales practices misconduct.  Most significant was a $400m civil money penalty assessed by the OCC and the Federal Reserve against an institution for deficiencies in enterprise-wide risk management, compliance risk management, data governance, and internal controls.

Supervisory guidance

Banking agencies often issue supervisory guidance that addresses a particular practice, such as leveraged lending.  The banking agencies have recently sought to clarify the role of guidance in the supervision and enforcement context.  A related issue is whether guidance amounts to a regulation that is subject to Congressional review, which means that Congress could possibly overturn it.  The U.S. federal banking agencies issued a statement in September 2018 that interagency guidance is not binding such that failure to comply with such guidance in itself should not be cited as a violation of law, and proposed a rule in October 2020 that would generally confirm the September 2018 statement.

Banking regulation in the United States remains an evolving and complex area as regulations and supervisory guidance implementing the Dodd-Frank Act and other post-crisis reforms are implemented and amended and the industry adjusts to the impact of COVID-19.  Navigating the U.S. regulatory framework requires not only a deep understanding of the complexity and nuances of U.S. banking laws but an alert eye to ongoing developments.  In addition, some of the requirements being imposed on the U.S. operations of non-U.S. banks (such as the IHC requirement) are now being replicated outside the United States, thereby impacting the overseas activities of U.S. banking organisations.

Acknowledgments

The authors would like to acknowledge Le-el Sinai and Caitlin Hutchinson Maddox, associates at Shearman & Sterling, for their assistance in preparing this chapter.

Источник: https://www.globallegalinsights.com/practice-areas/banking-and-finance-laws-and-regulations/usa

Claremore, Okla.-based RCB Holding Co. agreed to acquire Hutchinson, Kan.-based Central Bank and Trust Co., Wellington (Kan.) Daily News reported.

The financial terms of the deal were not disclosed in the news story.

For reference, SNL valuations for bank and thrift targets in the Midwest region between March 6, 2017, and March 6, 2018, averaged 159.37% of book, 165.03% of tangible book and had a median of 19.85x last-12-months earnings, on an aggregate basis.

The transaction is subject to regulatory approval and is expected to close in the second quarter.

RCBHolding will enter Reno County, Kan., with four branches to be ranked second with a 21.27% share of approximately $1.09 billion in total market deposits. The company will also expand in Sedgwick County, Kan., by two branches to be ranked No. 30 with a 0.24% share of approximately $12.85 billion in total market deposits.

Central Bank and Trust locations will continue to operate as Central Bank and Trust until late in the first quarter of 2019.

Central Bank and Trust Chairman, President and CEO Earl McVicker will continue with RCB Holding unit RCB Bank as its Kansas market board chairman.

SNL data shows that as of the end of 2017, RCB Bank had $2.79 billion in assets. Central Bank and Trust, a unit of Central Financial Corp., had assets of $323.1 million.

D.A. Davidson's managing director of investment banking, Eugene Katz, served as financial adviser to Central Bank and Trust. C. Robert Monroe, partner at Stinson Leonard Street LLP, acted as Central Bank and Trust's legal counsel.

To use S&P Global Market Intelligence's branch analytics tools to compare market overlap, click here. To create custom maps, click here.

SNL is owned by S&P Global Market Intelligence.

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Источник: https://www.spglobal.com/marketintelligence/en/news-insights/trending/o1o5x5q7hoaiu-vedvnpig2

Central Bank and Trust Co.

5 Branch Locations

Not Yet Rated

About Central Bank and Trust Co.

Central Bank and Trust Co. was established on April 22, 1915. Headquartered in Hutchinson, KS, it has assets in the amount of $264,981,000. Its customers are served from 5 locations. Deposits in Central Bank and Trust Co. are insured by FDIC.

Established On:
April 22, 1915
FDIC Certificate Number:
11772
Total Assets:
$264,981,000
Deposit Insurance:
FDIC
Community Bank:
Yes
Asset Concentration:
Commercial Lending Specialization
Institution Class:
Commercial bank, state charter and Fed nonmember, supervised by the FDIC

5 Central Bank and Trust Co. Branch Locations

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Источник: https://www.branchspot.com/central-bank-and-trust-co/

Banking, Money and Credit: A Systemic Perspective

  1. 1

    Introduction

  2. 2

    A functional representation of the banking system through three layered levels

    1. 2.1

      First level – banking as the ledger keeping of economy and society

    2. 2.2

      Second level – banking as the treasury management of economy and society

    3. 2.3

      Third level – banking as manufacturing of credit in economy and society

    4. 2.4

      Banking as an entity (going concern)

      1. 2.4.1

        Bank financial process (treasury department)

      2. 2.4.2

        Bank economic process (bank credit department)

      3. 2.4.3

        The real-financial nexus

  3. 3

    The public-private partnership: currency issuance and central banking

  4. 4

    The money market

  5. 5

    Shadow banking

  6. 6

    Money aggregates dynamics: systemic implications

  7. 7

    Thoughts for banking system regulation

  8. 8

    Concluding remarks

  9. Acknowledgements

  10. References

  1. 1

    “Banking, Money and Credit: A Systemic Perspective” by Yuri Biondi, https://doi.org/10.1515/ael-2017-0047

  2. 2

    “A Simple Fix for a Complex Problem? Comments on Morgan Ricks, The Money Problem: Rethinking Financial Regulation” by Margaret M. Blair, https://doi.org/10.1515/ael-2017-0042

  3. 3

    “Morgan Ricks: “The Money Problem: Rethinking Financial Regulation”” by Philippe Moutot, https://doi.org/10.1515/ael-2017-0029

  4. 4

    “Financial Stability and Money Creation: ” by Thorvald Grung Moe, https://doi.org/10.1515/ael-2018-0010

  5. 5

    “The Money Problem: A Rejoinder” by Morgan Ricks, https://doi.org/10.1515/ael-2018-0018

1 Introduction

Contemporaneous bank theories draw upon agency theory, contract theory and mechanism design to consider bank entities as firm-specific arrangements between bank management and depositors, focusing on intermediated monitoring. At the same time, financial economics has been developing a market-based theory of finance where banks come to be understood as portfolio managers quite analogous to non-bank investment funds and subject to perfect and efficient financial markets discipline (Black, 1970; Fama, 1970; Tobin, 1963). Drawing upon an agency theory approach, Calorimis and Kahn (1991) argue that bank entities rely on short-term debt funding as a deliberate strategy to constrain their own investment activities. This is expected to solve the agency problem in controlling bank management which may abscond with the bank assets. According to Diamond and Rajan (2001), a short-term funding structure is consistent with relationship lending to difficult, illiquid borrowers, which are monitored through the bank management’s specific selection skills. Drawing upon information asymmetry, Gorton and Pennacchi (1990) see bank entities as issuers of securities with very low default risk, making monitoring superfluous. Uninformed traders are then willing to hold these securities because they can avoid information gathering. As noticed by Admati and Hellwig (2013), these theories set incompatible views on creditors, respectively as bondholders or depositors: “one of creditors constantly on the watch for problems and the other of creditors trusting that banks are safe”. Taking an information asymmetry perspective under incomplete contracts, Diamond and Dybvig (1983) explain banking as financial intermediaries which provide a sort of consumption insurance arrangement for depositors, enabling the latter to be compensated for deposited asset illiquidity.

More fundamentally, these theories appear to sever the theoretical and heuristic connection between banking, credit and money. Banks are understood as intermediary agencies that obtain funds from deposits with one set of characteristics, and transform them into assets with another set of characteristics. This understanding may certainly point to some maturity transformation and liquidity provision mechanisms, but bank money creation through credit is not seen as an essential part of the core banking activity. The bank entity appears as a pure intermediary of loanable funds, either passing existing money from savers to borrowers, or acting as a mechanic link between central bank base money and the broader money aggregate that includes bank deposits (Werner, 2014a, 2014b).

These theories therefore neglect some essential facts concerning modern banking: monetary financial institutions issue claims which function as money; they facilitate payments among agents in the economy over time and space; they increase the money base through credit creation; they hold fractional reserves and lend to each other (Blair, 2013; Jakab & Kumhof, 2015; Ricks, 2015). Our approach takes a systemic perspective, building upon these featuring dimensions of banking. Our model considers bank activity process within each bank entity and across entities. Each bank keeps currency money in bank deposits on behalf of other people. But the bank activity is further characterised by the capacity or privilege to use these deposits, at the same time as their depositors, which keep using them for payment and redemption at will and at par. Moreover, the bank can create deposits by granting loans to (or buy a security issued by) some borrower. This bank capacity or privilege involves money generation that enables bank credit creation process. As a consequence, each and every bank generates money beyond its own money holdings. All the banks become therefore interdependent on the flow of payments that are performed across them, generating a ‘banking system’ (Amaduzzi, 1961; Caprara, 1946; Castellino, 1965; Saraceno, 1957).

This banking system requires specific coordination, within each bank and across them. Within each bank entity, two featuring processes are at work: (i) An economic process that creates bank money through credit, in order to generate income to the bank entity; and (ii) a financial process that rebalances cash inflows and outflows when they become due through time. Since each bank is structurally unbalanced due to money generation, an inter-bank coordination is required to maintain the banking system in operation over time and circumstances. Both inter-bank clearing and credit arrangements provide this coordination at the inter-bank level, which is effectuated through central bank intervention, clearing houses and the money market. From this perspective, our conceptual framework includes two collective dynamics: inter-agent interaction, and interaction between collective structures and individual agents. These structures follow the notion of ‘minimal institution’ introduced by Shubik (2011), Shubik and Smith (2016) and Goodhart et al. (2016), which aim to include institutions in economic theory and economic analysis of money.

Our institutional economic analysis is based upon the conceptual framework developed by Shubik (2011) and Biondi (2010), and inspired by Schumpeter’s theorising (Biondi, 2008). Accordingly, each entity involves two complementary processes, one cash-based, the other non-cash (accrual-) based. Accounting systems are designed and performed to deal with both processes. By combining these processes over space and time, every entity stands upon the economy ground-floor provided by property, bilateral contracts and cash holdings.

This frame of analysis allows developing a heuristic model of the basic mechanisms on which bank money creation lays upon. This model disentangles the specific role plaid by the bank entity through three successive layers or approximations. The banking system’s role in economy is then understood respectively as ledger keeping, treasury management, and manufacturing of money. This model paves the way to disentangle the link between functional and institutional dimensions of the money system, which Biondi and Zhou (2017) further study through dynamic systems analysis by simulation.

