1 Legal framework
1.1 Which legislative and regulatory provisions govern the banking sector in your jurisdiction?
The US commercial banking sector operates under a dual banking system. US banks can be chartered by one of the 50 state banking agencies or at the federal level by the Office of the Comptroller of the Currency (OCC) (collectively, the ‘chartering authorities'). If a US bank is chartered by a state, it will still generally have at least one federal supervisor as well as a state banking regulator. As a practical matter, all banks are subject to federal statutes and regulations, whether a bank is chartered by a state or the OCC.
Key federal banking statutes include:
- the National Bank Act;
- the Federal Reserve Act of 1918;
- the Federal Deposit Insurance Act;
- the Glass-Steagall Act;
- the Bank Holding Company Act of 1956;
- the Bank Secrecy Act of 1970;
- the International Banking Act of 1978;
- the Federal Deposit Insurance Corporation Improvement Act of 1991;
- the Foreign Bank Supervision Enhancement Act of 1991;
- the Gramm-Leach Bliley Act; and
- the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
These statutes are supplemented by regulations and guidance issued by the three primary federal banking agencies. These key regulatory agencies are discussed further in question 1.3.
1.2 Which bilateral and multilateral instruments on banking have effect in your jurisdiction? How is regulatory cooperation and consolidated supervision assured?
The US banking agencies participate in several international bodies that influence US banking regulation, including:
- the Basel Committee on Banking Supervision;
- the Financial Stability Board;
- the Organisation for Economic Co-operation and Development;
- the Financial Action Task Force; and
- the Bank for International Settlements.
The US bank regulatory agencies – the Federal Deposit Insurance Corporation (FDIC), the Board of Governors of the Federal Reserve System and the OCC – implemented the Basel III accords in the United States in 2013–14. US capital adequacy standards require banks and bank holding companies (BHCs) subject to them to calculate their risk-based capital ratios under both the ‘standard' and ‘advanced' approaches (with respect to large banks and BHCs subject to the ‘advanced' approaches).
In addition to participating in the organisations listed above, the US banking agencies have a number of bilateral relationships with individual foreign regulators that provide for cooperation and coordination as to regulatory actions, enforcement matters and cross-border insolvency.
1.3 Which bodies are responsible for enforcing the applicable laws and regulations? What powers (including sanctions) do they have?
The Federal Reserve is the US central bank. In addition to its role in US monetary policy, the Federal Reserve has supervisory oversight over:
- state-chartered banks that are members of the Federal Reserve System;
- foreign banks with a US commercial banking branch, agency, subsidiary or representative office (commonly referred to as a ‘foreign banking organisation');
- depository institutions organised or authorised under the Federal Reserve Act that engage in international activities (commonly referred to as ‘edge act corporations' or ‘agreement corporations'); and
- systemically important non-bank financial institutions (‘non-bank SIFIs') designated by the federal Financial Stability Oversight Council (FSOC).
The FDIC is the primary regulator for state-chartered banks that are not members of the Federal Reserve. In addition, it:
- insures bank deposits; and
- acts as the receiver or conservator of FDIC-insured banks under the Federal Deposit Insurance Act or systemically important financial institutions under the Dodd-Frank Act's Orderly Liquidation Authority in the event of their insolvency.
The OCC is an independent bureau of the US Department of Treasury responsible for chartering national banks, licensing federally chartered branches of foreign banks, and supervising and regulating both types of institutions.
FSOC is responsible for conducting comprehensive monitoring of the US financial system's stability. Its powers include:
- identifying and responding to emerging risks threatening US financial stability;
- designating non-bank SIFIs;
- requesting data and analyses from the Federal Reserve's Office of Financial Research;
- facilitating regulatory coordination and information sharing among member agencies to reduce gaps within the regulatory structure;
- designating financial market utilities that perform payment, clearing or settlement activities as systemically important;
- recommending specific risk management and oversight standards; and
- breaking up firms that ‘pose a grave threat' to US financial stability.
In addition, each state has a banking regulator that charters, supervises and regulates state-chartered banks and licenses, supervises and regulates the branches of foreign banks.
1.4 What are the current priorities of regulators and how does the regulator engage with the banking sector?
The US banking agencies' current priorities include the following:
- integrating fintech companies into their existing regulatory framework;
- ensuring the safety and soundness of the banking system;
- maintaining US financial stability;
- tailoring regulations to the size and complexity of, and the systemic risks posed by, individual institutions;
- enhancing cybersecurity;
- promoting anti-money laundering standards; and
- assessing the impact of the COVID-19 pandemic on the financial and non-financial sectors.
