What Is Involved in the Regulation of Financial Institutions?

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  • Written By: Kristie Lorette
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  • Last Modified Date: 08 September 2019
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Financial institutions laws are the laws that banking, investment and other financial institutions are required to abide by. Primarily, these laws are in place to ensure fair financial and lending practices for consumers and that all banks and institutions are abiding by the same rules. In other words, it is the regulation of financial institutions. In the US, the Federal Deposit Insurance Corporation (FDIC) is one of the agencies involved in the regulation of financial institutions to ensure that each is abiding by the rules.

The number of laws and regulations that banks, credit unions and other financial institutions are so numerous that it would be impossible to list them all out. The regulation of financial institutions is an audit of each of the banks and financial institutions to make sure that each organization is in compliance with these laws or regulations.

According to Federal Reserve Chairman, Ben Bernanke, as of 2011, the federal government has adopted the Dodd-Frank legislation as way to regulate the financial industry and those businesses involved in financial services. The approach complements the typical supervision that the government uses to oversee financial institutions. Part of the Dodd-Frank legislation is the creation of the Financial Stability Oversight Council. The members of the council are state and federal financial regulators that help to identify and regulate financial risks.


The process of the regulation of financial institutions typically involves auditors going in to the bank and financial institution. The auditors examine all of the files and statements of the bank and financial institution to ensure that they are processing files in accordance with the laws and regulations that are in place for these types of processes and institutions.

For example, for banks and mortgage lending institutions, the mortgage application must ask the application specific questions, such as their race and citizenship status. The applicant does not have to answer these questions, but it is a federal requirement that lenders ask this information on their applications. This is to ensure that the lenders are in compliance of fair lending, which is just one of the many regulations that the auditors are looking for in the regulation of financial institutions.

Generally, financial institutions found not in compliance have an opportunity to correct the problem. If the institution does not correct the issue or it continues to be a problem, it can cause the institution to be fined or even shut down completely.


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Post 4

@indemnifyme - That's an interesting way to look at it. And it kind of makes sense. I mean, what's the point of the banks having to ask people certain questions if the customer isn't obligated to answer?

I definitely think financial institutions should be regulated though. There's no disputing the fact that our economy is in trouble. I think if the banks were left to their own devices the situation would just get worse.

I do think the regulating should be done sensibly though!

Post 3

I've never worked in a bank, but I do work in the insurance industry, which is also regulated by the government. However, the insurance industry is regulated at the state level instead of the federal level.

Anyway, along with regulation comes a lot of bureaucratic nonsense. Yes, I understand some laws are there too protect people. But it seems like some of the stuff we have to do doesn't really make the customer more protected and just results in more work for us! I'm sure it's the same way with the banks.

Post 2

@Ivan83 - I understand where you're coming from, but I think it's also important to recognize that not every single financial institution is out to get the "little man." I'm not trying to excuse devious corporations, but I guess what I'm saying is that not every bank, mortgage lender, etc, is out to get people.

And though there were certainly problems with regulations before the 2008 recession, I'm sure that no matter how strict oversight becomes, there's still going to be institutions that get around the rules -- it's just the nature of the game. But that still doesn't mean that every bank or financial institution is the "bad guy."

Post 1

I for one think that financial regulations in this country are severely under regulated. Look at the recession of 2008. That is directly linked to lack of regulation and oversight on the part of the government.

If banks, mortgage lenders and investment banks were subject to greater regulation and more scrutiny it is likely that the housing crisis could have been avoided, the stock market wouldn't have tanked, we would not have hemorrhaged jobs and we could continue on a path of steady and predictable growth. Instead we hit worst financial crisis of the last 75 years.

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