Financial Industry Regulatory Authority

Financial Industry Regulatory Authority (FINRA)

7 min read

From the FED to FIRA, the Financial Institutions Regulatory and Interest Rate Control Act (FINRA) was formed to regulate depository financial institutions. In this blog post, we’ll dive into the Financial Industry Regulatory Authority to shed some light on this government body.

The Federal Reserve (Fed) is the central bank of the United States. One of the primary roles of the Fed is to supervise and regulate banks and other financial institutions. For more than 100 years, the Fed has supervised and regulated individual institutions’ operations, ensuring they are safe and sound.

They are following the laws and regulations established for them by both Congress and regulators like the Fed. This includes small community banks and some of the largest and most recognized financial institutions in the nation and the world. We rely on these organizations for simple services like checking and savings accounts, credit cards, loans, and mortgages. 

The operations and activities, common characteristics of financial institutions, have evolved and expanded tremendously. The Fed monitors this changing banking landscape through a broad and narrow lens. It monitors an economic system for its broader impact on the US economy. Moreover, they pay very close attention to how these banks interact with each other and even how governments participate in our economy. 

For example, the Fed ensures that a bank has enough capital to cover the risks from its loans. This is part of the process of ensuring they are operating safely. Where does the financial industry regulatory authority come into play?

Financial Industry Regulatory Authority

Banks vs Financial Industry Regulatory Authority

It should be no surprise that the government treats large global banks and small community banks very differently. Since the 2007 financial crisis, the largest banks have received even greater attention.

These large financial institutions either failed or were on the brink of failure. Due to banks’ excessive risk-taking, the government spent large amounts of taxpayers’ money to rescue those institutions.

In turn, this contributed to the global economic downturn that affected all of us. Hence, there is a need for a financial industry regulatory authority.

What Is the Financial Institutions Regulatory Act (FINRA)?

FINRA is a federal law created in 1978 to regulate depository financial institutions. Its other arm, the State Liaison Committee, ensures no regulation disparity among financial institutions.

Five Federal Agencies That Regulate the Financial System

FFIEC is primarily responsible for creating and maintaining standards for depository financial institutions. Such institutions include:

  • The Board of Governors of the Federal Reserve System (FRB)
  • The National Credit Union Administration (NCUA)
  • The Federal Deposit Insurance Corporation (FDIC)
  • The Office of the Comptroller of the Currency (OCC)
  • Consumer Financial Protection Bureau (CFPB)

Once established, it created the Central Liquidity Facility and the Federal Financial Institutions Examination Council (FFIEC). 

What Does FIRA Do?

  • Federally regulated electronic fund transfers
  • Adjusted loan terms provided to directors and officers
  • Authorized cease and desist orders on loans?
  • Created the Central Liquidity Facility
  • Created the Federal Financial Institutions Examination Council (FFIEC)
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Central Liquidity Facility Relation to Financial Industry Regulatory Authority

The CLF is a “mixed-ownership government corporation” managed by the NCUA. National Credit Union Share Insurance Fund. The NCUA is responsible for regulating federal credit unions, insuring deposits, and protecting members of credit unions.

In brief, the Central Liquidity Facilities’ main goal is to improve the financial stability of credit unions. It accomplishes this by acting as a liquid lender to credit unions experiencing a shortage of money to lend. 

Furthermore, it’s classified as a mixed-ownership corporation, as member credit unions own it. All credit unions over $250 million are CLF or Federal Reserve members. Membership in this facility is voluntary and specific to credit unions only. However, as of December 2019, approximately 278 credit unions were Central Liquidity Facility (CLF) members holding $115 billion or about 7.2% of assets.

Support Offered by the Central Liquidity Facility

  • supporting mortgage and consumer lending by credit unions
  •  encouraging savings
  • extending financial resources to all parts of the economy

Federal Financial Institutions Examination Council (FFIEC)

Established on March 10, 1979, The Federal Financial Institutions Examination Council (FFIEC) was added to the Financial Institutions Regulatory and Interest Rate Control Act of 1978.

As a formal US interagency body, it provides standardized methods for examining financial institutions per numerous regulating bodies. Composed of five banking regulators, its goal is to promote uniformity in the supervision of financial institutions in the United States. 

What I like about the Council is that it allows the public to access data about home loans and prices that depository institutions must disclose by law. In addition, the FFIEC also compiles this data in yearly reports for the public to research information about specific metropolitan and census areas.

Why Does the FFIEC Matter?

For a few reasons.

Firstly, it protects investors from fraud. It accomplishes this by holding companies accountable to regulations established by the Home Mortgage Disclosure Act, the FDIC, the NCUA, and the FRB, among others. Not only does it hold companies responsible, but the standardized forms and principles of the FFIEC ensure uniformity in the auditing process.

Secondly and perhaps more importantly, institutions such as the FDIC or NCUA guarantee investors’ money. Because of oversight from agencies through the collective FFIEC, investors can sleep well at night knowing that guarantees will be honored.

Problems Related to the Regulation of Financial Institutions

” There is a very real danger that financial regulation will become a wolf in sheep’s clothing.”

  • Henry Paulson, Public Servant

If the level of regulation is too high, free-market forces may no longer be able to work correctly. What ends up happening is that firms might be limited in their business activities. In the long run, this may cause financial institutions to lose competitiveness. 

Strict financial regulations may also prevent startups from entering the market. High barriers to entry may turn many investors off. They may not be willing to provide startups in the financial sector with sufficient money they need

Additionally, strict regulation may see banks pulling their operations from the US to less regulated countries. As a result, they might start to engage in high-risk-taking activities again. Because of the interconnectedness of our global financial system, we may see ourselves in the same boat as the 2007 financial crisis.

Final Thoughts: Financial Industry Regulatory Authority

Ultimately, the Fed’s mandate is to provide the nation with a safer, more flexible, and more stable monetary and financial system. But the jury is still out as to the usefulness of the Federal Reserve.

The problem with the Federal Reserve is that it creates an economy built on bubbles. I mean that the Fed incentivizes banks to pump liquidity into the economy. Unfortunately, this leads to loans that the banks would not make under normal circumstances.

A recipe for disaster indeed. As a result, it forces the banking system into bad investments that likely will fail when the rates rise. 

Frequently Asked Questions

This is a nongovernment association that makes and enforces rules that brokers must follow to ensure fair trading.

The Financial Industry Regulatory Authority regulates brokers while the SEC has a more broad regulation. They regulate all securities.

The Financial Industry Regulatory Authority is neither a state or government agency. It is not for profit and works as a private company to regulate brokers.  

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