2 Form and structure
2.1 What types of banks are typically found in your jurisdiction?
There are more than 5,000 Federal Deposit Insurance Corporation-insured banks in the United States. The vast majority of those banks are considered ‘community banks', with assets of under $10 billion. Just over 100 US commercial banks have assets in excess of that amount and 12 have assets in excess of $250 billion.
As noted above, deposit-taking banks may be chartered by either the federal or state governments. In addition, US law provides for certain other types of deposit-taking institutions, including credit unions, savings banks, thrifts and industrial loan companies.
2.2 How are these banks typically structured?
US banks are chartered as banks rather than as corporations that acquire a banking licence. US banks are often subsidiaries of a bank holding company and are often affiliated with other types of regulated financial institutions.
2.3 Are there any restrictions on foreign ownership of banks?
Federal banking laws do not generally restrict foreign ownership or control of US banks. However, as discussed below, establishing or acquiring a bank in the United States, or establishing an office of a foreign bank, requires the approval of the Federal Reserve and potentially other federal or state agencies. The Federal Reserve will evaluate the foreign acquirer's home country regulation in connection with such an approval.
Certain foreign investments in US banks may be subject to review and potentially rejection by the Committee on Foreign Investment in the United States.
2.4 Can banks with a foreign headquarters operate in your jurisdiction on the basis of their foreign licence?
No. Foreign banks must obtain regulatory approval in order to establish a US office. Generally, a foreign bank cannot conduct a deposit-taking business on a cross-border basis, though in some circumstances a foreign bank may be able to make commercial loans to US legal entity borrowers without obtaining any licence.
The International Banking Act of 1978 requires that a foreign bank seeking to establish a US commercial bank branch, agency, subsidiary or representative office obtain approval from the Federal Reserve System (or, in some cases, the Office of the Comptroller of the Currency). In assessing such a request, the Federal Reserve will consider whether the foreign bank's home country regulator subjects that bank to ‘comprehensive and consolidated supervision'.
The US regulators generally apply the concept of ‘national treatment' with respect to their regulation of foreign banks with a US commercial banking presence. Generally, such banks are treated to the same types of restrictions on non-banking activities as US banks and bank holding companies with respect to their US operations. As a practical matter, however, US banking law often has extraterritorial effect. Foreign banks subject to capital standards based on Basel III generally are not subject to US regulatory capital standards, though a foreign bank's bank subsidiaries and (in some cases) intermediate holding companies are subject to the US standards.
3.1 What licences are required to provide banking services in your jurisdiction? What activities do they cover?
As noted above, a bank must be chartered as a bank by either a state banking agency (under the relevant state banking law) or the Office of the Comptroller of the Currency (OCC) (under the National Bank Act). The choice of chartering authority is largely up to the founders of a bank. Virtually all banks – whether organized under state or federal law – must obtain deposit insurance from the Federal Deposit Insurance Corporation (FDIC), and so as a practical matter organising a new bank requires the approval of that agency as well.
Generally, a bank charter entitles a bank to engage in the ‘business of banking', including:
- acceptance of cash deposits;
- the issue of loans and other extensions of credit;
- discounting promissory notes and other evidence of indebtedness;
- custodial services;
- the purchase and sale of bullion; and
- certain types of related activities that are ‘incidental' to the business of banking, including trading in certain derivatives.
Deposit-taking banks may also engage in trust and fiduciary activities, although they generally require a separate approval from their chartering authority to do so. Deposit-taking banks and their subsidiaries are significantly limited in their ability to engage in securities trading or other types of non-commercial banking activities; though as discussed below, banking groups organised as BHCs may have broader authority to do so outside of the ‘bank chain'.
While a bank is typically limited to the activities permitted by the statute under which it is chartered, as a practical matter, the list of activities permissible for a US bank tends not to vary by virtue of its chartering authority. State banking laws often have so-called ‘wildcard statutes' that permit state-chartered banks to engage in the same activities as national banks chartered by the OCC, while the Federal Deposit Insurance Corporation Improvement Act typically bars a state-chartered bank from engaging in any activity as principal that is not allowed for a national bank.
