With a number of eye-watering fines emanating from the US in recent years, The Banker profiles the numerous regulators that are dishing out these punishments, and looks at how they police the world's largest financial market.

US regulators have handed out billions of dollars in fines since the global financial crisis started in 2007, and there are likely more on the way. The record individual settlement so far is the $16.65bn paid by Bank of America (BoA) in August 2014, relating to charges that it misled investors over purchases of mortgage-backed securities. The settlement concerned mortgages drawn up by mortgage originator Countrywide and sold to investors by financial management firm Merrill Lynch – both of which BoA acquired in 2008.

Apart from direct government involvement in prosecuting banks' financial misdeeds, financial sector regulation in the US involves a large number of regulatory bodies, which have distinct but sometimes overlapping roles. Their enforcement powers, oversight and rule-making responsibilities were expanded with the Wall Street Reform and Consumer Protection Act, better known as Dodd-Frank. The Banker profiles each of the US's top regulatory bodies, looking at their specific mandates and their recent enforcement record.

The Federal Reserve System (the Fed)

Who's in charge: Janet Yellen, sworn in as chair of the board of governors in February 2014, who is serving a four-year term. She also serves as chair of the Federal Open Market Committee, the Fed’s principal monetary policy-making body.

Mission and responsibilities: As the US's central bank, the Fed's responsibilities include: setting monetary policy; supervising and regulating banking institutions; maintaining stability within the financial system; and providing financial services to depository institutions and foreign official institutions, which involves playing a major role in the country's payments system.

Meanwhile, the Fed’s authority in the banking industry extends over all state-licensed member banks (which include most of the country’s smallest community banks); bank and financial holding companies (which, at the other extreme, encompass the country’s largest banks by assets); and foreign branches of both national and state-licensed banks, and the US branches and agencies of foreign banks.

Recent enforcement record: Even before the Dodd-Frank Act, the Fed started conducting stress tests of the largest US bank holding companies to evaluate their resilience to economic and financial shocks. All large bank holdings with consolidated assets of $50bn or more now have to submit annual capital plans for review by the Fed and, in 2014, regulators rejected Citigroup’s plan, while Bank of America had to make some data adjustments.

Additionally, the Fed and Federal Deposit Insurance Corporation (FDIC) have approved new risk-based and supplementary leverage capital rules. These are more rigorous than Basel III for the largest, most global and systemically important banking organisations.

At the time of writing, new liquidity rules were also expected to be announced by the Fed, FDIC and Office of the Comptroller of the Currency to ensure that, during a crisis, big banks have enough cash or assets that can be easily convertible into cash, to fund their operations for at least 30 days if other sources of financing are not available. The aim is to avoid a repeat of the 2008 crisis, when financial markets froze due to a lack of liquidity.

Volker Rule: Named after former Fed chairman Paul Volker, the Volker Rule is one of the most discussed aspects of Dodd-Frank. In December, the Fed, together with other federal regulators, jointly agreed on the final rules for implementing Volker, which applies only to the country’s largest banks and forbids them from betting against their own customers – the kind of speculative activity that contributed to the 2008 financial meltdown.

The major banks have until July 1, 2015 to comply with the rule, which forbids them from engaging in short-term proprietary trading of certain securities, derivatives, commodity futures and other financial instruments for the firm’s own account, subject to certain exemptions, including market-making and risk-mitigating hedging. The rule also limits banking entities from having investments in, and other relationships with, hedge funds or private equity funds.

Record fine: On June 30, 2014, the Fed fined BNP Paribas $508m for violations of US sanctions against Iran, Sudan and Cuba. The Fed order also prohibited the French bank from re-employing 11 individuals who were involved in actions resulting in the violations. These penalties, taken in conjunction with actions by the US Department of Justice, the US Treasury and the New York State Department of Financial Services, resulted in total fines against the bank of $8.9bn.

Quotes: “A one-size-fits-all approach to supervision is often not appropriate,” Ms Yellen said, at a speech at a community banks policy conference in Washington, DC, on May 1, 2014.

“Monetary policy faces significant limitations as a tool to promote financial stability… I believe a macro-prudential approach to supervision and regulation needs to play a primary role," said Ms Yellen, at the 2014 Michel Camdessus Central Banking Lecture at the International Monetary Fund in Washington, DC, on July 2, 2014.

Federal Deposit Insurance Corporation (FDIC)

Who's in charge: Martin Gruenberg has been the chairman of FDIC since November 2012, and is serving a five-year term. Previously, he served as vice-chairman and member of the FDIC board of directors, and was senior counsel and a staff director on the Senate committee on banking.

