Commercial Banking Regulations


Commercial banking is a highly regulated segment of the banking industry. Both the states and federal government put legislation in place to protect the public from fraudulent and other dishonest dealings. The average customer is usually not aware of these regulations and how they apply to his transactions. No commercial bank should break these rules, but the customer should still be aware of them to protect his finances.

Glass-Steagall Act

The Glass-Steagall Act, also known as the Banking Act of 1933, segregated commercial and investment banks. It distinguished commercial banks as institutions that directly service customers and investment banks as brokers that sell investments to third parties. It also created the Federal Deposit Insurance Corporation (FDIC) to ensure the deposits of commercial banking customers. The act was put into place because reckless investment activity by commercial banks was a major contributor to the stock market crash in 1929. The act was repealed in 1999, leading to a significant increase in sub-prime lending. Some speculation exists that this was a contributor to the financial crisis in 2008.

Federal Deposit Insurance Corporation Improvement Act of 1991

The Federal Deposit Insurance Corporation Improvements Act of 1991 was enacted as a result of the savings and loan crisis of the 1980s and 1990s. The FDIC passed a resolution to deal with the failures of banks and other lenders in the most cost-effective manner possible. To assist with this mandate, the act allowed the FDIC to borrow directly from the U.S. Department of Treasury.

Gramm-Leach-Bliley Act of 1999

The Gramm-Leach-Bliley Act of 1999 completed the repeal of the Glass-Steagall Act. It also modified the Bank Holding Company Act of 1956, which stated that a bank holding company could not acquire banks outside of its state of operation. The legislation allows banks to enter into affiliations with insurance underwriters and allows national banks to underwrite municipal bonds.

International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001

The International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 is the third section of the United States Patriot Act. This act was passed in response to the Sept. 11, 2001 terrorist attack on the World Trade Center. The law strengthened bank procedures to protect against money laundering. It also provided for improved communication between agencies to more effectively report suspected crimes.

Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 (SOX) is legislation enacted in the wake of the corporate accounting scandals of the early 2000s. The law is mandatory and applies to all public commercial banks. Under the provisions of the act, a bank must disclose its procedures. These procedures are audited on a regular basis. If, at any time, the bank is found to be in violation of the procedures it sets forth, it is seen to have a “material weakness.” The weakness is reported to the Securities and Exchange Commission and becomes public record.

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