Banking, the largest sector within the financial services industry, includes all depository institutions, from commercial banks and thrifts (savings and loan associations and savings banks) to credit unions. In their role as financial intermediaries, banks use the funds they receive from depositors to make loans and mortgages to individuals and businesses, seeking to earn more on their lending activities than it costs them to attract depositors. However, in so doing they must manage many risk factors, including interest rates, which can result in a mismatch of assets and liabilities.

Over the past decade, many banks have diversified and expanded into new business lines such as credit cards, stock brokerage and investment management services. (See Chapter 4: Convergence, pages __.) They are also moving into the insurance business, selling annuities and life insurance products in particular, often through the purchase of insurance agencies. Banks can be federally or state chartered.

The Federal Reserve was established by Congress in 1913 to regulate the money supply according to the needs of the U.S. economy. The agency attempts to do this by changing bank reserve requirements and the discount rate that banks pay for loans from the Federal Reserve system and by increasing or decreasing its open-market operations, the buying and selling of federal securities. Because of banks’ sensitivity to interest rates, Federal Reserve policy has a major impact on the banking sector.

The Federal Depository Insurance Corporation (FDIC) was created in 1933 to restore confidence in the banking system following the collapse of thousands of banks during the Great Depression. Under the program administered by the FDIC, which is an independent agency within the federal government, deposits in commercial banks and thrifts are insured for up to $100,000. In addition, the FDIC is charged with liquidating failing banks or disposing of their insured liabilities by selling them to a solvent institution. The agency also provides separate coverage for retirement accounts, such as individual retirement accounts (IRAs) and Keoghs. A 2006 law increased the coverage for retirement accounts from $100,000 to $250,000.

Since 1863, banks have had the choice of whether to be chartered by the national government or the states. Under the National Bank Act, national banks are chartered and supervised by the Office of the Comptroller of the Currency (OCC), part of the Treasury Department. State-chartered banks are subject to some federal regulation if they are members of the Federal Reserve System or insured by the Federal Deposit Insurance Corporation (FDIC). Thrift institutions, including savings and loans associations and savings banks, are regulated and suprivsed by the Office of Thrift Supervision (OTS), another agency in the U.S. Treasury Department. The National Credit Union Administration serves a similar function for federal credit unions. State credit unions are supervised by state regulators.