The rest of the article is organised as follows. The second section introduces our theoretical model through three layered approximations of the banking system focusing on the working of each bank entity in relation with the other ones. This section provides the functional model of the banking system that is applied to explore its further dimensions. In particular, the third section discusses the public private partnership which generally features the institutional structure of this banking dynamics. The fourth section discusses the role of the money market and the ways this market results in performing bank functions, contributing to the bank money generation process. The fifth section addresses features and concerns related to shadow banking. The sixth section develops some systemic implications of credit money and the money multiplication process. The seventh section provides some thoughts and implications for regulating the bank system. A summary of main argument and implications concludes.

2 A functional representation of the banking system through three layered levels

To understand the role of banking in the economy, the following theoretical analysis layers up three featuring dimensions (Table 1). They may be understood as successive approximations of the money dynamic system generated by the ongoing working of banking as a whole. The first layer sees banking as the ledger keeping of the economy. At this level, banks are custodians of currency money held on behalf of agents in the economy in view to protect holdings and facilitate payments across them over space. This corresponds to the institutional ruling that grants banking with the privilege of holding and aggregating deposits. The second layer builds upon this payments system to understand bank credit creation which leverages upon the currency money base through fractional reserve. This corresponds to the institutional ruling that enables banks to use the currency under custody, while the latter remains available to its holders, as well as to create deposits that are convertible in currency money. Governmental deposit insurance and reserve requirements point to this dimension of banking as treasury management of the economy. The third layer introduces the bank management intentional action which seeks for business opportunities in order to generate income to the bank entity under cost and risk controls. Equity capital requirements (including prudential reserves) and credit guidance point to this dimension of banking as manufacturing of money through bank credit creation.

Table 1:

Successive layered levels of the working of the banking system and related institutional instrumentalities.

Functional RegimeInstitutional Instrumentalities
Banking as ledger keepingAccounting Records
Deposit Protection
Banking as treasury managementCash Basis of Accounting (Flow of Funds)
Deposit Insurance
Liquidity Reserve Requirements
Lending of Last Resort
Banking as manufacturing of moneyAccruals Basis of Accounting
Equity Capital Requirements
Prudential Reserves Requirements
Credit Control (Guidance) Requirements

Although this articulation (Table 1) disentangles key functions and relate them to featuring institutional instrumentalities, monetary financial institutions are going concerns that deploy their working activities through time and space, seeking for evolving arrangements that combine the various functions. Bank business models and behaviours reshape the mutual relationship among those functions. Indeed bank economic organisation combines financial and economic processes involving the three layers of the money system (see Section 2.4 and Table 13 below).

2.1 First level – banking as the ledger keeping of economy and society

Let posit an economy where agents agree to employ one general means of payment – called currency money or cash - to settle transactions. In this first approximation (Table 2), the currency money is issued by a central monetary authority. All agents keep their currency money accounts with the central authority.[1] All the payments are immediately settled among agents. When an agent pays another agent, the amount is transferred from one agent’s account to the other agent’s account. Each agent is then constrained by its current cash holding, and so does the whole economy.

Table 2:

First level of banking – money issuance by central monetary authority.

Central Monetary Authority (Issue Department)
[Asset]Currency Money Issued: 1000
Central Monetary Authority (Credit Department)
Currency Money Issued: 1000Currency Money Holdings by agents: 1000

In this context, an emergent matter of interest concerns here the possiblity by central monetary authorities such as central banks to issue digital currencies and hold electronic deposits on behalf of the public (Sverige Riksbank 2017; Barrdear, J. and Kumhof, M. 2016; KPMG 2016). Interestingly, existing currencies in the form of coins and banknotes are already accounted for as liabilities of central banks (Table 2). They are recognised as functionally equivalent to central bank deposits. Their material form may be considered as transferable certificate for these liabilities. An upgrade to digital form would not involve therefore a substantial change in their economic function.

In fact, in order to facilitate transactions, some decentralised agencies may be and have been organised to manage currency money transactions. These monetary financial institutions situate between the central monetary authority and the agents. In this further specification (Table 3), the central monetary authority holds currency money on behalf of those banking institutions (so-called reserves or base money), while the banking institutions hold currency money on behalf of the agents.

Table 3:

First level of banking – money holding and ledger keeping by an illustrative monetary financial institution (bank A).

Central Monetary Authority (Credit Department)
Currency Money Issued: 1000Currency Money Holdings by Bank A: 300
Currency Money Holdings by Bank B: 500
Currency Money Holdings by Bank C: 200
Bank A
Currency Money Holdings (issued by the Central Monetary Authority): 300Currency Money Deposits by agents 300
Agents (Bank A Customers)
Currency Money Deposits (held by bank A): 300[Liabilities]

This intermediation by decentralised monetary institutions does not change the payments system that is in place in this miniature economy. These intermediary institutions act here as the ledger(s) of the economy, facilitating payments and transfers. Each institution keeps updating the agents’ accounts which are increased by currency money inflows and decreased by currency money outflows. In turn, this payments flow depends on and relates to the economic dynamic among the agents. They may then use money holdings to buy, pay and give to each other. In this context, the currency money function is to make agents capable to perform payments and settle transactions. Currency money holdings and flows reflect the power to pay or purchasing power held by each agent.

In this context, every bank holds the whole activity across customers in its balance sheet and it is deemed to fulfil its obligations as long as no customer is prevented from using the deposit. If monetary institutions ask to be paid for their payment services, this remuneration shall be taken out from the agent’s capacity to pay. This cost would constitute revenue to the monetary institution for banking services.

For sake of simplicity, we can imagine a stationary state where all agents keep making and receiving payments over time in a stochastically balanced dynamic. At the same time, the presence of intermediary institutions generates another inter-bank dynamic, since agents’ accounts are now split between several monetary financial institutions.

Each institution experiences a series of payment inflows and outflows related to each agent’s account. The sum of all these flows generates a specific dynamic at the level of the institution as a whole, as well as a specific inter-bank dynamic. Payments between agents can be settled among accounts held by the same institution, or across accounts held by different institutions. When the settlement occurs within the same bank, it does not modify the bank position relative to the other banks. When the settlement occurs across banks, it will generate a transfer between two or more banks (settlement arrangements being bilateral or multilateral). Each bank may then experience a series of currency money transfers from and toward the other banks that operate within the financial system. All these payments are immediately settled.

Regulation concerning deposit protection relates to this functional dimension of the banking system. This institutional rule assures depositors that their holdings are shielded against bank mismanagement of their accounts.

2.2 Second level – banking as the treasury management of economy and society

By the law of large numbers, each bank experiences that a considerable share of its currency money holdings does not change over time. Although agents keep performing payments, inflows and outflows tend to compensate each other, resulting in a relatively stable core that remains within the holding bank over time. This core may be understood as a functional basis for the bank lending activity. Therefore banks do not only keep currency money accounts on behalf of agents, but they may also perform specific credit operations which finance the ongoing economic activities run by agents. This specific banking activity operates under an institutional ruling that enables credit (Table 4). Through credit, agents are no longer constrained by current currency money holdings, but they can lend and borrow to each other. This involves postponing or anticipating payments, but also settling a payment by a promise to pay, instead of a currency money transfer. Here, money holdings and inflows further define each agent’s capacity to settle its debt obligations, defining money as means of debt settlement, that is, its redeeming or releasing power.

What happens at the level of the banking institution when credit is enabled?

The banking institution can now perform two distinctive operations somehow related to the same currency money holdings. On the one hand, the bank keeps holding them on behalf of the agents, performing currency money inflows and outflows on their behalf. On the other hand, the bank may create new deposits by granting loans to (acquiring securities from) borrowing agents. Bank credit generation involves then deposit creation. The bank is here leveraging upon currency money holdings by granting loans to borrowers.[2]

This banking regime is usually labelled ‘fractional reserve’ or ‘deposit creation’. Both notions tell the same story from a functional perspective. Money multiplication operates as follows. A bank creates a deposit when it grants a loan. The borrower can then transfer this amount, although the bank maintains the loan as an asset (as long as the credit is not reimbursed). At the same time, the loan granting does not undermine the capacity of depositors to use their holdings. Therefore, the bank has added additional money in the financial system through bank credit creation.

Table 4:

Second level of banking – credit granting and money-equivalent deposit creation by an illustrative monetary financial institution (bank A).

Bank A
Currency Money Holdings (issued by the Central Monetary Authority): 300Currency Money Deposits by agents 300
Loan to borrower: 100Deposit held by borrower: 100
Agents
Currency Money Deposits (held by banks): 300
Bank A Deposit: 100Loan from Bank A: 100

At the functional level, the deposit created by the bank to lend money, and the currency money deposit are equivalent.[3] Both can be employed by agents to perform payments. In this way, bank money has been added to the monetary base previously constituted only by the currency money issued by the central monetary authority. Although lending and borrowing operations can be performed by other collective agencies or individual agents, this money multiplying mechanism features the banking operation which is characterised by the capacity to hold money in deposit and use it at the same time. Banking is then operated through other people’s money and by creating bank money-equivalent means of payment. Banking is therefore unique in combining deposit-taking and deposit-creating through its credit generation process which involves money multiplication (or bank money creation). This uniqueness justifies banking licence for deposit-taking and credit-making, involving money creation.

When credit is enabled, another kind of lending-borrowing relation occurs at the inter-bank level (Table 5). As shown before, each bank faces a flow of payment transfers from and toward the accounts held by other banks. Each bank does then experience a series of potential settlements to be performed with the various banks that operate within the banking system. The banks may then decide to postpone settlement by transfer of currency money. When this postponement occurs, a credit position to be settled becomes lending to another bank, while a debit position becomes borrowing from another bank. An inter-bank loan mechanism appears, facilitating the ongoing banking activity. This mechanism constitutes an additional source of funding for the bank treasury department.

Table 5:

Second levels of banking (illustrative example) - interbank payment settlement with simultaneous interbank credit

Case (i): A payment is performed on behalf of two clients from Bank A (debtor) to Bank B (creditor). Simultaneously, Bank B grants a loan to Bank A for an equivalent amount, without sterilisation of the currency money transfer impact.[4]
Bank A
Currency Money Holdings (issued by the Central Monetary Authority): 300 – 50Currency Money Deposits by agents 300
Loan to borrower: 100Deposit held by borrower: 100–50
Deposit with Bank B: 50Loan from Bank B: 50
Bank B
Currency Money Holdings (issued by the Central Monetary Authority): 500 + 50Currency Money Deposits by agents: 500 + 50
Loan to Bank A: 50Deposit held by Bank A: 50
Case (ii): A payment is performed on behalf of two clients from Bank A (debtor) to Bank B (creditor). Simultaneously, Bank B grants a loan to Bank A for an equivalent amount, with sterilisation of the currency money transfer impact.[5]
Bank A
Currency Money Holdings (issued by the Central Monetary Authority): 300Currency Money Deposits by agents 300
Loan to borrower: 100Deposit held by borrower: 100–50
Loan from Bank B: 50
Bank B
Currency Money Holdings (issued by the Central Monetary Authority): 500Currency Money Deposits by agents: 500 + 50
Loan to Bank A: 50

How do these bank operations (credit creation and inter-bank lending) interact with the banking regime?