3.2 What requirements must be satisfied to obtain a licence?
While each chartering authority has different requirements to grant a bank charter, the organisers of a new bank can generally expect to be required to provide at least the following information:
- biographical and financial information for each organiser, director, officer and shareholder (including experience, business familiarity and compliance and risk management record);
- proposed compliance policies with respect to regulatory, corporate governance and risk requirements;
- a business plan and financial projections, including a plan with respect to soliciting deposits;
- an explanation of how the newly organised bank will serve the community;
- evidence of sufficient capital to support the organisation's initial operations and operate in a safe and sound manner; and
- articles of association (or equivalent constitutional document) and bylaws.
US banking agencies exercise significant discretion in assessing an application to charter a new bank. They generally review such an application to assess whether, among other things:
- the proposed bank will have sufficient financial resources;
- the organisers, directors and executive officers are sufficiently experienced to operate the proposed bank;
- the proposed bank will adequately serve the needs of the community in which it operates;
- the proposed bank will comply with all applicable laws and regulations; and
- the business plan and projections are reasonable and indicate that the proposed bank will be profitable and able to operate in a safe and sound manner.
3.3 What is the procedure for obtaining a licence? How long does this typically take?
The process for obtaining a licence can vary among the chartering authorities, and can last from a few months to a couple of years, depending on:
- the complexity of the proposed bank's business;
- the proposed activities of the bank; and
- the potential regulatory concerns that arise in connection with the application.
A notice of the filing of the application must generally be published in a newspaper of the area in which the proposed bank will operate. A chartering authority may also require additional information beyond that included in the original charter application, and may request a meeting with the proposed bank's organisers to discuss the application.
In addition, most newly chartered US banks must obtain deposit insurance from the FDIC. In addition, many banks become members of the Federal Reserve System and must obtain approval to do so.
4 Regulatory capital and liquidity
4.1 How are banks typically funded in your jurisdiction?
Banks are typically initially capitalised and funded by investors and organisers. Once operational, a bank is typically funded by equity investments along with deposits, loans and debt securities. In addition, banks (particularly large banks) may obtain short-term funding through overnight loans and repurchase agreements.
4.2 What minimum capital requirements apply to banks in your jurisdiction?
US banks and bank holding companies (BHCs) are subject to capital standards based on the Basel III accords, as noted above.
4.3 What legal reserve requirements apply to banks in your jurisdiction?
US banks must hold reserves of a particular proportion of their deposits to ensure the availability of cash to fulfil depositor demands. Reserves generally must be held as vault cash or cash on deposit with the Federal Reserve. The Federal Reserve sets the minimum reserve rate. In light of the COVID-19 pandemic, the Federal Reserve has reduced the reserve rate to 0%; though in doing so, it has noted that "this is largely irrelevant because banks currently hold far more than the required reserves".
A bank's liquidity is also regulated under the US implementation of Basel III's liquidity coverage ratio (LCR). The LCR requires US banks and BHCs to maintain sufficient liquid assets to cover a 30-day run on the bank. A bank's liquidity is also regulated prudentially by the bank's chartering authority and/or primary federal regulator. The strength of a bank's liquidity position plays a key role in US banking agencies' supervisory assessment of the bank in connection with annual examinations. If an agency believes that the bank lacks sufficient liquidity, it may impose sanctions on the bank or limitations on its ability to engage in activities.
5 Supervision of banking groups
5.1 What requirements apply with regard to the supervision of banking groups in your jurisdiction?
As noted above, many US banking organisations are often structured under bank holding companies (BHCs). A ‘BHC' is defined as any company that ‘controls' (as defined in the Bank Holding Company Act (BHCA)) a US bank or another BHC. The Federal Reserve is responsible for supervising, monitoring, inspecting and examining BHCs to ensure that they comply with applicable laws and regulations, and that they operate their subsidiary US banks in a safe and sound manner. Supervision for BHCs is tailored based on the institution's size, complexity and activities. In addition, BHCs must act as a source of financial and managerial strength for their bank subsidiaries. Under certain circumstances, this can require a BHC to provide additional capital to an insolvent or undercapitalised bank subsidiary.
BHCs are generally subject to significant restrictions on the types of activities that they and their non-bank subsidiaries may engage in. Specifically, a BHC generally is limited to owning US banks and engaging in activities that are ‘closely related to banking' provided that they obtain Federal Reserve approval. Such activities include:
- engaging in lending activities;
- acting as a securities or derivatives broker or placement agent;
- dealing in certain types of derivatives;
- providing investment and economic advice; and
- underwriting and dealing in obligations of the US federal and state governments (though not other securities).
