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Banking Acts and Regulations
Bank regulations are a form of government regulation which subject banks to certain requirements, restrictions and guidelines. This regulatory structure creates transparency between banking institutions and the individuals and corporations with whom they conduct business, among other things. Given the interconnectedness of the banking industry and the reliance that the national (and global) economy hold on banks, it is important for regulatory agencies to maintain control over the standardized practices of these institutions. Supporters of such regulation often hinge their arguments on the “too big to fail” notion. This holds that many financial institutions (particularly investment banks with a commercial arm) hold too much control over the economy to fail without enormous consequences. This is the premise for government bailouts, in which government financial assistance is provided to banks or other financial institutions that appear to be on the brink of collapse. The belief is that without this aid, the crippled banks would not only become bankrupt, but would create rippling effects throughout the economy leading to systemic failure.
Objectives of bank regulation
The objectives of bank regulation, and the emphasis, vary between jurisdictions. The most common objectives are:
Prudential: to reduce the level of risk to which bank creditors are exposed (i.e. to protect depositors)
Systemic risk reduction: to reduce the risk of disruption resulting from adverse trading conditions for banks causing multiple or major bank failures[2]
Avoid misuse of banks: to reduce the risk of banks being used for criminal purposes, e.g. laundering the proceeds of crime
To protect banking confidentiality
Credit allocation: to direct credit to favored sectors
It may also include rules about treating customers fairly and having corporate social responsibility (CSR)
General principles of bank regulation
Banking regulations can vary widely across nations and jurisdictions. This section of the article describes general principles of bank regulation throughout the world.
Minimum requirements
Requirements are imposed on banks in order to promote the objectives of the regulator. Often, these requirements are closely tied to the level of risk exposure for a certain sector of the bank. The most important minimum requirement in banking regulation is maintaining minimum capital ratios.
