Making Sense of the Federal Reserve

Supervision and Regulation: An Introduction

Bank regulation refers to the written rules that define acceptable behavior and conduct for financial institutions. The Board of Governors, along with other bank regulatory agencies, carries out this responsibility.

Bank supervision refers to the enforcement of these rules. The 12 Reserve Banks carry out this responsibility, supervising state-chartered member banks, the companies that own banks and thrifts, international organizations that conduct banking business in the United States, and some companies that are not banks at all, but nevertheless are important to the financial system. In addition to the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) also supervise financial institutions.

Have you ever been in a panic? Your heart pounds, you start to sweat, and your stomach feels queasy. Imagine hearing that the bank holding your life savings is running out of money. Imagine the panic you feel as you run to that bank to get whatever you can before the doors are closed and locked forever. Now, imagine having nothing but your savings to support you through your later years. Social Security doesn't exist and you don't have a pension. All you have is your savings, and now it could be gone. Forever.

The nation's periodic episodes of banking panics were one of Congress' most serious concerns in creating the Federal Reserve and led to one of the Fed's three main responsibilities: to foster safe, sound, and competitive practices in the nation's banking system.

To accomplish this, Congress included the Fed among those responsible for regulating the banking system and supervising financial institutions. What's the difference between these two responsibilities?

For the Fed, supervising banks generally means helping to establish safe and sound banking practices and protecting consumers in financial transactions.

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