A BHC may obtain approval from the Federal Reserve to become a ‘financial holding company' (FHC) under the BHCA and the Gramm-Leach-Bliley Act, which permits it to engage in a wider array of financial activities, including:
- underwriting and dealing in all types of securities;
- operating an insurance underwriting business; and
- making merchant banking investments in non-financial companies, subject to certain limitations on the length of the FHC's investment and the ability of the FHC to participate in the management of the portfolio investment.
In addition, significant quantitative caps and qualitative requirements apply to many transactions between US banks and many of their affiliates. Among other things, any credit exposure by such a bank to an affiliate must be collateralised (or, in some circumstances, overcollateralised). The aggregate value of transactions between a US bank and its affiliates is generally capped at 10% of the bank's capital and loan loss reserves with respect to any single affiliate, and 20% of its capital and reserves with respect to all affiliates. Further, all such affiliate transactions must be on ‘arm's-length' terms.
5.2 How are systemically important banks supervised in your jurisdiction?
Any BHC with assets of $50 billion or more is subject to enhanced prudential standards; and additional standards are imposed on BHCs with assets of greater than $100 billion and $250 billion. In addition, systemically important non-bank financial institutions (‘non-bank SIFIs') may be subject to such enhanced standards imposed by the Federal Reserve. These enhanced standards include:
- Federal Reserve and company-administered stress testing and related minimum capital requirements;
- corporate governance and risk committee requirements;
- heightened risk management requirements;
- heightened liquidity risk management and liquidity risk stress testing requirements; and
- single counterparty credit limits.
In addition, BHCs that are deemed to be ‘global systemically important banks' (G-SIBs) under the Federal Reserve's regulations are subject to additional requirements, including requirements:
- to maintain an additional ‘G-SIB buffer' of regulatory capital;
- to maintain ‘total loss absorbing capacity' (based largely on the FSB's standard); and
- to include contractual language in certain of their financial contracts.
In addition, US banks and BHCs with assets of $10 billion or more, while not considered ‘systemically important', are often subject to closer regulatory scrutiny and supervision than smaller institutions.
5.3 What is the role of the central bank?
The Federal Reserve is the US central bank. The Federal Reserve's role is to provide services to financial institutions and the federal government, oversee monetary policy, and provide additional functions such as handling cheques and managing currency movement. With respect to monetary policy, the Federal Reserve is tasked with ensuring both price stability and high levels of employment.
Historically, the Federal Reserve has used reserve rates and interest rates charged on funds lent to banks as key monetary policy tools. More recently, however, the Federal Reserve has employed the ‘federal funds rate' – which is the rate that the Federal Reserve targets for interbank lending – in connection with its monetary policy. The Federal Reserve trades in US treasuries and certain other securities to effect its monetary policy.
Further, in extraordinary circumstances, the Federal Reserve may extend credit to non-financial companies, as it did during the 2007–08 financial crisis and has during the COVID-19 pandemic. Since the adoption of the Dodd-Frank Act, such credit may be extended only in connection with credit facilities that are made broadly available to borrowers rather than to individual institutions or borrowers.
As noted above, the Federal Reserve also regulates and supervises many US financial institutions, including BHCs, FHCs, foreign banking organisations, non-bank SIFIs and US banks that are members of the Federal Reserve System.
6.1 What specific regulations apply to the following banking activities in your jurisdiction: (a) Mortgage lending? (b) Consumer credit? (c) Investment services? and (d) Payment services and e-money?
(a) Mortgage lending?
Both federal and state law impose significant obligations on both banks and non-banks that engage in mortgage lending. Among other things, non-bank mortgage lenders and individuals involved in the mortgage business must be licensed and are subject to ongoing supervision and, in the case of individuals, training and educational requirements. Mortgage lending is also subject to significant disclosure and substantive regulations under federal and state consumer protection statutes, including the Truth in Lending Act. Further, the Fair Housing Act prohibits discrimination or differential treatment in mortgage lending.
Banks engaged in mortgage lending must generally obtain appraisals of the property against which they lend in order to assure the quality and safety of such loans. Further, the Dodd-Frank Act requires financial institutions which sponsor a securitisation of mortgage loans to retain 5% of the risk of such a securitisation.
(b) Consumer credit?