First of all, due to fractional reserve regime or deposit creation, banks are structurally dependent on the banking system to operate, since they lend out money that they do not own and in excess of money that they hold on behalf of agents (currency money deposits).[6]

A dynamic and collective dimension emerges therefore in the banking activity. Three illustrative examples may highlight this featuring dimension.

Imagine that the banker decides to give up the bank money, by granting a loan that cannot be repaid. The extra money that is generated is not expected to be reimbursed. At the same time, this potential loss may remain unrevealed because of the outstanding deposit mass. Indeed the money loss may remain hidden because a certain core of money holdings remains stable over time within the bank entity. This situation raises a moral hazard problem with bank management.

Imagine now that an unexpected number of customers decide to redeem their deposits. The bank may then become exposed, since it is structurally unable to repay all the deposit accounts at the same time (due to the money multiplication mechanism). This is the case of bank run, when rumours on the bank credit worthiness lead most depositors to withdraw their holdings at the same time. This panic contains a self-fulfilling mechanism, since the mass simultaneous deposit withdrawal makes the bank defaulting even though its ongoing banking activity (that is, its asset portfolio) would make it solvent through time. This situation raises a collective action problem with the ongoing bank activity, dependent on reciprocal expectations and exposed to market failure (Ricks, 2015, chapter two).

The third illustration concerns interbank credit coordination. Imagine that an unexpected number of creditor banks do simultaneously: ask to be repaid on their outstanding credit positions; stop rolling-over positions that become due; deny new credit agreements; redeem their deposit with the borrowing bank; or refute borrowing bank credit admittances as collateral or means of interbank settlement. The borrowing bank may then become exposed, since it is structurally dependent on interbank credit funding to maintain its banking activity over time. This is the case of flight to quality, when rumours on the borrowing bank credit worthiness lead most bank counterparties to withdraw their lending commitments at the same time. This commitment withdrawal contains another self-fulfilling mechanism and a systemic threat, which the interbank liquidity crisis of 2007–08 made apparent (Gorton, 2010).

Coordination within the banking system is required to cope with this dynamic and collective dimension of banking. This coordination need emerges not only within each bank entity (as the bank run case illustrates), but also across banks (interbank credit case). In its treasury management, each bank depends on (potentially all) the other concurrent banks connected within the same banking system, establishing fundamental interdependence links to each other. This coordination occurs then and establishes a collective layer that expresses itself through time. Its collective and dynamic dimension features and denotes the nature of the banking system.

Deposit insurance relates to this functional dimension of the banking system. This institutional rule assures depositors that their holdings are shielded against bank losses and bank insolvency, under certain terms and conditions.

Voluntary reserves and compulsory reserve requirements do also relate to this functional dimension of the banking system. Every bank has its own fractional reserve policy concerning its bank money creation for lending purpose. A minimal reserve rule may also be established and enforced by the central monetary authority. Both minimal reserve target rulings – by private or public ordering - aim to prevent excess lending on fractional reserve, while protecting the bank entity continuity against expected flow of redemptions.[7]

The central monetary authority may intervene to rescue the bank which is confronted with a bank run, acting as a lender of last resort. Borrowing from the central banking may then respond to that liquidity crisis. In fact, this liquidity provision (well-known as lender of last resort) remains exposed to the moral hazard problem which relates to bank solvency (dependent on sustainable lending process). In this context, the central monetary authority is further confronted with a novel situation. Banks do still hold issued currency on behalf of agents, but also generate additional bank money by creating loan and deposit for borrowers. Whenever a borrower wishes to redeem its deposit holding in currency (legal tender), the lending bank may seek to cover this request through its internal currency reserve, through a loan from another bank, or from the central monetary authority. This confirms the functional equivalence between the legal tender (currency money) and the money-equivalent bank deposit, since they can be converted into each other at request and at par.

2.3 Third level – banking as manufacturing of credit in economy and society

How does bank money creation intervene in the economic process of production and consumption?

Relative to the cash-in-advance settlement system (first layered level), the bank credit system introduces flexibility across space and time. On the one hand, banks economise on cash transfers by managing inter-bank transactions. On the other hand, banks enable agents to displace cash settlements through time and space.

From the borrower’s viewpoint, typical banking operations point to financing, discounting and refinancing.

Financing is perhaps the most well-known banking operation. The bank loan provides the borrower with money to pay for expenditure. Through it, the borrower may settle a payment (or a series of payments) for consumption or investment purposes. The bank reviews the borrower file to assess its capacity to repay the loan through time and circumstances. For example, a borrower obtains a loan to buy and own a house.

Discounting enables the borrower to receive money in exchange of (or guaranteed by) the transfer to the bank of a definite stream of future payments. Typical example is the discount of commercial paper, that is, an entitlement of commercial credit that the borrower holds as a creditor against another agent (the commercial debtor).

Refinancing consists in rolling over an existing financial position, obtaining new money over it. It may be asset- or liability-based. Asset-based refinancing consists in using that asset as collateral to obtain a loan. For example, the same borrower which has acquired a house financed by a loan obtains another loan based upon that house as collateral. Liability-based refinancing results in rolling over debt positions over time. When a debt position becomes due in its capital instalment, another debt position is taken to cover that instalment, with the same or another lender. The borrower is then able to maintain its debt position in place by paying only for interest charges, while successive cohorts of lenders keep refinancing (rolling over) its debt over time.

From the bank’s viewpoint, bank management leads the lending activity for the entire bank through time and circumstances. The bank activity is then managed at the level of the bank entity as a whole, involving its collective and dynamic dimensions. In particular its ongoing organisation requires recovering overhead costs and investments, while it incurs being exposed to credit risks and eventual losses. It may also involve a profit-seeking purpose.

Therefore, the bank seeks to generate income through the ongoing banking activity. This implies that lending – which is enabled by the bank capacity or privilege to generate money – will be oriented to generate net income to the bank entity. Possible losses would then depend not only on mismanagement, accidents or bank runs, but also by the very risk-taking strategy adopted by the bank in its lending activity. This income flow dimension – along with its possible profit-motive – adds an additional layer to the bank organisation.

As was the case for the treasury management dimension, credit manufacturing involves additional interdependency for the bank activity over time and space within every bank entity and across them. Credits granted by each and every bank may be interdependent and they do generate an additional series of cash flows to be managed by the bank treasury department. At the same time, this credit portfolio involves a series of payments that may generate profits to the bank but also incur losses when some borrower fails to reimburse its loan.

Imagine that a loan is continuously renewed over time. This implies that that borrower can keep employing it by only paying interest charges. An additional dynamically stable source of funding is then available to the borrowing entity activity. At the same time, this may make the bank credit department prone to excess risk-taking, as long as the capital commitment (separated from the interest charge flow) is continuously renewed over time (Biondi, 2013).

In sum, credit manufacturing implies another systemic coordination across credit institutions. When every bank entity grants a loan or buys a security against bank deposit creation, this newly created flow of money (equivalents) adds to the current money aggregates in economy and society, easing the flow of payments across agents. At the same time, it increases both demand for goods and services paid through the money added, and the flow of transfers to be settled across credit institutions that manage payments on behalf of those agents; and the debt outstanding that shall be repaid or refinanced in due course according to the terms and conditions attached to that loan or security. The bank entity which has initiated the process is then exposed and takes responsibility for the additional money amount and the additional risky venture that are underwritten by the banking system as a whole.

In this context, credit manufacturing may involve a profit motive which raises specific hazard for bank system coordination as a whole. Nothing assures that, in principle, credit manufacturing at the level of each bank entity does spontaneously align through time and under all circumstances with the ideal (and possibly unknown) level that would be required to protect monetary (financial) stability in that situation. And this misalignment may occur even though every bank conducts a sound treasury management and credit policy at its individual level. In other words, it is possible that the levels of credit constraint and/or minimal reserve which would be suitable for monetary (financial) stability are higher than the levels that banks would set by following their own profit-seeking strategies under their own reserve management and credit policies. This situation may occur because single banks do not know about the ongoing state of other banks (and of the banking system as a whole), or because their individual policies enable and enact behavioural patterns that are inconsistent with monetary (financial) stability at the systemic level. In sum, a bank may ignore, or be tempted to purposefully neglect, the financial stability target if it expects to take advantage from this move.

This misalignment between individual and collective levels implies a collective action problem that differs from the prisoner’s dilemma. Ricks (2015, p. 66 ff.) has characterised it through ‘The Stag Hunt’ game. Excess credit creation by some banks within the system may involve systemic risk which may eventually affect the other banks within the system, and the outside actors which rely on it, not only the banks which expanded their credit lines excessively. In fact, the latter might even profit from this expansion, improving on their relative position in the meantime before a systemic crash. This problem – involving a coordination need – is embedded in the featuring fact that a multitude of concurrent banks have the capacity or privilege to generate payment means.

Capital requirements and prudential reserves do relate to this functional dimension of the bank activity. In particular, equity injection is expected to provide an ultimate loss-bearing capacity to protect the bank continuity against insolvency. Prudential reserve requirements enable the bank entity to insulate a share of income from distribution, provisioning precautionary reserves against exposure to borrowers’ default. Credit control requirements may also be considered as an institutional response to this functional dimension, targeting the bank exposure to specific borrowers or asset classes. Credit guidance and surveillance do also respond to the moral hazard problem that potentially threats ongoing bank affairs with related parties and insiders, as shown by the Icelandic case study (Johnsen, 2014).

At the level of bank credit manufacturing process, the bank balance sheet does not only comprise holdings on behalf of agents, but also: assets generated by the bank through its lending activity; lending and borrowing undertaken by the bank with other banks; and equity capital for profit-and-loss purpose (Table 6).

Table 6:

Third level of banking – balance sheet presentation of illustrative bank A.