Mission and responsibilities: The FDIC is an independent federal regulator created by Congress to maintain stability and public confidence in the financial system by insuring deposits, examining and supervising banks for safety, soundness and consumer protection, and managing bank failures and receiverships. It is financed by premiums that banks and savings institutions pay for deposit insurance coverage which amounts to at least $250,000 per depositor, and earnings from US Treasuries’ investments.

FDIC insures about $9000bn of deposits, covering virtually every bank in the country, and it supervises more than 4500 institutions, more than half of the country's banks. It also examines banks to see whether they are complying with consumer protection laws, such as the Community Reinvestment Act, which requires banks to help meet the credit needs of everyone in the communities in which they operate.

Recent enforcement record: In August 2014, the FDIC's board of directors and the Federal Reserve's board of governors jointly criticised 11 of the largest and most complex banking organisations, which have consolidated assets of more than $250bn, for failing to show in their respective resolution plans (required under Dodd-Frank) how they could be dismantled in a rapid and orderly way if they went bankrupt without government support. The 11 banks are: JPMorgan Chase, Bank of America, Citigroup, Goldman Sachs, Morgan Stanley, Bank of New York Mellon, State Street and the US units of Credit Suisse, Deutsche Bank, UBS and Barclays.

The regulators said that the banks had failed to overhaul their complex structures or practices in the way needed to avert damaging consequences to the economy in the event of a collapse. Among the changes suggested by the regulators, the banks were directed to update their derivatives contracts to allow for a short-term suspension of early termination rights in the case of the bank becoming insolvent, to prevent a disorderly unwinding of the contracts.

Banks have until July 1, 2015 to make the change. Failure to do so, or to meet regulators other conditions, could lead to the regulators raising the banks' capital adequacy ratios or making them sell businesses. Many commentators view the conditions as a good way of tackling some of the problems relating to too-big-to-fail banks, as well as some of the threats posed by derivatives.

Between 2009 and July 2014, FDIC recorded some 475 US bank failures. FDIC usually resolves bank failures by selling the deposits and loans of the failed institution to another bank. The customers of the failed bank automatically become customers of the assuming institution.

Record fine: On August 21, 2014, Bank of America (BoA) and its affiliates, Countrywide and Merrill Lynch, agreed to pay FDIC a $1bn fine to settle claims relating to misrepresentations in the firm's documents when it sold flawed residential mortgage-backed securities to various US banks, which resulted in these banks suffering crippling losses. FDIC brought the claims against BoA and its affiliates as it was the receiver of the 26 banks affected, all of which ultimately failed.

Quote: In August, FDIC chairman Mr Gruenberg, on announcing US banks' second-quarter results for 2014, said that the data showed that banks have moved away from a phase of recovery to one where they are putting more money at risk.

“Net income was up, asset quality improved, loan balances grew at their fastest pace since 2007, and loan growth was broad based across institutions and loan types,” he said, warning that risks and challenges remain. “Industry revenue has been under pressure from narrow net interest margins and lower mortgage-related income. Institutions have been extending asset maturities, which is raising concerns about interest rate risk. And banks have been increasing higher risk loans to leveraged commercial borrowers.”   

New York State Department of Financial Services (DFS)

Who's in charge: Benjamin Lawsky, New York state’s first superintendent of financial services. As the chief of staff of Andrew Cuomo, the New York state governor, Mr Lawsky led an initiative to integrate state banking and insurance departments, and establish a single financial regulator with expanded powers.

Mission and responsibilities: The DFS is responsible for keeping financial regulation in New York up to date, guarding against financial crises, and protecting customers and markets from fraud. The superintendent supervises all New York state-licensed banks, the majority of US-based branches and units of foreign banking institutions, and New York-based insurance companies. Additionally, DFS regulates mortgage brokers, mortgage bankers, money remittance companies and other financial service firms that operate in the state. According to its website, DFS which employs 1400 staff, supervises more than 3800 financial entities, with assets exceeding $7000bn.

Recent enforcement record: Under Mr Lawsky, DFS has introduced new ways of prosecuting financial misdeeds and pressed for some of the toughest penalties. For instance, on August 19, 2014, the UK’s Standard Chartered Bank in New York received its second fine from DFS, and agreed to pay $300m as part of a settlement related to non-compliance with anti-money laundering rules. The penalty reflects DFS’s belief that the bank failed to carry out promises to improve its anti-money laundering procedures after an earlier 2012 agreement. In 2012, Standard Chartered, accused of money laundering and violating US sanctions with Iran, agreed to pay DFS a $340m fine.