Both US banks and non-bank lenders are subject to licensing, disclosure and other substantive requirements with respect to their consumer lending. While US banks are generally permitted to extend consumer credit in any state, most states require non-bank lenders to obtain a licence to extend consumer credit.
In addition, consumer lenders are subject to the regulations of the Consumer Financial Protection Bureau (CFPB), which implement a number of federal statutes governing consumer credit and credit rating agencies. The CFPB also has the authority to supervise and examine certain financial institutions to ensure compliance with its regulations.
(c) Investment services?
Securities brokers and dealers, and investment advisers, are subject to licensing and regulation by the Securities and Exchange Commission (SEC). Banks may engage in limited securities activities without registering with the SEC, such as the provision of securities custodial services; but are otherwise not exempt from such licensing.
Commodity and derivatives brokers, dealers, investment advisers and large investors are regulated by the Commodity Futures Trading Commission (CFTC). As with securities activities, banks may be subject to CFTC registration if they engage in the foregoing derivatives activities.
As noted above, US banks and bank holding companies (BHCs) are subject to significant limitations on their ability to provide certain types of investment services. Approval to engage in such activities from a US banking agency is generally required in addition to any required SEC or CFTC licensing.
In addition, investment and trading activities of US banks, BHC and foreign banking organisations are subject to the Volcker Rule, which broadly prohibits proprietary trading and investments or sponsorship of certain types of private fund vehicles, subject to a number of exceptions.
(d) Payment services and e-money?
Non-bank companies involved in the payments and e-money sector may be subject to regulation under both federal and state statutes. Most states require a non-bank company that provides payment services to register as a ‘money transmitter'. Those statutes typically also impose a number of requirements on money transmitters, including with respect to consumer protection, custody of customer assets, minimum capital requirements, reporting and recordkeeping.
E-money services may also be subject to regulation as money transmission, depending on exactly how they are structured and what types of instruments are involved. For instance, certain states regulate the transmission and trading of cryptocurrency as money transmission to the same extent as fiat currency, while others limit their statutes to fiat transactions.
In addition, money transmitters – including those involved in the cryptocurrency space – are considered ‘money services businesses' under the Bank Secrecy Act and as such are required to register with the federal Financial Crimes Enforcement Network (FinCEN). FinCEN regulations require money services businesses to establish an anti-money laundering programme, maintain certain records and report certain types of transactions to FinCEN.
US banks generally are not subject to state money transmitter statutes or registration as a money services business under the Bank Secrecy Act.
7 Reporting, organisational requirements, governance and risk management
7.1 What key reporting and disclosure requirements apply to banks in your jurisdiction?
US banks, bank holding companies (BHCs) and foreign banking organisations (FBOs) are subject to extensive reporting and disclosure requirements. Among other things, such financial institutions must periodically disclose balance sheets, organisational structure and regulatory capital ratios. In addition, systemically important banks, BHCs and FBOs are subject to even more onerous disclosure requirements, including with respect to developing and periodically disclosing the contents of resolution plans and more detailed financial data.
In addition, US banking agencies, in the course of conducting supervisory examinations and reviews, may require banks, BHCs and FBOs to disclose additional information that the agency believes may be relevant to its examination. Among other things, this could include a review of loan files, trading records, personnel files and commercial agreements.
7.2 What key organisational and governance requirements apply to banks in your jurisdiction?
The organisational and governance requirements applicable to banks vary depending on their chartering authority. The directors of a national bank chartered by the Office of the Comptroller of the Currency, for instance, generally must be US citizens and must reside in or near the state in which the national bank is located. Directors are subject to the same duties of loyalty and care as the directors of a corporation. Directors are required to hold at least some equity in the bank. Boards of directors are required to include an appropriate number of independent directors.
Among other things, a national bank's board is required to provide effective oversight of the bank's activities, exercise independent judgement and provide a credible challenge to the judgment of the bank's management. It is also required to approve and review the effectiveness of the bank's compliance programmes. The board must also review the bank's financial performance and the performance of its management team.
Under federal law, the US banking agencies will typically require US banks and BHCs to maintain or conduct, among other things:
- internal and external audits;
- board audit and risk committees;
- internal control systems; and
- compliance policies and guidelines.
7.3 What key risk management requirements apply to banks in your jurisdiction?
Since the 2008 financial crisis, large US banks and BHCs have become subject to increasingly stringent risk-management requirements.