Bank A
Currency Money Holdings (issued by the Central Monetary Authority): 250 – 20 + 20Currency Money Deposits by agents 300 – 20
Loan to borrower: 100Deposit held by borrower: 50
Deposit with Bank B: 50Loan from Bank B: 50
Equity: + 20

The notion of maturity transformation (or liquidity provision) featured by contemporaneous bank theories relates here to this specific structure of bank balance sheet. The typical banking operation consists in generating a loan that becomes an asset on its balance sheet against a deposit that becomes a liability on its balance sheet. By looking at bank balance sheet matching between assets and liabilities, this operation appears to imply the financing of the asset position through a liability with shorter duration. In fact, this maturity mismatch depends on the money multiplication mechanism described above. Bank deposits are cash-equivalent for their holders: They are usually redeemable on demand and at par. However, the bank can use them while they remain available to their holders. In fact, some agents keep maintaining at least a core share of their deposits indefinitely in their bank account. On bank balance sheet, this core share appears as a liability that is continuously rolled over by those agents. It constitutes indeed, in aggregation and over time, a relatively stable source of funding.

This deposit core may be understood as one component of the single bank money base for lending purpose. However, this ongoing money base is not necessarily composed by central bank reserves (as the notion of ‘base money’ does), and it is not needed before bank lending takes place. Other sources of funding complement deposits held and created by the ongoing bank activity. In particular, inter-bank loans, central bank loans, issued bonds and equity shares. The next section shall examine in further details how the ongoing bank entity organises and manages its operations to assure its continuity over time and circumstances.

2.4 Banking as an entity (going concern)

Through combination of these three layers of activity, the ongoing bank entity generates two distinctive processes: a financial process and an economic process.

2.4.1 Bank financial process (treasury department)

The financial process concerns money and credit creation. At the first layer, banks manage the payments system, enabling settlement of transactions and holding the ledgers in economy and society. At the second layer, banks enable delaying payments, shifting settlement across space and time. At this level, one key process of the banking activity emerges: banking enacts the multiplication (generation) of money through bank credit creation. On the one hand, the bank entity assures the availability of money for its customers. On the other hand, it goes on leveraging upon other people’s money, in fact adding money to the existing monetary base.[8] This is made possible by the capacity or privilege the bank has to use money in custody, and the functional equivalence between money and bank deposits. These deposits remain redeemable at will and at par, although the bank entity uses and creates them for lending purpose. This process involves money multiplication and maturity transformation (or liquidity provision).

In this context, the so-called reserve (or treasury) management assures the funding of banking through time and circumstances (Table 7). It involves ongoing inter-bank compensation of payments and inter-bank loan dynamics. This makes banks interdependent, triggering coordination need, for instance, by central banking in its role of bank of banks. Liquidity reserve regulation, including deposit insurance and reserve requirements, points to this dimension.

Table 7:

Cash flow statement (flow of funds) of an illustrative bank.

Cash outflowsCash inflows
Costs of business paid by cashRevenues by banking activities paid by cash
Purchase by cash of assets (investments, securities)Liquidation of assets by cash
Reimbursement of debts of various kindsReimbursement of credits of various kinds
Lending by cashBorrowing by cash
Equity capital buybacks and dividend distribution by cashEquity capital increase by cash

The bank treasury department seeks to rebalance cash inflows and outflows when they become due.[9] It aims to match current and future cash outflows with available sources of funding under cost and security controls. Each source has its own funding cost and involves counterparty risk. If based on collateral, the source of funding implies dependency on collateral perceived quality and availability.

Sources of funding include cash deposits from customers, cash injections from equity and bond issuances, but also borrowing facilities with other banks (inter-bank channels), with the central bank, and with non-bank financial agencies. The latter includes shadow banking financial arrangements.

In this context, the bank entity has a specific recourse to borrowing, which makes it structurally dependent on the banking system to be sustainable (interbank credit). The bank does continuously receive cash inflows in the shape of new incoming payments. It may then seek to rebalance not the whole stock outstanding of its deposits, but only the expected cash outflow from them, that is, the gross or net negative variation of their total stock through time and circumstances. Not only cash reserves, but also borrowing from other banks and from the central bank, may be employed to this purpose. These reserve and credit facilities provide an essential service to the bank, which may then be ready to renounce to some higher return, accept no return at all, or even pay a negative interest rate to maintain access to them.[10]

2.4.2 Bank economic process (bank credit department)

The economic process concerns the bank’s economic organisation and performance. At the third layer, the bank entity organises its own banking activity to generate income for its ongoing sustainability and as remuneration for bank stakeholders, including management and shareholders. The ledger keeping and the money manufacturing are then organised in view to seek for and exploit business opportunities, involving revenues and expenses, profits and losses to the bank entity over time and circumstances. Therefore, the ongoing bank entity adds an income statement to the balance sheet (Table 8).

Table 8:

Income statement presentation of an illustrative bank.

Bank Income Statement
Revenues from payments system managementCost of doing business (including employment)
Revenues from lendingCost of funding
Prudential reserves provisioning
Net Balance = Income to the bank entity

From this perspective, the bank generates loans while simultaneously creating deposits (and then bank money) according to some expected profits that may be realised. At the same time, the bank is exposed to possible losses that may be incurred through its lending activity. In this context, bank equity and prudential reserves are expected to provide a cushion against these losses, preventing the bank to become insolvent. While shareholder equity injection is supposed to be provided by outside investors in loss-bearing irredeemable dividend-remunerated bank capital, reserve provisioning is retained from earnings that are internally generated by the ongoing bank entity. Bank equity regulation, including capital requirements and prudential reserves policy, points to this dimension.

In sum, the bank credit department seeks to generate assets to the bank entity in view to earn income, including remuneration for bank stakeholders such as management and shareholders. From a functional perspective, these assets may be distinguished between loans to non-financial agents (which are not meant to be transferred and remain on the bank balance sheet), securities issued by non-financial agents (which can be transferred and are generally traded on market exchanges), lending (through loans or securities) to other banks (inter-bank facilities), and lending to other non-bank financial institutions. Securities may be held for holding or trading purposes. Securities for holding purpose are expected to be longer-term involvements in other entities. Securities for trading purpose are expected to be continuously exchanged for market trade and market making.

2.4.3 The real-financial nexus

The banking[11] activity comprises two parallel processes. On the one hand, the bank seeks business opportunities by lending. The purpose is here to generate income under cost and loss controls. On the other hand, it shall assure the funding of its operations over time and circumstances through core deposits, equity and bond issuances, but also inter-bank loans and access to central bank facilities. The purpose here is to assure the ongoing balance of inflows and outflows, fulfilling obligations under cost and security controls.

Through combination of both banking processes, the ongoing banking activity acquires a specific role in economy and society.

One real-financial nexus of this banking activity consists in creating credit by granting loans to non-financial agents who may use it for consumption and investment purposes. These agents are expected to pay for interest charges, and repay the capital instalments over time. Paid interest charges will become revenue to the bank entity.

Another real-financial nexus of this banking activity consists in creating credit by granting loans to the state treasury which may use it to finance public expenditure. The loan interest charge and repayment will be covered by taxation and refinancing (public debt rolling over). Paid interest charges will become revenue to the bank entity.

The bank entity itself generates a real-financial nexus when, by setting its financial statements, it determines and eventually distributes net income and cash flows to stakeholders, including management and shareholders. Income to the bank entity is determined on a non-cash (accrual) basis of accounting, while enabling the bank entity to distribute cash payments that provide purchasing power to their recipients. This power to pay enters the overall economic process, adding to the economic system dynamic according to the recipients’ use of purchasing power.

Therefore, the bank entity accounting system adds a non-cash floor dynamic over the basement floor constituted by the cash payment dynamic. Accounting systems (comprising recognition and measurement rules for revenues and expenses, assets and liabilities) purport to represent and govern both entity processes, framing and shaping the overall entity dynamic and its role in economy and society. This non-cash-based (accrual) accounting floor adds up to the cash-based basement floor in the same way as the credit economy builds upon the circular flow in Schumpeter’s theoretical frame of analysis (Biondi, 2008).

To make the impact of bank accounting system clearer, let recall here the previous example of hidden loss on a granted loan. That loss could remain absconded by deposit mass and payments flow dynamic. However, the accounting system decides whether, how and when that loss shall be disclosed.[12] The loss may be recognised according to some formal legal event such as the borrower’s default or insolvency; or it may be imputed through some voluntary or compulsory rule on delayed payment limit threshold. Its amount may be based upon: the expected recoverable amount in some legal procedure; an estimation based upon internal or external thresholds; or a market amount of reference at the time of its book-keeping recognition. The timing and value impact of the loss is modified according to the accounting treatment that is applied. Moreover, the loss may have been provisioned before the triggering event through some prudential reserve accounting method, in view to protect the bank entity continuity and the vested interests of various stakeholders in it, including creditors and shareholders.

Finally, more generally speaking, these possible methods of accounting for loss occurrence and provisioning combine with all the other recognition and measurement rules, in order to establish accounting models of reference. These models frame and shape income generation and allocation over space and time by the bank entity as an economic organisation. They further constitute the accounting basis for income allocation for distributional, prudential and fiscal purposes. Indeed they constitute an integral part of the bank entity institutional structure (Biondi, 2005). Fundamentally, the accounting system does design and then decide whether and when the bank money generation process is allowed to generate income to the bank entity, making it available for distribution to executive management and shareholders.[13]

This bank entity dimension highlights the importance to consider the evolving dynamic of flows and stocks, not only their current values estimated at some arbitrary point of time. The bank entity cannot be represented and governed by looking only at the current values of its assets and its liabilities. The flow of bank activity is critical and essential to its working through time and circumstances. For instance, a bank entity may incur default although its value structure is solid (in case of bank run), whereas it may hide insolvency behind the veil of ongoing activities (in case of hidden cash loss). Its collective and dynamic nature should indeed be considered and accounted for as a going concern.

In this context, book-keeping at nominal value acquires a functional role in assuring traceable consistency throughout the money multiplication process which underlies both money circulation and bank money creation.[14] At the first and second layer of our functional representation, money assets were held by banks on behalf of customers – and circulated across them – at their nominal values. Every departure from this baseline bookkeeping rule – such as loss recognition – involves reshaping the economic impact of ongoing bank activity (as a going concern) on the overall economic process, including entity profit generation.[15] This modifies resource allocation across constituencies and trough time.