Quote: In a March 2014 speech on financial regulatory enforcement, Mr Lawsky stated that financial institutions should face more than stiff fines when found to have committed misdeeds. “Individuals should face real, serious penalties and sanctions when they break the rules… That can mean putting people in jail when they break the law in the context of criminal prosecutions. But it can also mean suspensions, firings, bonus clawbacks and other types of penalties in the regulatory context,” he said.  

Office of the Comptroller of the Currency (OCC)

Who's in charge: Thomas Curry, comptroller since April 2012. The comptroller is also automatically a member of the Federal Deposit Insurance Corporation board. Mr Curry is also chairman of the Federal Financial Institutions Examination Council, which enforces uniformity in the standards and principles used by the different financial regulators when they examine banks.

Mission and responsibilities: The OCC is the regulator of the 1415 national banks in the US, 642 federal savings associations, as well as of the 51 federal branches and agencies of foreign banks. Together, these institutions have $9700bn of assets, according to OCC’s website.

Recent enforcement record: In April 2014, payments to more than 4 million borrowers started to be made after an agreement reached by the OOC and the Fed with several banks that would see $3.6bn refunded to borrowers that were in the process of being evicted from their homes in 2009 and 2010. The banks involved include Bank of America, Citibank, Goldman Sachs, HSBC, JPMorgan Chase, Morgan Stanley, PNC, SunTrust and Wells Fargo.

In January 2014, OCC announced a $350m fine against JPMorgan Chase, JPMorgan Bank and Trust Company, and Chase Bank USA for bank secrecy violations. The OCC found critical and widespread deficiencies in the banks’ secrecy and anti-money laundering compliance procedures. The penalty was based, in part, on JPMorgan Chase’s failure to report suspicions about Bernard L Madoff Investment Securities to US police and regulators, despite having alerted UK authorities in the months before Mr Madoff’s arrest.

Quote: In an interview with The Banker, Mr Curry said: “Interest rate risk in a low-interest environment is important and always worth monitoring. We’re also seeing cyber threats as an issue that transcends the entire banking industry from our largest to our smallest institutions.”

Securities and Exchange Commission (SEC)

Who's in charge: Mary Jo White, sworn in as chairwoman in April 2013. Ms White was formerly US attorney general for the southern district of New York, specialising in the prosecution of complex securities and financial institution frauds, and terrorism.

Mission and responsibilities: According to the SEC’s own website, its responsibilities are to protect investors; maintain fair, orderly and efficient markets; and facilitate capital formation. Additionally, the agency interprets and enforces federal securities laws; issues new rules; oversees the inspection of securities firms, brokers, investment advisers and ratings agencies, as well as private, self-regulatory organisations in the securities, accounting and auditing fields; and coordinates US securities regulation with federal, state and foreign authorities.

Recent enforcement record: The SEC had a bigger rule-writing mandate than any other federal regulator when it came to the Dodd-Frank Act, and many of the rules that it devised relate directly to the problems that brought about the financial crisis. For example, the SEC recently completed new disclosure rules for the more than $600bn part of the asset-backed securities market that it oversees and, at the same time, published stiffer regulations for credit rating firms, which were widely criticised for failing to provide sufficient warnings to investors about flawed mortgage bonds prior to the US housing collapse.

In response to concerns expressed by regulators, law enforcement officials and Congress that stock market trading rules have not kept up with a rapid move to high-frequency and off-exchange trading, the SEC, the Financial Industry Regulatory Authority and New York’s attorney general have all launched investigations into private stock trading platforms or venues, known as 'dark pools'. The SEC, Justice Department and the Federal Bureau of Investigation are also separately investigating high-speed trading.

In 2013, the SEC’s enforcement division obtained orders requiring securities violators to refund illegal profits of approximately $2.2bn to investors, and pay fines of approximately $1.2bn, the largest in the agency’s history. As is the case with other US federal financial regulators, the SEC does not keep the money, but rather returns it to harmed investors or turns it over to the US Treasury.

Quote: “The percentage of trading volume executed in dark venues [dark pools] increased from approximately 25% in 2009 to approximately 35% today. Transparency has long been a hallmark of the US securities markets, and I am concerned by the lack of it in dark venues," said Ms White at a brokerage conference in New York on June 5, 2014.