US banks and BHCs with $50 billion or more in total consolidated assets must
- designate a chief risk officer (CRO);
- develop a risk management framework; and
- create a board risk committee that includes at least one risk management expert and an independent member.
The bank or BHC's board must review and approve the institution's risk management framework. A CRO should generally have clear reporting lines to the bank or BHC's CEO or board of directors.
Lastly, US banking agencies often use stress tests as a supervisory practice for large banking organisations to assess their potential resilience during difficult economic times. As noted above, depending on their complexity and size, US BHCs may be required to run company-run stress tests and undergo supervisory-run stress tests, annually or biannually. Smaller institutions may not be subject to a formal requirement, but are expected to consider the consequences of and prepare for economic downturns.
7.4 What are the requirements for internal and external audit in your jurisdiction?
A bank's internal audits must generally be conducted in line with the complexity and risks posed by the bank. Audit committees are typically tasked with oversight responsibilities for the internal audit function and, with respect to systemically important banks and BHCs, may be subject to specific requirements for the composition and independence of such a committee. Institutions should have an internal audit function, plan, programme and report that demonstrates a detailed risk assessment for that institution.
Heightened standards applicable to large banks require that its audit function be led by the CRO. The CRO must report regularly to the board of directors and the audit committee.
8 Senior management
8.1 What requirements apply with regard to the management structure of banks in your jurisdiction?
Regulatory requirements as to a bank's management structure may vary based on the size and complexity of the bank, and the bank's chartering authority. The National Bank Act permits a national bank to have a board of between five and 25 directors, and imposes certain qualifications applicable to those directors, as discussed above.
Beyond formal requirements, the US banking agencies generally expect that the structure of a bank's board and management is appropriate for its business and size. Directors and senior management officials should have appropriate experience and sufficient time to devote to a bank or bank holding company (BHC). A US banking agency's assessment of the quality of a bank or BHC's management plays a key role in the agency's annual examination score for the institution and also influences the agency's exercise of its discretion to permit the institution to expand its operations, engage in new activities or make acquisitions.
In connection with their authority to enforce the US banking laws, the US banking agencies may bar individuals that they have found to have violated those laws from working for or being associated with US banks in the future. Further, if a US bank is in financial distress, its regulators may direct the bank to terminate certain management employees even if they are not subject to such an industry bar.
8.2 How are directors and senior executives appointed and removed? What selection criteria apply in this regard?
Director and management appointments and removals are primarily a question of the laws and regulations of the chartering authority. With respect to national banks, the Office of the Comptroller of the Currency has issued general guidance for director selection criteria, which include the following:
- Exercise independent judgement and provide credible challenge to management's decisions;
- Possess knowledge of the banking industry, financial regulatory system and laws and regulations that govern the bank's operation;
- Accept fiduciary duty obligations and additional responsibility, including prioritising the bank's interests over personal interests;
- Avoid conflicts of interest;
- Maintain firm commitments to attending and preparing for board and committee meetings;
- Possess background knowledge and experience in business or another field to facilitate bank oversight; and
- Possess knowledge and background about the community the bank serves.
Directors must also be periodically elected by shareholders, as is the case with corporations, although a board of directors may fill vacancies that occur.
Directors may appoint and remove a bank's management. The qualifications of bank's management are discussed in question 8.1.
8.3 What are the legal duties of bank directors and senior executives?
Generally, bank directors and management are obliged to discharge duties owed to their institutions, the shareholders and creditors of their institutions while complying with applicable laws and regulations. Directors and executives owe duties of loyalty and care, and must administer bank affairs with candour, honesty and integrity. Directors and executives are also prohibited from advancing the personal interests or business interests of themselves or others at the expense of the bank.
Directors are responsible for:
- selecting, monitoring and evaluating competent management;
- establishing business strategies and policies;
- monitoring and assessing the progress of business operations;
- establishing and monitoring adherence to policies and procedures required by statute, regulation and principles of safety and soundness; and
- making business decisions based on fully informed and meaningful deliberation.
Executives are responsible for running the day-to-day operations of the institution in compliance with applicable laws, rules, regulations and the principles of safety and soundness. This responsibility includes implementing appropriate policies and business objectives.
8.4 How is executive compensation in the banking sector regulated in your jurisdiction?
While the Dodd-Frank Act permitted the US federal banking agencies to adopt regulations governing executive compensation, including permitting an institution to ‘claw back' previous compensation, those agencies have not yet done so. There are no general caps applicable to bank executive compensation, though US banks and BHCs generally must ensure that compensation arrangements are compatible with their obligation to operate their institutions in a ‘safe and sound' manner.