The combination of bank money creation and distributable profit generation makes the accounting system critical to the proper working of the bank entity. In fact, the bank entity process is exposed to the paper profit hypothesis which occurs when banks issue fiat money and are able to transform this issuance in accrued (distributable) revenues without having generated anything else but the ‘paper’ issuance, so to speak. It is the accounting system that rules over it to determine when the lending and borrowing activity has accrued revenues in excess of incurred expenses in view to determine net distributable earnings. The ‘originate and distribute’ model of bank credit creation is particularly sensitive to this problem. Under this model, a bank may grant new loans – generating new money – and then book profits by the ‘simultaneous’ distribution of those loans (through asset-backed securitisation, for instance), through: their actual liquidation; their shift into out-of-balance sheet related entities; or their accounting measurement at current (mark-to-market) values. In these circumstances, the originating bank may accrue revenues which maintain loose connection with the underlying loans’ profile and ongoing performance over time and circumstances. An immediate profit is then recognised that might well be actually represented as a premium for bearing a hidden risk (Kerr, 2011; Roca and Potente et al. 2017; Ryan, Tucker, & Zhou, 2016; 2012).

Moreover, the working of the banking system as a whole generates dynamic and collective feedbacks or interdependencies. We mentioned before the case of bank run, when most depositors withdraw and redeem their accounts at once, provoking the bank entity default. Further systemic effects can occur at the collective and dynamic level of the banking system as a whole. Let take two illustrative examples.

First, the banking system may provoke an economic crisis by revoking its credit facilities in a credit crunch. In fact, banks are the main providers of purchasing power. If banks do massively and materially decide to revoke this provision, many agents may be forced to sell their assets at the same time in a context characterised by lack of purchasing power, provoking asset prices to fall and agents to default, with obvious feedback effects on the banks themselves. The banking system may then maintain itself over time only by an orderly evolution of its credit commitment with the agents.[16]

Moreover, the banking system may provoke inflation by granting its credit facilities in a credit bubble.[17] If (some) banks do provide credit in excess to the capacity to absorb it smoothly outside the banking system, this additional purchasing power may generate nominal and relative price increases on the goods (especially assets) that are targeted by borrowers, including securities (triggering financial asset price increases), instead of facilitating the overall economic process and its sustainable development. These price increases may further reshape wealth and income distributions across agents and through time.

Not only real estate, but also securities market finance is sensitive to this inflationary problem. Banks may grant loans – generating new money – to facilitate market trading. If trading follows speculative motive (that is, it targets security price changes in short-time window), increased demand driven by bank credit may foster further securities price increase in a self-reinforcing loop, generating paper profits for both the bank and the trader. In these circumstances, financial actors may accrue revenues which are disconnected by fundamental performance of security issuers.

Second, the banking system as a whole cannot meet a generalised run on bank deposits which leads to redemption and withdrawal on most banks at once. In this situation, each bank struggles to face outflows and maintain its reserve target, while other banks cannot assist it because they are confronted with the same situation due to depositors’ general and massive run on most banks. A loop of bank asset forced sales, asset price falls, and bank defaults may occur as a consequence. Only the central monetary authority may respond to this general run on banking, by substituting asset liquidation with its credit facilities, including non-market-based repo mechanisms (so-called lending of last resort or LLR, already discussed by Thornton, 1802). However, this emergency lending of last resort makes central banking exposed to the moral hazard problem mentioned before.

This collective and dynamic dimension of the banking system as a whole has historically involved some sort of public private partnership between the banking system and the public authorities, including the organisation of a bank of banks, i. e., central banking.

3 The public-private partnership: currency issuance and central banking

The previous analysis focused on money creation through bank credit, pointing to a credit notion of money (Schumpeter).[18] The central monetary authority was introduced in the first level, but it remained passive throughout the banking working process. In fact, central banking plays a crucial role in bank credit dynamics by setting reserve requirements, determining refinancing conditions through its facilities (discount rates, lending conditions, eligible collaterals, etc.), and acting as lender of last resort.

In our miniature economy, under a regime of fiat money, the central monetary authority may manage the money base in two ways: by issuing or retiring currency in circulation (Table 10); and by acting as a bank of banks, that is, granting loans to banks that are ultimately covered by its fiat money creation capacity and privilege (Table 9). In both ways, the central monetary authority becomes a central bank. Its collective action backs and coordinates the system generated by monetary financial institutions as a whole.

Historically speaking, when central banks manage the monetary base, they intervene on state debt. In particular, when central banks issue new currency, they acquire a governmental debt against it, either directly (by funding the state treasury’s need for expenditure), or indirectly (by acquiring state debt from other agents, especially banks). When central banks grant a loan to a bank, they may ask for state debt as collateral.

Table 9:

Credit granting by central monetary authority (central banking).

Central Monetary Authority (Credit Department)
Currency Money Issued: 1000Currency Money Holdings by Bank A: 300
Currency Money Holdings by Bank B: 500
Currency Money Holdings by Bank C: 200
Loan to State Treasury: 500Central Bank Deposit by State Treasury: 500
Loan to Monetary Financial Institutions: 500Central Bank Deposit by Monetary Financial Institutions: 500

This financing of State Treasury and monetary financial institutions may also be covered by direct currency issuance (Table 10).

Table 10:

Money issuance by central monetary authority (central banking).

Central Monetary Authority (Issue Department)
[Asset]*Currency Money Issued: 1000
Loan to State Treasury: 500Currency Money Issued: 500
Loan to Monetary Financial Institutions: 500Currency Money Issued: 500

This collective action performed by the central bank has two featured impacts. On the one hand, it enables further expenditure by the State Treasury which, in its economic effects, may lead to the creation of real goods and services that could not have been created without this practice.[19] On the other hand, it enables additional money generation by banks, which can now benefit by direct access to central bank financing facilities. Again, this central bank action adds to, and overlaps with issuance of currency in circulation.

It is interesting to note here the connection between money creation and expenditure. When central banking lends to the State Treasury, the latter spends it for consumption and investment purposes. When central banking lends to banks, it delegates to them the actual use of this funding, although the banks are expected to eventually transform it in bank credit to agents (including the State Treasury). However they could also either lend, or directly use it to purchase financial assets, generating asset-price inflation spiralling, as it occurs under the paper profit hypothesis. Functionally speaking, currency and central bank deposits are equivalent: both represent central bank base money which is formally reported on the liability side of the central bank issue department (both “liability” and “reserve” are quite misleading terms in this context).

Therefore, the public private partnership goes beyond the functional dimension of credit, pointing to the overarching governance of the purchasing power (Desan, 2005; Gabor & Ban, 2016; Wall Street Journal – WSJ, 2016). In particular, governmental debt refinancing involves this public-private partnership between government and banking to manage the monetary base. This partnership has historically assumed various forms, which illustrate the overarching constitutional project involved in designing and managing the monetary base of a polity (Desan, 2014). Constitutional political choices are involved in granting some debt securities with the privilege to be refinanced through central banking. For instance, shifting this privilege from governmental securities to private securities will shift control on the purchasing power from the public sphere of government to the private sphere of those security issuers, while reducing overall refinancing size may deleverage the economy, with effects on both spheres (Biondi, 2016a). In this context, massive quantitative easing policy has accommodated private credit interests and increased central bank and treasury exposures in the aftermath of the financial crisis of 2007–08.

A long-standing debate has been occurring between state and private theories of money. Under the functional equivalence between currency and deposit, money generation can emerge through both issuance of cash-equivalent assets, and granting of drawing credit facilities. Both issuance and granting may be performed by public and private members of the monetary system. In both regimes, the essential point is that coordination remains the clue for the monetary system as a whole. Multiple issuers critically depend on inter-currency convertibility and related arrangements; multiple credit grantors critically depend on intra-grantors lending facilities and related arrangements. And the systemic stability and resilience rely on the ongoing connection between currencies and credits through time and circumstances.

Ultimately, matters of institutional design and enforcement define the ways in which the monetary system members control and are controlled in their mutual relationships and their connection with non-monetary constituencies which depend on the monetary system members to use monies in their transactions. Two illustrative examples show the criticality of this institutional architecture. On the one hand, free banking aims to understand money as a commodity, whose price would be the inter-bank interest rate of reference, and whose control may then be performed through market arrangements. On another hand, emergence of digital monies and electronic payment systems does raise (again) concerns of money issuance and supervision which were solved in the past through central banking coordination. In both cases, the free initiative in money matters is at issue. And free initiative is generally associated with the market. Both examples point then to the role of the money market in the money system coordination.

4 The money market

The previous analysis was developed without reference to financial markets. The money transfers were executed at their face values. Lending and borrowing were effectuated through specific transactions with agents or among banks. Bank loans remained on the book of the bank which originated them. Only two kinds of money existed: currency (legal tender) and bank accounts which were functionally equivalent to currency.

Historically speaking, some loans were issued in a specific form that makes them transferable. For instance, a commercial paper represents a debt that is due in a commercial transaction and may involve a long chain of debt transfers with or without recourse on the previous holder along this chain. In case of securities such as bonds, this transfer is made possible without consent by the original borrower and without recourse to the transferor.

This debt transfer may be performed in a variety of ways for a variety of reasons. For instance, a debt transfer may be realised through a market sale and purchase. Or it may be effectuated by using that debt as collateral to securitise a loan that is made dependent on this collateral. In this context, sale and repurchase agreements stand in-between liquidation and pledged borrowing; they do often work out as market-based collateralised borrowing.[20]

Some agencies may specialise in facilitating this transfer through market exchanges, acting as market-makers for financial securities. Credit facilities may be employed to fund these market-making activities. This market mechanism makes the underlying securities liquid, in the sense that, instead of being locked in the bank accounts, they can now be easily transferred. Market exchange may facilitate this transfer by continued trading.

In the aftermath of the systemic liquidity crisis of 2007–08, attention was paid to the ways collateralisation arrangements manage implied transaction risks, generally requiring borrowers to over-collateralise: The current value of the posted collateral is then higher than the actual amount that is borrowed. Evolving terms and conditions for ‘haircuts’ and margins are certainly relevant for the banking system dynamics; they may deal with exposure at the margin. However, when counterparty risk materialises, or when the overall refinancing mechanism comes under distress, the entire outstanding is at stake and the very continued access to short-term wholesale funding.[21] Haircuts and margins do not and cannot protect against the latter situations, as larger umbrellas cannot much against hurricanes. In these circumstances, the systemic dimension of the money markets through space and time shows its significance. Money markets activate relationships which potentially or actually involve more than the two parties in one single transfer, and are exposed to changes in circumstances over time, although this single transfer occurred at one point of time.

