Objectives of Bank Regulation

Objectives of bank regulation
The objectives of bank regulation, and the emphasis, vary between jurisdictions. The most
common objectives are:
1. Prudential—to reduce the level of risk bank creditors are exposed to (i.e. to protect
depositors)
2. Systemic risk reduction—to reduce the risk of disruption resulting from adverse trading
conditions for banks causing multiple or major bank failures
3. Avoid misuse of banks—to reduce the risk of banks being used for criminal purposes,
e.g. laundering the proceeds of crime
4. To protect banking confidentiality
5. Credit allocation—to direct credit to favored sectors
[edit] 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.
[edit] Minimum requirements
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.
[edit] Supervisory review
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 licenced 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 licence.
[edit] Market discipline
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.
[edit] Instruments and requirements of bank regulation

[edit] Capital requirement
Main article: 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 II. This updated framework is
intended to be more risk sensitive than the original one, but is also a lot more complex.
[edit] Reserve requirement
Main article: 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.
[edit] Corporate governance
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 organisational 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.
[edit] Financial reporting and disclosure requirements
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.
[edit] Credit rating requirement
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.
[edit] Large exposures restrictions
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.
Basel II is the second of the Basel Accords, which are recommendations on
banking laws and regulations issued by the Basel Committee on Banking Supervision.
The purpose of Basel II, which was initially published in June 2004, is to create an
international standard that banking regulators can use when creating regulations
about how much capital banks need to put aside to guard against the types of
financial and operational risks banks face. Advocates of Basel II believe that such an
international standard can help protect the international financial system from the
types of problems that might arise should a major bank or a series of banks collapse.
In theory, Basel II attempted to accomplish this by setting up risk and capital
management requirements designed to ensure that a bank holds capital reserves
appropriate to the risk the bank exposes itself to through its lending and investment
practices. Generally speaking, these rules mean that the greater risk to which the
bank is exposed, the greater the amount of capital the bank needs to hold to
safeguard its solvency and overall economic stability.
umbai: The Reserve Bank Thursday proposed timelines for banks to migrate to
advanced risk norms under Basel II, which entails improved standards for banks
worldwide to assess their risks.

RBI has proposed that banks can apply to the central bank for migrating to these
norms earliest by April 1, 2012, while it may give approvals for that by March 31,
2014.

The Reserve Bank said banks are advised to undertake an internal assessment of
their preparedness for migration to the advanced norms and decide whether to
migrate to them.

Already, basic approach for three kinds of risks relating to credit, operation and
markets -- have been implemented for banks in India.

Basel II norms are improved version of Basel I, for preparing banks to assess
different kinds of risks. These norms assume significance after the global financial
crisis.

Basel I required banks to calculate a minimum level of capital that has to be kept
aside by assigning risk weight for each of a limited number of asset classes like
mortgages, consumer lending, corporate loans etc.

Basel II goes beyond this, allowing banks to use their own risk measurement models
to calculate the capital that has to be kept aside.

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What are the main objectives of bank regulation?

What are the general principles of bank regulation?

Objectives of bank regulation

[edit] General principles of bank regulation

[edit] Minimum requirements

[edit] Supervisory review

[edit] Market discipline

[edit] Instruments and requirements of bank regulation

Main article: Capital requirement

[edit] Reserve requirement

Main article: Reserve requirement

[edit] Corporate governance

1. To be a body corporate (i.e. not an individual, a partnership, trust or other unincorporated

[edit] Financial reporting and disclosure requirements

Banks may be required to:

1. Prepare annual financial statements according to a financial reporting standard, have

[edit] Credit rating requirement

[edit] Large exposures restrictions

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