Banking law covers a broad swath of financial regulations. It includes not only how banks operate, but also how other financial institutions are run. For the purposes of this exercise, we include any financial institutions that offer similar services to banks.
A dazzling array of local, state, and federal regulations govern financial institutions in the United States. A legal career in this field will usually be lucrative, and there are various specializations that lawyers can select in this field.
In this post, we'll look at banking law specializations.
Who is the regulatory body?
Different bodies govern the banks in the United States.
The Federal Deposit Insurance Corporation
The FDIC is the agency that guarantees the deposits which are made by clients of the bank. The corporation monitors the capitalization of the bank (capitalization refers to the ratio of deposits to loans). Banks are required to keep a certain amount of capital on hand to ensure that their clients have funds accessible to them.
Capitalization regulations prevent banks from lending out, and potentially losing, all the funds entrusted to them by their customers. A healthy capitalization ratio is considered to be ten percent (or higher). At this level, the bank would have to keep at least 0.1 of its funding deposited in a safe as a liquid investment.
The FDIC considers eight percent capitalization adequate. The authorities will step in when capitalization declines to six percent (or lower). If a bank declares insolvency, the FDIC also steps in and takes over operations.
The corporation aims to maximize the returns bank creditors receive. In this case, we classify the depositors as creditors, too, since the bank technically owes them money.
The National Credit Union Administration
The organization performs the same functions as the FDIC but relates to funds deposited in credit unions.
The Office of the Comptroller of the Currency
The OCC has a broader mandate. Tasks include:
- ensuring the country's banking system is secure
- ensuring fair competition is maintained by allowing banks to increase the range of services they offer
- improving the efficiency with which the OCC operates
- making sure every American has equal access to the financial services on offer
- enforcing regulations that prevent money laundering or the funding of illicit activities
- investigating misconduct on the part of those associated with national banks
Why do we need banking laws?
Banks have a significant impact on the economy. If something goes wrong within a financial institution, the consumers suffer. Serious issues within the banking system also have a far-reaching effect on the economy.
If we could rely on banks to operate in the best interest of clients, we wouldn't need the regulations. The subprime mortgage crisis of 2007-2009, however, proves that banks have a long way to go.
What happened in the 2008 subprime mortgage crisis?
Bankers performed unsound lending practices that fueled the collapse of the housing bubble in 2007. The financiers lowered the lending rates to make mortgages easier to obtain, but they also practiced reckless lending at the time.
When the bubble burst, the recession hit. There was a glut of properties on the market, and values plummeted. Many homeowners had mortgages that were significantly higher than the value of the property. This unfortunate phenomenon was directly attributable to the greed on the part of the banks and other lenders.
It wasn't only the American economy that suffered, though. Ripple effects were felt around the world, kicking off a global recession.
Banks must be firmly guided
The banking regulations in place are to prevent incidents like the 2008 crises from reoccurring. The regulatory bodies aim to create a transparent and fair banking system. It's a dynamic field, and the laws often change, seldom without controversy.
What do banking laws govern?
Banking laws have many different aims, which include:
- making the system transparent for customers
- reducing the risk faced by consumers
- preventing illicit practices, such as money laundering
- ensuring the privacy of clients is protected
- the prevention of crime
- the promotion of lending practices in line with social and economic priorities
- providing access to banking for all Americans
- fighting terrorism
- creating fair lending agreements, especially under revolving credit facilities
- preventing the abuse of the system through loans to friends or shareholders
- giving consumers the ability to raise disputes
- making debt collection practices fairer
What are the primary banking laws in force today?
There are several laws at different levels governing financial institutions. Banks might be subject to state, local, and federal laws simultaneously. Federal laws usually receive preference over state and local laws, though.
Exploring all the laws would fill a few books, so we've opted to go over the main ones instead.
The Banking Act of 1933
This legislation led to the formation of the Federal Deposit Insurance Corporation. The body was formed to protect the funds of depositors. Initially, the amount insured was just $2,500, which was a large sum of money back then, but now the insured limit has increased to $250,000.
As a banking lawyer, you'll need to understand what protection your client requires. The FDIC will insure deposits made to the bank, but not all investments. Stocks, for example, are not guaranteed by the FDIC.
The Right to Privacy Act
This act is another significant guideline, especially today. It puts the onus on the bank to protect their client's privacy. Banks must take reasonable steps to ensure that the client's transactions and information remain confidential.
The act also governs what banks may do with client information. Should banks want to share the information with a third party, they need the client's consent. The client has the right to say how the banks share their data.
The Privacy Act also requires banks to share details of suspicious activity on any account. The regulation is a bid to prevent illicit activities, such as money laundering. Banks are required, by law, to report all transactions over a certain threshold, for example.
The Dodd-Frank Act of 2010
This act is one that you'll want to study meticulously. It consists of 1,500 different line items, and President Obama tabled this act to create new rules for Wall Street. It recently introduced four hundred new regulations to exercise tighter controls over the banking industry.
The Patriot Act
This act aims to combat terrorism. Banks have the responsibility of confirming their clients' identities. The idea is that stricter control can curb terrorist access to funds and lending.
Banks are also required to keep more extensive records than in the past. These records can be drawn upon when the government prosecutes terrorists, for example.
The Bank Secrecy Act
This act aims to prevent tax evasion and money laundering. Banks must report every cash transaction over $10,000 to the government. They must also keep more extensive records if they buy flagged assets.
Community Reinvestment Act of 1977
This act aims to promote community investments and puts the onus on banks to invest money in the communities they serve. They're also expected to assist people with low or moderate salaries. The files regarding their investments must be made public so that the community can see what the banks are doing.