The critical feature here is that the more this transfer may be effectuated at will and at par, the more these transferable securities resemble to money.[22]

This quasi-money status provides an advantage especially for banks. As shown above, banks operate in a structural interdependency due to money multiplication and maturity transformation (or liquidity provision). If banks generate a loan that is transferable, they may liquidate it when cash is required by their working process. The more the transfer may be effectuated smoothly and without loss, the more the bank activity is facilitated. Moreover, banks may get extra-funding by using these liquid quasi-money securities as collaterals to obtain loans from other agents, other banks and from the central bank. Last but not least, banks may then be encouraged to grant more loans, for they may expect to transfer or refinance them in various ways.

Historically speaking, this quasi-money status was especially granted to state securities admitted to refinancing facilities managed by the central bank. When a bank acquires a state security, it is involved in lending to the state. At the same time, the bank knows that that security may be liquidated on the market, and collateralised with the central bank. This means that the bank expects to be able to transform it into money easily and without loss. The more this transformation operates at will and at par, the more the security looks like quasi-money in the bank’s eyes. In fact, this monetisation affords the risk to blur the distinction between investment and money, with the functional relationship between the monetary process and the economic process being muddled by the evaporation of this fundamental distinction. The illusion of liquidity becomes panacea and hides the money generation that liquidity may involve.[23]

In the bank balance sheet, collateralisation should appear as a special class in the asset side, and as a credit line received in the liability side (Table 11). On the contrary, its representation as two distinct operations (a sale and a buy-back) might mislead decisions and facilitate the paper profit creation hypothesis addressed before. Off-balance sheet transactions and conduits facilitate this misrepresentation.

Table 11:

Collateralised refinancing by an illustrative bank A - Suggested on-balance sheet presentation.

Bank A
Currency Money Holdings (issued by the Central Monetary Authority): 250Currency Money Deposits by agents: 280
Loan to borrower: 100 of which:Collateralised loan: 30Deposit held by borrower: 50
Deposit with Bank B: 30Loan (collateralised) from Bank B: 30
Deposit with Bank B: 50Loan from Bank B: 50
Equity: 20

However, the liquidity advantage granted by the quasi-money status comes with the exposure to the market price change of the underlying security, if the liquidation or the collateralisation pass through a market-based transaction or involve a market-based evaluation. This exposure is especially critical for banks which depend on such market-based arrangements for funding their operations.

Various arrangements involve this exposure to market price dynamics (or market dependency): market-based valuation of assets or collaterals; fire sales to pay for deposit redemptions; funding facilities to market-traders, involving speculation and market-making on borrowing; refinancing based upon sale and buyback; securitisation chains based on market valuation; collateral reuse and rehypothecation chains on market valuation basis.

This market dependency may further involve a tension in the financial-real nexus of bank activity. Where does the bank profit come from? The leverage that enables bank money creation may be used to fund either trading or investment in business and non-business activities. When used for trading purpose, it may be indirectly connected to investment funding, or merely generate traded asset price inflation. In the last case, bank profit and loss are generated through a purely monetary loop which does not finance investment in real activities. A difference of nature may then exist between bank profit coming from capital gains and revaluations, or from the flow of interest charge payments from borrowers. In the former, the bank may book a profit without engaging with some ongoing real economy activity, taking the shortcut from bank money generation to bank profit distribution (paper profit hypothesis).

In sum, the liquidity added by market dependency may involve macroeconomic issues along with microeconomic excessive and misleading behaviours. As Robertson (1922, 1959, p. 142–143) argued,

when once the speculative spirit is abroad it is not so easily exorcised. The man who expects to make a money gain of 20% by merely sitting for a few months on some bales of cotton or some barrels of oil will not be put off by a rise of 1 or 2% per annum in the rate of interest which he must pay to his bank.

This speculative process definitely exposes the banking system to the paper profit hypothesis. In fact, the market basis makes especially easy to pass money multiplication directly into distributable profits without having performed anything but money paperwork.

5 Shadow banking

Much has been written concerning shadow banking in the wake of the ‘North-Atlantic Financial Crisis’ (Biondi, 2016b; ECB 2015; Financial Stability Board – FSB, 2015).

From our systemic perspective, shadow banking constitutes a series of financial arrangements that do mimic banking activity outside the bank law and regulations.[24] These arrangements play banking functions especially by connecting monetary and non-monetary financial institutions to each other (Adrian & Jones, 2018; Adrian & Shin, 2009; Bavoso, 2017; Blair, 2013; Hockett & Omarova, 2017; Ricks, 2015).

On the liability side, shadow banking grants deposit-like facilities to gather short-term funding for its lending purposes. This mimics the banking operations of deposits provision. Moreover, it may issue currency-like cash equivalent securities which look like currency in their holders’ eyes.

On the asset side, shadow banking may both lend to financial institutions, and securitise their assets in order to make them transferable through liquidation or collateralisation. This collateralisation mimics the refinancing mechanism that has been put in place for state securities. In fact, shadow banking collateralisation may extend far beyond the restricted assets base that used to be admitted by central banking, while relaxing control and security terms and conditions which used to be imposed by it. In this context, Singh and Stella (2012) distinguish two kinds of collateral, whether they are admitted to central bank refinancing facilities or not.

Moreover, the collateral recipient may be able to reuse it, involving long interdependency chains based upon successive transfer arrangements on the collateralised asset and its successive uses (Singh, 2014). Underlying asset price dynamics and counterparty credit dynamics may then reverberate along these chains, disseminating credit and market shocks.

These shadow banking operations become especially critical when involved parties are financial institutions. By lending to and borrowing from financial institutions, shadow banking adds to, and builds upon the leverage capacity of banks. By securitising bank asset portfolio, shadow banking monetises it, as does the central bank through state securities collateralisation.

Furthermore, through financial innovation, shadow banking creates hybrid financial instruments that combine characteristics of debt and equity. More crucially here, these hybrid instruments and other refinancing facilities may involve bank equity shares into the money generation process, monetising shares and hence bank equity. This makes bank shareholder equity endogenous to the financial system dynamics. Therefore, it cannot longer provide an outside cash-based source of funding that assures residual risk-bearing and loss-absorption. This raises an issue that deserves consideration for bank equity capital requirements targeting shareholder equity.[25]

In sum, shadow banking expands the monetary base – generating short-term money-equivalent liabilities and entitlements – through unregulated banking. When it monetises bank assets through collateralised refinancing, shadow banking operates central banking function across financial institutions, acting as shadow central banking which coordinates the monetary working of those institutions. By operating as bank of banks, shadow banking adds unregulated leverage on top of bank leverage. It may be especially sensitive to market dynamics if financing arrangements are based on trading (especially capital market liquidations) and market-based collateralisation. As candidly stated by Paul Tucker (2012: 4),

anyone holding a securities portfolio can build themselves a shadow bank using the securities lending and repo markets. One simply lends out the securities at call for cash, and then one employs that cash by making loans or buying credit-assets with a longer maturity. This is leverage and maturity mismatch.

In this context, systemic concerns do not stop with the systemic risks and excess liquidity generated by banking and central banking in the shadow. A further unanswered question is whether and how much shadow banking actors keep booking paper profits through leveraging and trading among themselves in a sort of seignorage on this market-based (shadow) money creation.[26] Some general interest mission should be acknowledged to justify the backing of such a shadow money creation by public policy and regulation. Why is banking in the shadow admitted and facilitated, if not endorsed? In fact, should anyone who can procure money-equivalent assets while offering monetary liabilities (that is, money-procuring, deposit-equivalent liabilities) be licenced and regulated as a monetary institution?[27]

6 Money aggregates dynamics: systemic implications

The working of the financial system outlined above is based upon the functional equivalence between currency and deposits, featuring a credit theory of money.[28] In the consolidated ledger of economy and society, both can be seen as liabilities held by monetary financial institutions, matched by assets in form of securities (currency included) and loans. Both are means to settle payments and discharge debts. Both are admittances of debt owed by monetary financial institutions, that is, credit admittances that may be used to discharge debts contracted with other agents. The current system of fiat money may be reconsidered from this functional perspective (Table 12 and Table 13).

Table 12:

A functional perspective on hierarchy of money aggregates (central bank base money, bank credit money, interbank credit money).

AssetsLiabilities
Central Bank base money, of which:
CurrencyCurrency-based deposits
Deposits with Central BankLoans from Central Bank
Bank credit money, of which:
Loans to and Securities issued by real-economy agents (Bank Credit Department)Bank credit-based deposits
Interbank credit money, of which:
Loans to and Debt Admittances issued by other banksInterbank credit-based deposits
Deposit with other banksLoans from and Debt Admittances held by other banks

What is currency (that is, paper money) in this context? It is a piece of legal paper issued by the central bank and recorded as a central bank liability, which the rule of law (that is, the institutional framework for the financial system)[29] enforces and grants with (i) free transferability without nominal value change, and (ii) the privilege to settle payments. Since every payment can be understood as the settlement for a debt obligation that has become due (synchronous with the counter-exchange of goods in purchase transactions settled by cash), currency is the means to discharge (all the other) debts. The first feature provides it with transferability or liquidity, the second one makes it the legal tender. The combination of both features into one instrument enables currency to function as a store of payment means, that is, a store of purchasing power through time and circumstances (Fantacci, 2013: 139 ff.).

Table 13:

A functional perspective on money, credit and accounting (conceptual summary).

MoneyCreditAccounting
Banking as ledger keepingMoney as means of paymentCredit as temporary part with money holdingsAccount-keeping at nominal (face) values
Banking as treasury managementMoney as means of redemption (legal tender)Credit as financial dynamics (settling, refinancing, discounting)Cash basis of accounting
Banking as manufacturing of moneyMoney as means of investment (and speculation)Credit as financingAccruals basis of accounting

Drawing upon this legal privilege granted to currency and other central bank liabilities (labelled all together as base money), the ‘fractional reserve’ theory along with some hierarchical views on money aggregates (Werner, 2014a, 2014b) understand bank money generated through credit-manufacturing over time as a more or less mechanical multiplication of base money provided by central banking.[30] But currency legal privileged status does not put central bank base money at the core of the monetary process. The latter relates to the overall bank money creation through credit. Both central bank liabilities, and bank liabilities and bank admittances of debt are significant. As outlined above, currency-based bank deposits and loan-based bank deposits are functionally equivalent: both substitute and lever upon central bank base money which is formally reported on the liability side of the central bank issue department. This implies that both can be employed to settle payments and discharge (all other) debts, as long as each system member relies on the other depositary institutions, which are expected assuring the prompt and safe convertibility of one into another. The same functional equivalence applies to inter-bank lending. Instead of using base money, banks may employ both their own admittances of debt, and their own credit lines to each other (inter-bank credit and related inter-bank deposit creation), to perform settlements and discharges across them, as long as each bank member relies on the others for prompt and safe convertibility of them into central bank base money. In a close and perfectly pooled interbank system, this mutual recognition of debts transforms inter-bank credit into base money, that is, into a multilateral means to settle payments and discharge debts through time.

