Protections towards banking fraud within the U.S. have by no means been capable of hold tempo with criminals.
The explanation why has its roots within the begin of the national banking system proposed by Abraham Lincoln and created by Congress in 1863.
Till the mid-Civil Struggle, the U.S. didn’t have its personal federal forex. Banks have been free to create their very own paper cash, topic solely to state legislation, which various dramatically. One-third of all paper cash circulating earlier than the Civil Struggle was likely counterfeit, leading to forex mayhem.
Lincoln’s purpose was to create the nation’s first federal paper forex—national bank notes that solely newly authorized nationwide banks may subject, topic to regulation by the US’ first monetary regulator, the Office of the Comptroller of the Currency.
To safe the brand new federal forex, these nationwide banks have been required to buy interest-bearing U.S. authorities bonds from the U.S. Treasury.
This financed the Union Military, however it by chance created a dual banking system. On the time, the wartime Congress thought state-chartered banks would go away, selecting to turn out to be nationwide banks that would subject federal forex.
Congress was flawed.
The following twin banking system, with no single regulator in charge of policing all banks, nonetheless exists as we speak.
State banks couldn’t subject the brand new federal forex. Soon, Congress enacted a federal tax on state bank paper currency in an try and drive state banks out of enterprise.
To remain in enterprise, state banks wanted to subject new monetary merchandise. The primary one, which got here during the Civil War, was what finally became known as the check.
Since then, state and federal regulators have competed to seek out methods to earn completely different streams of revenue.
Time and again, as criminals started discovering methods to defraud banks, Congress and regulators addressed the complaints, however piecemeal. And on this recreation of regulatory “whack-a-mole,” banks tried to remain not less than one step forward.
A ‘race to the underside’
In 2009, then-Senate Banking Committee Chair Christopher Dodd known as banking regulation a “race to the bottom.”
When bank card abuses got here to mild, Congress amended the Truth in Lending Act, inflicting the Federal Reserve to vary Regulation Z, which protects shoppers from unfair lending practices. The adjustment required banks to supply refunds for transactions that bank card holders hadn’t licensed. This led to losses to banks’ backside strains.
Banks then created debit playing cards. When shoppers started to lose cash by debit card fraud, Congress passed amendments to the Electronic Fund Transfer Act, inflicting the Fed to regulate Regulation E, which protects shoppers from unauthorized or incorrect digital fund transfers. This adjustment added related shopper protections for fraudulent debit card transactions.
However by then, the business was transferring to a brand new cost innovation—reward playing cards, served up with out the fraud protections for shoppers supplied by debit and bank cards, although a lot of these reward playing cards have the phrase “debit” printed on them.
Right this moment, regulators and Congress are nonetheless making an attempt to catch as much as the fraudsters.
Dr. David P. Weber is a professor of the apply in fraud and forensic accounting at Salisbury University.
Jake Bernstein is an investigative journalist at The Conversation.
This text is republished from The Conversation underneath a Artistic Commons license. Learn the original article.