Controversy Reigns Supreme
Banks are making up a far larger share of our economy than ever before, so they're coming under more scrutiny.
The government passed the Emergency Economic Stabilization Act in 2008, which is one of the most controversial acts on the books. It allows the government to bail out failing banks. According to proponents of the legislation, this change is essential to protecting the economy at large.
Opponents argue that it does more to encourage unsound management practices. If banks know they'll be bailed out when there's a problem, why should they engage in better stewardship? The issue is a contentious one.
Which side of the argument do you support? Perhaps, it's something that you'd like to work on in your practice?
Where will I work as a banking lawyer?
There are several options open to you in this area.
Work as a Lobbyist
As an attorney, lobbying for change in the regulations can make a noticeable difference in society. You'd be involved in creating history, and you'd work on proposing new laws, or amendments to existing laws. It could be both personally satisfying and lucrative work.
Here you could work on behalf of the banks, or special interest groups. Banks might call for the relaxation of some of the requirements of the law. Special interest groups might call for the exact opposite. You'll find it easy to find work as a lobbyist, too.
Work for the Government
You could join one of the government agencies and assist in enforcing the law, or you could help draft new legislation. You might earn less working for the government than you would in private practice, though.
It could be worthwhile if you want to make a real difference for the man on the street. It is the kind of position ideal for the social warrior in you. Banking laws go some way to protecting the interests of depositors, but there's still a lot of work to be done.
For our money, we believe the entire system could use an overhaul. The law surrounding this area is congested at present, so streamlining the rules would make things a lot simpler.
We have different state and federal laws, for example, which makes the entire system less efficient overall. Perhaps, you could be instrumental in changing the status quo.
Work in the Private sector
In the private sector, you also have options.
Working as in-house counsel is usually a lucrative position. You'll be expected to represent the bank in civil and criminal suits. You'd also need to conduct negotiations on behalf of the bank, assisting them to stay on the right side of the law.
In-house counsel is also called upon to update policies and procedures within the bank to ensure compliance. You might be required to conduct regular compliance audits, or to rework systems to improve efficiency in these areas.
Banking law is complex, so you should never be short of work. From this position, you might also be able to affect change to the laws of the country. The bank you work for might want to challenge existing laws or have their say on impending regulations.
As the in-house counsel, convincing the government to hear the bank's side of the case will form part of your job.
You could also seek a position in a firm of attorneys or go into practice on your own. You'll be performing many of the same functions.
A banking attorney will also be instrumental in the development of regulatory systems for financial institutions. The task may entail training staff, as well as the design of the processes to follow. If you can become a specialist in this area, you could quickly carve out a niche for yourself and your practice.
Why should I practice banking law?
Being proficient in banking law will require a lot of dedication. The laws in this country are incredibly intricate. In most other countries, the federal government is responsible for the policing of banks. Central control allows for a streamlined system of laws and processes.
In America, things are different. You'll need to know the local, federal, and state statutes, too. You'll also need to understand which laws take preference in different circumstances, so it's a challenging field to enter.
It Requires Experts
As an attorney in this field, you'll need to digest a large amount of information. If you love tackling technical work and can retain a lot of information, you could do well here. The advantage is that qualified banking attorneys are not too prevalent in the United States.
Your competition pool is less saturated, and you can command a higher fee.
Litigation is Less Important
If you're not an active litigator, this might prove a viable option for you. Most of the time, you won't even need to see the inside of a courtroom. If you focus your practice on assisting banks with compliance issues, you might never have to litigate again.
You Have Plenty of Range
Numerous banks are operating throughout America, and many have branches across the globe. The size of the market opens a range of opportunities for travel and relocation. Otherwise, choose to work in a private firm, or as in-house counsel.
There are many options when it comes to advancing your career, as well. An excellent banking attorney should be able to write their checks and follow a lucrative career path.
You'll Never be Bored
The section of the law is vast, covering hundreds of options. You can choose a career path along any route you can imagine. There are a plethora of areas to cover, and it would take a lifetime to experience every potential outcome.
If the idea of assisting with the same old divorce cases for the rest of your life is unappealing, banking law is a viable option. Considering that banking laws are usually in flux, it's true that there's always something new to learn.
Who would make a good banking lawyer?
A competent banking lawyer must have an excellent eye for detail. This field is not one where you can wing it and hope for the best. Technical expertise is essential here, so if you don't have the patience to excel and study, look for a different field.
You don't need to have strong litigation skills, but you will need to be a good negotiator. There may be settlement conferences to attend. You'll also need to be able to convince your clients of the right way forward using the law as a motivator.
What are my career prospects?
The career prospects are excellent. You could start as an in-house counsel and work your way up to the head of compliance in your organization. You'll be integral in creating policies and systems that will be in place for many years to come.
It is a complicated field, and the numbers of law students opting for this specialization are understandably lower than in other areas. Less competition means more work and more money for you.
Banking institutions are also going to be around for a long time. Lawmakers are continually trying to change the laws to favor consumers, so you'll always have banks that need your advice.
Final Notes
Banking law is not a field that will suit everyone. It requires someone who is meticulous and has a keen eye for detail. If you display an aptitude for this kind of work, it can be extremely lucrative.
The practice of law can sometimes be stale and boring, but this is seldom the case with banking law, thanks to its density. You can enjoy a varied career.
You might opt to start as an in-house counsel and then progress to the position of a lobbyist. There are so many nuances to these laws, and changing them can be challenging and rewarding. It requires a special kind of legal mind to accomplish this task.
Are you up for the challenge?