From this perspective, ‘reserve’ is what reserve does. Indeed the monetary space (broad money base) is constituted by the whole of instruments that are generally accepted to be cash-equivalent through space and time, that is, promptly and safely convertible into currency and other central bank liabilities. They may take the form of IOUs and other debt admittances by banks, but also revolving credit lines across banks, being currency-like entitlements and deposit-like facilities functionally equivalent within a close monetary system. The whole of these instruments enables each institution member of the financial system to rebalance its position, discharging through them its debts and payments that become due. What matters for these cash equivalent instruments is less their potential redemption in cash, than their actual use in discharging debts and settling payments across space and time.

In this way, the financial system features an endogenous money creation mechanism that is inwardly unbound (Biondi & Zhou, 2017), as long as new loans keep being granted and outstanding loans reimbursed over time and circumstances, while being continuously refinanced through inclusion into the ongoing base money jointly constituted by central bank liabilities and inter-bank liabilities held by financial institutions that are members of the monetary system. Boundaries come from outside: the ongoing lending capacity to real-economic borrowers, and the institutional definition of base money. The latter does not depend on some exogenous quantity (stock) of currency – a sort of conceptual relic from the gold standard regime – but on the functional definition of base money (what is admitted to be used to settle payments and discharge debts at the various system levels). This broad base money is jointly managed by central banking and inter-bank refinancing facilities. In both facilities, base money depends on both the list of financial entitlements that are admitted for refinancing (including central bank as ‘dealer’ of last resort, or better, asset-based lender of last resort), and the ongoing capacity of banks to lend to each other (including the central bank as loan-generating lender of last resort). Both interbank coordination modes are cash-equivalent because currency-like and deposit-like financial instruments are functionally equivalent at the interbank level, as are currency and bank deposits at the lower level of the financial system (that concerned with the real-economy payments flow).[31]

This functional equivalence reshapes the theoretical distinction between money as a commodity or a claim (Schumpeter 1917). At the first level of our functional representation, an accounting system kept at nominal values puts the former on the asset side, and the latter on the liability side, revealing their functional dependency. However, a commodity view would consider every movement between accounts as a market transaction, requiring the evaluation of money holdings at current market prices. A market transaction supposes severing the mutual dependence link that the overall systemic process establishes between the involved parties. This market understanding does therefore neglect the institutional membership which makes those money-like holdings (reserves) eligible for and circulating as means of settlement.[32] The interest rate definition is critical here. A commodity theory would reduce it to the commodity price quoted by one peculiar commodity market. In turn, this market view would neglect the privilege implied by having access to the upper levels of coordination in the financial system. From this systemic perspective, interest rate definition does ideally combine some basic membership fee (which Ricks, 2015: 44–46 and figure 1.6 calls the money premium) with some transactional margin. Here inter-bank interest rates settled by either public central banking or private central clearing agencies constitute the cost to access the financial system which combines market and non-market dimensions. This levered economic organisation generally implies segregation and interdependency between the various levels of the monetary system (and related interest rates of reference): the money use granted to non-monetary agents; the role plaid by monetary coordinating agencies; and the coordination among the latter (including central banking and clearing houses).

In this context, the fractional reserve theory represents a corner case where base money is strictly limited to currency (reserve requirement definition), and the central bank monetary policy does not accommodate request for it by monetary member institutions (reserve requirement enforcement). As a matter of fact, over the last three decades, central banks have dropped requests for compulsory reserves; accepted to accommodate the increasing demand for reserves by monetary financial institutions; and extended the list of admitted securities to include debt admittances by monetary financial institutions such as bonds, with the overall purpose to ensure systemic liquidity. During this period, monetary control has been supposed to depend mainly on benchmarking discount rate fixing for central bank refinancing facilities. In parallel, securitisation[33] has facilitated monetary recycling of bank loans, while expanding financial markets have fostered issuances of transferable bank debt admittances that are generally admitted to refinancing facilities. All together, these features foster bank money manufacturing, paving the ways to its unbound money generation process with potential inflationary threats: It is not surprising that market securities-price inflation and real-estate price inflation (when targeted as financial investment instrument) have occurred under this regime, since those securities were especially targeted by inter-bank credit creation (Aikman, Haldane, & Nelson, 2014; 2008).

The ultimate resilience of the financial system rests on the ongoing flow of lending and repayment to real-economic borrowers (coordination related to bank credit); the rebalancing flow of inter-bank lending (coordination related to treasury management); and the mutual coordination of the two flows through space and time. In a close and perfectly pooled system, an exogenous quantity of gold and silver – even substituted by the quantity of currency issued by the central bank – does not constrain or stabilise the system dynamics.[34] In fact, the notion of ‘reserve’ may make sense when one money system is open to transactions with other systems. These inter-currency transactions establish relationships across monetary financial systems, involving outward convertibility into money instruments that do not belong to the inward monetary process.[35] Reserves in those external currencies may play a role to assure payment performance in those external currencies, since the system member cannot generate them. But again, this would involve matters of coordination (the so-called transnational monetary architecture) across systems at the various levels, especially inter-central banking coordination (provided that currencies are ultimately managed through central banking arrangements).[36]

How to deal with an endogenously unbound financial system? Prudently.[37] Together, its features imply a functional separation of money and credit from the real economy. Credit is understood as an entitlement to a certain quantity of money, that is, a self-contained process of anticipation of money in view of receiving money in the future, possibly against an additional money payment for credit service provision. With regard to the real-financial nexus, this arrangement does not include a direct bounding connection with some provision of goods, services or resources that may be paid through that credit (Fantacci, 2013).[38] This credit base of money enacts both the systemic capacity of credit to shift payments and settlements through space and time, and its systemic capacity to lever over existing reserves of goods or cash through the money multiplication process (Biondi, 2010). Its management requires therefore systemic coordination. Ongoing financial stability and resilience of the financial system depend on its overarching institutional setting and actual behaviours by members situated in time, space and circumstances. It is featured by self-balancing, self-reinforcing and self-fulfilling feedbacks that may involve destabilising outcomes. ‘Systemic risk’ and ‘macro-prudential’ management and regulation are new labels for recurrent concerns of systemic coordination. A careful combination of design and policy is required to reach coordination in view to prevent or respond to local and systemic crashes.

It is not by accident indeed if historians of financial systems have been pointing to endemic instability and cyclical outcomes, already highlighted by Thornton (1802). Kindleberger’s notions of manias, panics and runs provide a spirited historical perspective on those concerns. From a systemic perspective, manias relate to self-reinforcing and self-fulfilling feedbacks that enable the financial system to sustain lending growth even beyond reasonable levels (those based upon real-economy capabilities to repay credit through time and circumstances), involving local or global insolvency issues. Panics relate to self-reinforcing and self-fulfilling feedbacks that enable the financial system to dry away from liquidity, distressing the fundamental monetary mechanism that enables some of its assets and liabilities (that is, credits and debts) to smoothly circulate as functional equivalents to cash. In fact, cash itself may be and has been occasionally submitted to runs, when real-economy agents or financial system member institutions distrustfully disregard the legal tender and keep replacing it with alternative means to store purchasing power, settle payments and discharge debts (episodes of hyperinflation and dollarization usually involve such a situation). Even central bank base money becomes subject to and then casualty of its systemic nature, notwithstanding its face value established by law.

Shall we get rid of credit – at least under its current functional and institutional features – because of these possible shortcomings? Before pronouncing a death sentence, at least one positive side of its potential shall be remembered here. Ultimately, credit and a credit base of money ease the financial constraint, enabling production, transfer and consumption acts that would not be possible without them. A cash-in-hand, cash-in-advance system would be certainly more stable and safe, but it would drastically limit not only the money multiplication process, but also the kind of collective and temporal economic organisation that this credit-based regime enables (Biondi, 2010). Can business and non-business entities operate their collective and temporal processes - in view to fulfil their collective missions through time and circumstances - without credit? At the same time, how can we respond to crashes and abuses that yet another systemic financial crisis has made apparent again?

7 Thoughts for banking system regulation

Источник: https://www.degruyter.com/document/doi/10.1515/ael-2017-0047/html

Banking Laws and Regulations 2021

ADJUDICATED central bank and trust hutchinson DECISIONS

¶ No.FDIC
Docket No.
Case CaptionType of Order
5,28102-174e, 02-158e, 02-160c&b, 02-161c&b, 02-175k, 02-176kRandolph W. Lenz and J. Donald Weand, Jr.
Connecticut Bank of Commerce
Stamford, Connecticut
9-21-04
Decision And Order On Interlocutory Review
5,28202-174e, 02-158e, 02-160c&b, 02-161c&b, 02-175k, 02-176k, 02-177k, 02-178k, 02-179k, 02-180k, 02-181k, 02-182kRandolph W. Lenz, J. Donald Weand, Jr., Marcial Cuevas, Jack W. Dunlap, Steven B. Levine, Timothy S. Reed, Brian A. Marks, Marshall C. Asche
Connecticut Bank of Commerce
Stamford, Connecticut
9-30-04
Decision And Order Dismissing Request For Stay Of Order On Interlocutory Review