Commodity Futures Trading Commission (CFTC)

Who's in charge: Timothy Massad has been chairman of the CFTC since April 2014. A former Wall Street lawyer, Mr Massad oversaw US president Barack Obama’s troubled Asset Relief Programme, aimed at bolstering the capital of essentially sound large, medium and small banks hit by the financial and economic crisis.

Mission and responsibilities: To protect market participants and the public from fraud, manipulation and systemic risks related to derivatives – both futures and swaps – and foster transparent, open, competitive and financially sound markets. Swaps – a type of derivative product that were previously unregulated – were at the centre of the financial crisis. They allow banks and their business clients to hedge against risks or bet on an asset’s value. CFTC was charged with reforming the swaps market in the wake of the financial crisis and the regulator, with considerably enhanced authority stemming from the Dodd-Frank Act, rapidly approved dozens of new swaps trading rules.

Recent enforcement record: CFTC’s new rules, bringing the $690,000bn-plus swaps market under US federal oversight for the first time, sparked a trans-Atlantic conflict with banks and European regulators, which did not want companies to have to comply with both US and foreign rules.

In December 2013, Wall Street’s largest lobbying groups, representing major swaps traders including Goldman Sachs, JPMorgan Chase and Deutsche Bank, sued CFTC for allegedly not following rigorous rule-making procedures before approving the new rules. Gary Gensler, who had been chairman of CFTC during this controversial period, stepped down in January 2013. For the three months following this, the agency did not have a full team of commissioners or a new head due to a boycott of Mr Obama’s nominees by Republican representatives in the Senate.

In July, CFTC charged JPMorgan Securities with repeatedly submitting inaccurate large trader reports and imposed a $6500 fine. During Mr Gensler’s chairmanship in 2012 and 2013, Royal Bank of Scotland paid CFTC $325m, UBS paid $700m and Barclays paid $200m in penalties over accusations of rigging the Libor market.

Quote: Speaking on the topic of the ongoing discussions with European regulators, Mr Massad told Ben White, chief economic correspondent of Washington news publication Politico: “Our European counterparts… they’ve indicated to us that… they don’t have issues with how we govern our clearing houses. Their issues actually [relate] to whether they feel we’ve granted appropriate deference to them with respect to the oversight of a couple of global clearing houses where we’ve had essentially co-operative oversight. We’ll work that out.

"What I don’t want to do… what I can’t do by law… is lower some of the protections that have been in place for US customers with respect to those clearing houses that have worked very well in crisis times.”

Consumer Financial Protection Bureau (CFPB)

Who's in charge: Richard Cordray, the first director of CFPB, the youngest federal financial regulator, which was created by the Dodd-Frank Act to consolidate consumer protection authority in one place. Formerly, Mr Cordray was Ohio’s attorney general.

Mission and responsibilities: CFPB writes rules, enforces consumer financial protection laws, and restricts unfair, deceptive or abusive financial actions and practices. It also promotes financial education. In a written statement, Mr Cordray said that CFPB’s authority extends to all consumer financial markets, including mortgages, credit cards, auto loans, student loans, bank account products, payday loans, credit reporting, debt collection, money transfers and more.

CFPB has regulatory oversight over all types of banks with assets of more than $10bn, as well as thousands of non-bank firms that operate in the markets that come under its jurisdiction.

Recent enforcement record: Congress directed the CFPB to write sweeping new mortgage rules to address some of the most serious underwriting problems that undermined the mortgage market before the crisis. In response, the regulator has written the ability-to-repay rule, which Mr Cordray says “is designed to end many irresponsible lending practices by making sure consumers get mortgages they can actually afford to repay”.

Meanwhile, new mortgage servicing rules require banks and non-bank financial companies to, according to Mr Cordray, "provide clear and timely information and ensure that [these companies] follow commonsense policies in handling consumer accounts. We have also placed consumer complaints at the focus of compliance requirements for financial institutions.” And a new integrated mortgage disclosure rule written by CFPB, which analysts say will alter the whole mortgage origination process at banks, will take effect in August 2015.

Quote: “Whatever you think about government regulation, it cannot work in a patchwork manner by addressing only certain competitors while leaving others alone," said Mr Cordray in a written statement. "The most glaring example is the race to the bottom with underwriting standards in the mortgage market, which caused the entire financial system to teeter on the brink of collapse. Even-handed oversight of all players, not only across the mortgage market but across all consumer financial markets, is a better and more enduring formula for economic stability.”

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