As the central bank of the United States, the Federal Reserve is responsible for keeping the banking industry safe and sound (supervision and regulation) and ensuring smooth payment transactions between businesses and consumers (payments). (It is also responsible for monetary policy—more on that in the "Great Recession" section.) Over time, economic and financial events—and technological advances—have refined these responsibilities. Over the past 25 years, four important pieces of legislation have been particularly significant, one affecting the Fed's role in the payments system, the other three affecting its supervisory role.
EFAA expands Fed's role in payments
In the late '80s and early '90s, the Fed made several improvements to the check system, including taking steps to address consumer depositor complaints about delays in check processing and returns. The Fed began requiring banks to start disclosing funds-availability policies to customers and to make funds deposited in transaction accounts available to customers within a specific time frame.
Until the enactment of the Expedited Funds Availability Act (EFAA) in 1987, the Fed would not have been able to take such actions. Although the Fed had the authority to regulate parts of the checks and payments system, this authority had limits. Over time, the Fed's inability to address complaints about the length of holds that banks were placing on deposits called for a change.
With the EFAA, the Fed now had the authority to regulate "any aspect of the payment system, including the receipt, payment, collection, or clearing of checks; and any related function of the payment system with respect to checks." The Federal Reserve implemented the EFAA through Regulation CC.
S&L crisis calls for changes
The next major regulatory change came in the midst of the savings and loan crisis. By the late 1980s, bank failures in the United States were averaging about 200 a year. Meanwhile, the thrift industry was experiencing its own crisis. The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 overhauled the regulation and oversight of thrifts in the United States. This act gave the Fed greater responsibility over banks' acquisition of thrifts, requiring the central bank to dedicate more staff resources to reviewing the proposals of bank holding companies to acquire thrifts.
The growing number of bank failures and the crises in the thrift industry led to the passage of the Federal Deposit Insurance Corporation Improvement Act (FDICIA) in 1991. The act established new monitoring and examination procedures to ensure the safety and soundness of the banking and thrift industries. The FDICIA also created the Foreign Bank Supervision Enhancement Act (FBSEA), which required the Fed to approve applications for international banks wanting to establish offices in the United States. The FBSEA required annual examinations of U.S. offices of international banks. It fell to the Atlanta Fed to manage most Latin American and Caribbean banks with operations in the United States.
Consolidation challenges the financial industry
A major trend of the banking industry began in the 1970s and picked up steam in the 1990s: consolidation. The number of banks in the United States fell drastically, dropping from more than 14,000 in 1984 to fewer than 9,000 in 1999. As banks consolidated, they grew in size. Meanwhile, commercial banks had begun to underwrite securities in the late 1980s; some even offered insurance products. To address the continued integration of the financial services industry, Congress passed the Financial Services Modernization Act of 1999. Commonly referred to as the Gramm-Leach-Bliley Act—after the bill's authors—the law repealed parts of the Glass-Steagall Act of 1933 that restricted some forms of financial integration. The new law also gave the Fed new supervisory powers over financial holding companies, a new kind of umbrella organization that could own subsidiaries involved in different industries.
Dodd-Frank overhauls financial system
The next major phase of regulation resulted in the most comprehensive overhaul of the financial system since the Great Depression. In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) to correct weaknesses in the system. Below are some of the main components of the law:
- Addressed the issue of "too big to fail" by expanding supervision through the Financial Stability Oversight Council and giving the Fed greater supervisory authority.
- Enhanced resolution capabilities through an orderly resolution authority for nonbank financial institutions.
- Banned proprietary trading and concentration limits for financial institutions (with the Volcker Rule).
- Expanded Fed authority to provide credit to systemically important financial institutions.
- Created the Consumer Financial Protection Bureau to focus exclusively on consumer protection.
- Introduced new rules for debit interchange fees.
Four years later, the implementation of Dodd-Frank remains a work in progress. According to law firm Davis Polk, which keeps a monthly progress report on the law, about 206 of the 398 rules mandated by the law had been completed by the first of April 2014.