Banking Environment
The United States has a dual banking system that is regulated at the federal level and at the individual state level. At the federal level, three agencies share bank supervision: the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC). Banking boards and commissions regulate at the state level.
Acting as the Central Bank, the Federal Reserve performs a variety of functions, including operator of the payments system, bank regulator, lender of last resort and controller of the money supply.
Traditionally, the financial environment has been segmented with barriers for banks to conduct business across state lines and product offerings. The Glass-Steagall Act of 1933 prohibited the combining of banks, insurance companies and securities entities under the same corporate umbrella. Most major banks are structured under a holding company umbrella enabling them to offer investment services, insurance products, etc.
In 1999 these restrictions were broken down and the regulatory environment has been relaxed since then. However, national banks may still consist of many individual operations and the degree to which they are linked operationally and technically is still subject to officially imposed barriers.
Although there are many banks, the branch density of individual banks is low, and commercial banking operations often involve the customer connecting physically not with a branch but an operations centre – using courier or truck services organised by the bank.
Regulations include:
Regulation D:
requires banks to leave a percentage of certain account balances on their books in a non-interest earning account with the Federal Reserve.The FDIC insures deposits up to $100,000 for each depositor. To cover this insurance, premiums are assessed on demand deposit and savings accounts. Balances at the end of a quarter are used to calculate premiums and banks charge customers and make required payment to the FDIC.
Regulation Q:
prohibits payment of interest on commercial demand deposit accounts. However, customers may be given earnings credit for balances left in DDA accounts, which can be used as an offset for bank fees, including cash management fees. Demand deposit accounts (current accounts) are intended to facilitate operational activities and are not to be used as a form of finance through overdrafts.
Overdrafts are penalised and expense charged to the customer.Corporate customers may hold many current accounts. An account is required at every bank where customers intend to do business.
Customers generally do not hold accounts in currencies other than USD. This is an outcome of the combination of Regulations D and Q (no DDA interest), timing, and the absence of investment vehicles in the respective currencies that are as attractive as the ones available in the currency centre or in London/Singapore. Non-USD dollar and/or Eurodollar business is generally conducted outside of the U.S., or in special Edge Act subsidiaries or an IBF. These entities can transact certain business with corporate customers without certain restrictions of the FDIC or certain provisions of Regulation D.
Features of the U.S. Banking System
Electronic payment system is well-developed enabling wire and ACH transactions across the large number of banks.
Cheque usage continues to be high compared to other developed countries.
Developments to improve the efficiencies and timeliness of cheque clearing have introduced features such as electronic cheque presentment, MICR Capture at Point of Sale, and distributed electronic cheque conversion.
The recently passed “Check Clearing for the 21st Century” Law will drive additional development to move from paper clearing and delivery.
Technology supports risk management tools and greater control for the customer by providing capabilities to match cheques against issue file, images of cheques and matching of payee names.
Account openings and ongoing activities are subject to increased due diligence under regulations regarding Anti-Money Laundering and the USA Patriot Act.