[1]Bank regulations are a form of government regulation which subject banks to certain requirements, restrictions and guidelines.
The objectives of bank regulation, and the emphasis, vary between jurisdictions. The most common objectives are prudential, systemic risk reduction, avoidance of misuse of banks, protecting banking confidentiality and credit allocation.
In the prudential aspect of banking regulation, it is to reduce the level of exposure of the bank creditors. While in Systemic risk reduction, it is for the purpose of reducing the risk of disruption resulting from adverse trading conditions for banks causing multiple or major bank failure.
In the process of avoiding the misuse of banks, one main purpose was to avoid laundering the proceeds of a certain crime.
With regards to credit allocation — it is to direct credit to favored sectors and to avoid misappropriations of the credit being used.
Banking regulations can vary widely across nations and jurisdictions. But in general, these set principles of bank regulation are being used by most banks throughout the world such as minimum requirement, supervisory review, and market discipline.
Minimum requirements are imposed on banks in order to promote the objectives of the regulator. The most important minimum requirement in banking regulation is maintaining minimum capital ratios. If this minimum requirement has been already used up, certain percentage will be imposed upon the account of the depositor.
Banks are required to be issued with a bank license by the regulator in order to carry on business as a bank, and the regulator supervises licensed review of banks for compliance with the requirements and responds to breaches of the requirements through obtaining undertakings, giving directions, imposing penalties or revoking the bank’s license.
The regulator requires banks to publicly disclose financial and other information, and depositors and other creditors are able to use this information to assess the level of risk and to make investment decisions. As a result of this, the bank is subject to market discipline and the regulator can also use market pricing information as an indicator of the bank’s financial health.
There are certain instruments and requirements of bank regulations; there is what we call Capital requirement. The capital requirement sets a framework on how banks must handle their capital in relation to their assets. Internationally, the Bank for International Settlements’ Basel Committee on Banking Supervision influences each country’s capital requirements. In 1988, the Committee decided to introduce a capital measurement system commonly referred to as the Basel Capital Accords. The latest capital adequacy framework is commonly known as Basel III. This updated framework is intended to be more risk sensitive than the original one, but is also a lot more complex.
Another instrument and requirement of bank regulations is the Reserve requirement. The reserve requirement sets the minimum reserves each bank must hold to demand deposits and banknotes. This type of regulation has lost the role it once had, as the emphasis has moved toward capital adequacy, and in many countries there is no minimum reserve ratio. The purpose of minimum reserve ratios is liquidity rather than safety. An example of a country with a contemporary minimum reserve ratio is Hong Kong, where banks are required to maintain 25% of their liabilities that are due on demand or within 1 month as qualifying liquefiable assets. Reserve requirements have also been used in the past to control the stock of banknotes and/or bank deposits. Required reserves have at times been gold coin, central bank banknotes or deposits, and foreign currency.
Instrument and requirement of bank regulations also includes Corporate governance requirements are intended to encourage the bank to be well managed, and is an indirect way of achieving other objectives. Requirements may include:
1. To be a body corporate (i.e. not an individual, a partnership, trust or other unincorporated entity)
2. To be incorporated locally, and/or to be incorporated under as a particular type of body corporate, rather than being incorporated in a foreign jurisdiction.
3. To have a minimum number of directors
4. To have an organizational structure that includes various offices and officers, e.g. corporate secretary, treasurer/CFO, auditor, Asset Liability Management Committee, Privacy Officer etc. Also the officers for those offices may need to be approved persons, or from an approved class of persons.
5. To have a constitution or articles of association that is approved, or contains or does not contain particular clauses, e.g. clauses that enable directors to act other than in the best interests of the company (e.g. in the interests of a parent company) may not be allowed.
Banks may be required to:
1. Prepare annual financial statements according to a financial reporting standard, have them audited, and to register or publish them
2. Prepare more frequent financial disclosures, e.g. Quarterly Disclosure Statements
3. Have directors of the bank attest to the accuracy of such financial disclosures
4. Prepare and have registered prospectuses detailing the terms of securities it issues (e.g. deposits), and the relevant facts that will enable investors to better assess the level and type of financial risks in investing in those securities.
Banks may be required to obtain and maintain a current credit rating from an approved credit rating agency, and to disclose it to investors and prospective investors. Also, banks may be required to maintain a minimum credit rating.
Most of the banks may be restricted from having imprudently large exposures to individual counterparties or groups of connected counterparties. This may be expressed as a proportion of the bank’s assets or equity, and different limits may apply depending on the security held and/or the credit rating of the counterparty.
[2]A capital market is a market for securities (debt or equity), where business enterprises (companies) and governments can raise long-term funds. It is defined as a market in which money is provided for periods longer than a year,[1][dead link] as the raising of short-term funds takes place on other markets (e.g., the money market). The capital market includes the stock market (equity securities) and the bond market (debt). Financial regulators, such as the UK’s Financial Services Authority (FSA) or the U.S. Securities and Exchange Commission (SEC), oversee the capital markets in their designated jurisdictions to ensure that investors are protected against fraud, among other duties.
Capital markets may be classified as primary markets and secondary markets. In primary markets, new stock or bond issues are sold to investors via a mechanism known as underwriting. In the secondary markets, existing securities are sold and bought among investors or traders, usually on a securities exchange, over-the-counter, or elsewhere.
Banks is where people and companies entrusts their money. If the banks won’t follow a certain regulation, and abide by the local banking law, do you think they still deserve the trust that the public is giving them?
[1] http://en.wikipedia.org/wiki/Banking_law
[2] http://en.wikipedia.org/wiki/Capital_market
Credit:ivythesis.typepad.com
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