Banking Regulation Example For Free

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Banking regulation originates from microeconomic concerns over the ability of bank creditors depositors to monitors the risks originating on the lending side and from micro and macroeconomic concerns over the stability of the banking system in the case of bank crisis.In addition to statutory and administrative regulatory provisions,the banking sector has been subject to widespread “informal” regulation,i.e the government’s use of its discretion,outside formalized legislation,to influence banking sector outcomes (for example,to bail out insolvent banks,decide on bank mergers or maintain significant State ownership) (Bonn,2005) Financial institution refers to an institution which deals with financial transaction such as investment,loans and deposits.Financial institutions constist of units such as banks,trust companies,insurance companies and investment dealers.These units which form financial institutions acts as channel between savers and borrowers of funds.Financial regulations are simply laws and rules which supervise financial institutions,as it happens all people depend on services offered by financial institution,it is imperative that they are regulated highly by the government.For example if a financial institution were to enter into bankruptcy as a result of controversial matters,this will no doubt cause panic and havoc as people start to question safety of their finances. Also this loss of confidence may have negative impact on the economy. Of all the financial institutions,banks is heavily regulated.Prevention of financial crisis may act as a major reason,while consumer protection may tall under minor reason.However bank regulations is unusual compared to another types of regulation as there is no wide agreement on what kind of market failures justifies regulation.Banks in one form or another have been subject to the following non exhaustive list of regulatory provisions:restrictions on branching and new entry,restrictions on pricing (interest rate controls and other controls on prices or fees),line of business restrictions and regulation on ownership linkage among financial institutions,restrictions on portfolio of assets that banks can hold (such as requirements to hold certain types of securities or requirements and/or not to hold other securities,including requirements not to hold the control of non financial companies),compulsory deposit insurance (or informal deposit insurance,in the form of an expectation that government will bail out depositors in the event of insolvency),capital adequacy requirements,reserve requirements (requirements to hold a certain quantity of the liabilities of the central bank),requirements to direct credit to favored sectors or enterprises (in the form of either formal rules or informal government pressure),expectations that in the event of difficulty,banks will receive assistance in the form of “lender of last resort”,special rules concerning mergers (not always subject to competition standard) or failing banks (e.g liquidation,winding up,insolvency,composition or analogous proceedings in the banking sector),other rules affecting cooperation within the banking sector (e.g with respect to payment systems).(Bonn.2005) Consider an overview of regulatory reform in banking:In early 70s financial systems “were characterized by important restrictions on market forces which included controls on the prices or quantities of business conducted by financial institutions,restrictions on market access and in some cases controls on the allocation of finance amongst alternative borrowers.These regulatory restrictions served a number of social and economic policy objectives of governments.Direct controls were used in many countries to allocate finance to preferred industries during the post-war period:restrictions on markets access and competition were partly motivated by concern for financial stability;protection of small savers with limited financial knowledge was an important objective of controls on banks and controls on banks were frequently used as instruments of macroeconomic management.”

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