The US federal banking agencies have issued guidance on bank executive compensation that generally require US banks and BHCs to abide by certain principles in connection with establish compensation policies:
- Incentive compensation should provide employees with incentives that appropriately balance risk and financial results, and may not encourage employees to expose their institutions to imprudent risk;
- Incentive compensation should be compatible with effective controls and risk management; and
- Incentive compensation should be supported by strong corporate governance, including board oversight.
9 Change of control and transfers of banking business
9.1 How are the assets and liabilities of banks typically transferred in your jurisdiction?
Most acquisition transactions are structured as share transactions rather than asset deals. However, banks and bank holding companies (BHCs) frequently sell individual assets to other financial institutions in the form of asset deals.
9.2 What requirements must be met in the event of a change of control?
Regulatory approval with respect to a change of control or merger may be required under the following statutes:
- The Bank Holding Company Act (BHCA) requires any company that acquires ‘control' (as defined under the BHCA) of a US bank or BHC to seek approval to become a BHC;
- An existing BHC must seek approval under the BHCA to acquire 5% or more of the voting shares of an additional US bank;
- For transactions not required to be approved under the BHCA, certain acquisitions of the shares of a US bank – including many minority investments – must be approved by the bank's primary federal regulator under the Change in Bank Control Act;
- Mergers of two banks must generally be approved by the relevant federal regulator; and
- A chartering authority's regulations may require the approval of the chartering authority in addition to any of the approvals listed above.
10 Consumer protection
10.1 What requirements must banks comply with to protect consumers in your jurisdiction?
US banks are subject to a myriad of consumer protection statutes and regulations at both the state and federal level. Among other things, these laws require banks to:
- disclose material information to borrowers and depositors;
- not engage in any unfair or deceptive practices; and
- not discriminate against customers based on their race, gender, national origin or other factors.
The following represent examples of applicable consumer protection requirements:
- Banks must prominently disclose the interest rates, fees and certain other terms and conditions applicable to deposit accounts;
- Consumer lending regulation typically requires the disclosure of interest rates, loan charges and other terms and conditions concerning the repayment of credit;
- Banks may also be subject to a requirement to make a good-faith determination of a consumer borrower's ability to repay credit extended;
- Under the Community Reinvestment Act, US banks must adopt policies and plans to meet the credit needs of the communities in which they operate and from which they draw deposits;
- The Federal Reserve's margin regulations limit the amount of credit that a US bank may extend to a borrower to purchase securities; and
- US banks are generally forbidden from ‘tying' a banking product to any of the products of the bank or any of its affiliates by, for instance, conditioning the provision of a loan by the bank on the borrower's willingness to establish a securities brokerage account with the bank's broker-dealer affiliate.
10.2 How are deposits protected in your jurisdiction?
As noted above, US banks must generally be insured by the Federal Deposit Insurance Corporation, which covers $250,000 of each depositor's money. In addition, the insolvency regimes applicable to US banks provide for ‘depositor preference', under which a depositor will generally rank senior to all of the unsecured creditors of a bank with respect to their entire deposit (whether insured or uninsured). As a result, depositors rarely lose any of their money – even if it was uninsured – in a bank insolvency.
11 Data security and cybersecurity
11.1 What is the applicable data protection regime in your jurisdiction and what specific implications does this have for banks?
11.2 What is the applicable cybersecurity regime in your jurisdiction and what specific implications does this have for banks?
12 Financial crime and banking secrecy
12.1 What provisions govern money laundering and other forms of financial crime in your jurisdiction and what specific implications do these have for banks?
12.2 Does banking secrecy apply in your jurisdiction?
13.1 What specific challenges or concerns does the banking sector present from a competition perspective? Are there any pro-competition measures that are targeted specifically at banks?
14 Recovery, resolution and liquidation
14.1 What options are available where banks are failing in your jurisdiction?
14.2 What insolvency and liquidation regime applies to banks in your jurisdiction?
15 Trends and predictions
15.1 How would you describe the current banking landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?
15.2 Does your jurisdiction regulate cryptocurrencies? Are there any legislative developments with respect to cryptocurrencies or fintech in general?
16 Tips and traps
16.1 What are your top tips for banking entities operating in your jurisdiction and what potential issues would you highlight?
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.