¶ No.FDIC
Docket No.
Case CaptionType of Order
12,26504-073e, 04-074kJames R. Peacock, Sr.
The Commercial Bank of Volusia County
Ormond Beach, Florida
central bank and trust hutchinson 9-2-04
Order of Removal and Prohibition and Civil Money Penalty
12,26604-106eRebecca Streetman
central bank and trust hutchinson Grapeland State Bank
Grapeland, Texas
central bank and trust hutchinson 9-2-04
Order of Removal and Prohibition
12,26703-155eLeslie Howard Shipp
Texas Bank and Trust Company f/k/a Longview Bank and Trust Company
Longview, Texas
9-2-04
Order of Removal and Prohibition
12,26804-176bFirst Bank, Inc.
Louisville, Kentucky
9-9-04
Order To Cease and Desist
12,26904-185qWells Fargo Central bank and trust hutchinson Michigan
National Association
Central bank and trust hutchinson, Michigan
9-14-04
Order of Approval of Termination of Insurance
12,27004-186qWells Fargo Bank Alaska
National Association
Anchorage, Alaska
9-14-04
Order of Approval of Termination of Insurance
12,27104-187qWells Fargo Bank Montana
National Association
Billings, Montana
9-14-04
Order of Approval of Termination of Insurance
12,27204-188qWells Fargo Bank Nebraska
National Association
Omaha, Nebraska
9-14-04
Order of Approval of Termination of Insurance
12,27304-189qWells Fargo Bank Texas
National Association
San Antonio, Texas
9-14-04
Order of Approval of Termination of Insurance
12,27404-190qWells Fargo Bank West
National Association
Denver, Colorado
9-14-04
Order of Approval of Termination of Insurance
12,27504-191qWells Fargo Bank Wyoming
National Association
Casper, Wyoming
9-14-04
Order of Approval of Termination of Insurance
12,27604-192qWells Fargo Bank Arizona
National Association
Phoenix, Arizona
9-14-04
Order of Approval of Termination of Insurance
12,27704-193qWells Fargo Bank Illinois
National Association
cut out tie front dress Galesburg, Illinois
9-14-04
Order of Approval of Termination of Insurance
12,27804-194qWells Fargo Bank Indiana
National Association
Fort Wayne, Indiana
9-14-04
Order of Approval of Termination of Insurance
12,27904-195qWells Fargo Bank Iowa
National Association
central bank and trust hutchinson Des Moines, Iowa
9-14-04
Order of Approval of Termination of Insurance
12,28004-196qWells Fargo Bank Minnesota
National Association
Minneapolis, Minnesota
9-14-04
Order central bank and trust hutchinson of Approval of Termination of Insurance
12,28104-197qWells Fargo Bank Nevada
National Association
Las Vegas, Nevada
9-14-04
Order of Approval of Termination of Insurance
12,28204-198qWells central bank and trust hutchinson Fargo Bank New Mexico
National Association
Albuquerque, New Mexico
9-14-04
Order of Approval of Termination of Insurance
12,28304-199qWells Fargo Bank North Dakota
National Association
Fargo, North Dakota
9-14-04
Order of Approval of Termination of Insurance
12,28404-200qWells Fargo Bank Ohio
National Association
Van Wert, Ohio
9-14-04
Order of Approval of Termination of Insurance
12,28504-201qWells Fargo Bank South Dakota
National Association
Sioux Falls, South Dakota
central bank and trust hutchinson 9-14-04
Order of Approval of Termination of Insurance
12,28604-202qWells Fargo Bank Wisconsin
National Association
Milwaukee, Wisconsin
9-14-04
Order of Approval of Termination of Insurance
12,28704-203q Pacific Northwest Bank
Oak Harbor, Washington
9-14-04
Order of Approval of Termination of Insurance
12,28804-038eThea M. Marston
Central Bank and Trust Company
Hutchinson, Kansas
9-16-04
Order of Removal and Prohibition
12,28904-110eClaude M. Conley
The Bank of Alamo
Alamo, Tennessee
9-16-04
Order of Removal and Prohibition
12,29004-146ePeter M. Hueser, Former President of Commercial Loan Corporation, Oak Brook, Illinois, Service Provider to UmbrellaBank, fsb
Chicago, Illinois, OTS No. 08462
and Harvard Savings Bank
Harvard, Illinois
9-16-04
Order of Removal and Prohibition
12,29104-150eRhonda A. Baker
Countryside Bank
Meriden, Kansas
9-16-04
Order american restaurants near td garden of Removal and Prohibition
12,29204-151kRhonda A. Baker
Countryside Bank
Meriden, Kansas
9-16-04
Civil Money Penalty
12,29304-153kThea M. Marston
Central Bank and Trust Company
Hutchinson, Kansas
9-16-04
Civil Money Penalty
12,29404-159kPrime Security Bank
Karlstad, Minnesota
9-18-04
Civil Money Penalty
12,29504-220bCalifornia Oaks State Bank
Thousand Oaks, California
9-24-04
Order To Cease and Desist
12,29604-181qSobieski Bank
South Bend, Indiana
9-29-04
Order of Approval of Termination of Insurance

central bank and trust hutchinson No.FDIC
Docket No.
Case CaptionType of Order
16,39202-201bClay County Bank
Clay, West Virginia
9-1-04
Order Terminated
16,39303-191bContinental Community Bank and Trust Company
Aurora, Illinois
9-13-04
Order Terminated
16,39403-047bFairview State Banking Company
Fairview, Illinois
9-16-04
Order Terminated
16,39503-183bCalifornia Oaks State Bank
Thousand Oaks, California
9-29-04
Order central bank and trust hutchinson Terminated
 
Источник: https://www.fdic.gov/bank/individual/enforcement/nov04b11.html

Jack and Janet AyresGetting to know Earl McVicker

Earl McVicker has just completed a term as vice chairman of the foundation's board of trustees. Earl graduated from K-State's College of Agriculture in 1971 and earned a graduate degree in banking from the University of Colorado in 1975. He is chairman, president and CEO of Central Financial Corporation and its subsidiary, Central Bank and Trust Co. of Hutchinson, Kan., and currently sits on the board of Community First National Bank in Manhattan, Kan. Previous appointments include chairman of the American Bankers Association (ABA) and the ABA Community Bankers Council, president and chairman of the Kansas Bankers Association, and president of the K-State Alumni Association board. He and his wife Molly live in Hutchinson, Kan., have three adult children, and are members of the KSU Foundation President's Club and lifetime members of the K-State Alumni Association.

What has serving on the KSU Foundation board of directors meant to you? Do you have any favorite memories?
Serving on the board of the KSU Foundation has allowed me to observe all aspects of the foundation —fundraising, investments, stewardship and its financial contributions to the university through scholarships and other university needs. It has given me a greater understanding of the needs of the university and how the foundation serves as an essential supporter of the university. The most enjoyable part has been observing the positive impact the foundation has had on the university and the students. The most memorable event was the celebration of the success of the Changing Lives Campaign.

How did your experience at K-State influence you in your professional life? Why is K-State important to you?
My experience at K-State influenced all aspects of my life. I met Molly, my wife of 41 years, on Halloween night when we were freshmen. She has been a very positive influence on my personal and professional life. K-State was where I built the base for my professional career — it's a family with a culture of caring.

Why is philanthropy important?
Philanthropy is about providing support, financial and otherwise, to those with needs. We have all benefitted from the contributions of others. It is important that continue this philosophy by giving our own time and resources.

In the years you've served on the board and in other roles with the foundation, what is something your colleagues may not have learned about you?
I was the valedictorian of my eighth grade class. I was also the only student in my class in a one-room grade school in Ness County. Many folks only see me as banker in a suit; however, on evenings and weekends, I am usually in boots and jeans and am most comfortable on a horse, my Harley-Davidson or in my farm pickup.

Back to current issue.

Источник: https://www.ksufoundation.org/making-a-difference/1111_earlmcvicker.html

Claremore, Okla.-based RCB Holding Co. agreed to acquire Hutchinson, Kan.-based Central Bank and Trust Co., Wellington (Kan.) Daily News reported.

The financial terms of the deal were not disclosed in the news story.

For reference, SNL valuations for bank and thrift targets in the Midwest region between March 6, 2017, and March 6, 2018, averaged 159.37% of book, 165.03% of tangible book and had a median of 19.85x last-12-months earnings, on an aggregate basis.

The transaction is subject to regulatory approval and is expected to close in the second quarter.

RCBHolding will enter Reno County, Kan., with four branches to be ranked second with a 21.27% share of approximately $1.09 billion in total market deposits. The company will also expand in Sedgwick County, Kan., by two branches to be ranked No. 30 with a 0.24% share of approximately $12.85 billion in total market deposits.

Central Bank and Trust locations will continue to operate as Central Bank and Trust until late in the first quarter of 2019.

Central Bank and Trust Chairman, President and CEO Earl McVicker will continue with RCB Holding unit RCB Bank as its Kansas market board chairman.

SNL data shows that as of the end of 2017, RCB Bank had $2.79 billion in assets. Central Bank and Trust, a unit of Central Financial Corp., had assets of $323.1 million.

D.A. Davidson's managing director of investment banking, Eugene Katz, served as financial adviser to Central Bank and Trust. C. Robert Monroe, partner at Stinson Leonard Street LLP, acted as Central Bank and Trust's legal counsel.

To use S&P Global Market Intelligence's branch analytics tools to compare market overlap, click here. To create custom maps, click here.

SNL is owned by S&P Global Market Intelligence.

SNL Image

Источник: https://www.spglobal.com/marketintelligence/en/news-insights/trending/o1o5x5q7hoaiu-vedvnpig2

Richard Chambers

ABOUT Richard

Richard is a wealth management consultant for Commerce Trust Company. He facilitates the introduction of our prospective clients to a comprehensive service team which includes private banking, investment management, trust administration, and financial planning. Richard provides an integrated and seamless experience as we partner with clients to meet their long-term goals and objectives.     

Prior to joining Commerce Trust Company, he was a Senior Vice President and Senior Trust Officer in Bank of America’s Private Bank (formerly U.S. Trust) in Wichita, Kansas; a Senior Vice President and Manager of the Trust and Investment Divisions of Central Bank and Trust Co. in Hutchinson, Kansas; and a Vice President and Relationship Manager with BANK IV, Boatmen’s and NationsBank, all in Wichita. Before entering banking, he was a practicing attorney in Wichita, whose practice focused on trusts and estates, tax, and employee benefits.         

Richard earned a Bachelor of Business Administration degree in economics, with Special Distinction, from the University of Oklahoma; a Juris Doctor degree from the University of Kansas; and a Master of Laws in taxation from the University of Missouri-Kansas City.     

 
Richard is active in his community and profession, serving on the Board and as a Past President of the Wichita Estate Planning Council, and on the Wichita Catholic Diocese Planned Giving Advisory Council. He previously served on the Boards of the Wichita Symphony Orchestra, Hutchinson/Reno County Chamber of Commerce, TECH Foundation and Hospice of Reno County. He was also Past President of the Rotary Club of Hutchinson, and a Past Advisory Trust Committee member and faculty member for the Kansas and Nebraska Schools of Banking. Richard enjoys watching his favorite sports teams—K-State football and basketball, Kansas City Royals and Chiefs, and the St. Louis Blues. He also enjoys family game and movie nights with my wife and two children.  

Источник: https://www.commercetrustcompany.com/contact-us/our-team/a-g/richard-chambers
central bank and trust hutchinson

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