Banking and Public Policy

BANKS & PUBLIC
POLICY
JUSTIN JAMES MARINAY BSBA FM

COURSE LEARNING
OUTCOMES:
1. Define public policy.
2. Explain rational theory.
3. Compare public policy in different
countries.
WHY BANKS NEED PUBLIC
POLICY?
• Financial System Stability: Banks play a crucial role in a healthy economy. Public
policy helps ensure the banking system is stable and avoids crises. This is
achieved through regulations on capital requirements, risk management, and
deposit insurance.
• Consumer Protection: Depositors and borrowers need safeguards. Public policy

sets rules to prevent unfair lending practices, ensure transparency in fees, and
protect consumers from predatory lending.
• Economic Growth: Banks act as a bridge between savers and borrowers. Public
policy can incentivize banks to lend to specific sectors or promote financial
inclusion, ultimately aiming to boost economic growth.
Public Policy Tools for Banking:
• Regulation: This is the primary tool, encompassing capital

adequacy requirements (amount of capital banks must hold),
liquidity rules (ability to meet short-term obligations), and
anti-money laundering measures.
• Central Bank Policy: The central bank influences the banking

system through interest rates and reserve requirements,
impacting how much banks can lend.
• Government Guarantees: Deposit insurance protects

individuals if a bank fails, promoting public trust in the
banking system.
What is a public
policies?
Public policy is the process by which governments
translate their political vision into programmes and
actions to deliver ‘outcomes — desired changes in
the real world.
Public policy making and the Implementation of
Public policy
Public policy making can be characterized as a

dynamic, complex, and interactive system through
which public problems are identified and resolved
by creating new public policy or by reforming
existing public policy.
Public Policy Making
• Problem Identification: Identifying issues within the banking system that need
government intervention. Examples include a rise in predatory lending practices
or a lack of access to credit for underserved communities.
• Agenda Setting: Raising public awareness and convincing policymakers that the
issue requires action. This often involves lobbying by industry groups, consumer
advocacy organizations, and academic research.
• Policy Formulation: Developing potential solutions, which can involve public

hearings, expert consultations, and drafting legislation. Regulatory bodies like the
Federal Deposit Insurance Corporation (FDIC) or central banks often play a key
role here.
• Decision-Making: The legislative body (e.g., Congress) debates and votes on the
proposed policy. Political considerations and lobbying efforts can influence the
final outcome.
Public Policy Implementation
• Regulatory Agencies: Government agencies like the FDIC or a

country's central bank are responsible for writing and enforcing
specific regulations based on the new policy.
• Industry Compliance: Banks need to adjust their internal policies

and procedures to comply with the new regulations. This might
involve changes in lending practices, data security measures, or
reporting requirements.
• Monitoring and Evaluation: Regulatory agencies monitor bank

compliance and assess the policy's effectiveness in achieving its
goals. If necessary, the policy can be adjusted or even repealed.
Challenges in Policy Making and Implementation:
• Balancing Interests: Finding a balance between protecting

consumers, maintaining financial stability, and fostering
innovation in the banking sector can be complex.
• Globalized Market: Policymakers need to consider the

international nature of banking and the potential impact of
regulations on global financial markets
.
• Technological Advancements: New technologies like fintech
and cryptocurrencies require ongoing policy adjustments to
ensure a level playing field and mitigate potential risks.
Examples of Public Policy in Action
• The Dodd-Frank Wall Street Reform and Consumer Protection

Act (Dodd-Frank Act): This US law enacted after the 2008
financial crisis aimed to prevent future crises by increasing bank
regulations.
• Open Banking Initiatives: Public policy can encourage open

banking, where banks share customer data securely with third-
party providers, promoting competition and innovation in
financial products.
DATA DRIVEN
POLICY
• Data-driven policy is a policy designed by a government
based on existing data, evidence, rational analysis and
use of information technology to crystallize problems
and highlight effective solutions.
• Data-driven policy making aims to make use of data and

collaborate with citizens to co-create policy
RATIONAL CHOICE THEORY/ EVIDENCE-BASED
POLICY
Rational Choice Theory (RCT):
• Core Assumption: Individuals are rational actors who make choices to maximize their
own utility (benefit or satisfaction).
• Policy Application: Policymakers design policies considering how individuals will

respond based on their perceived costs and benefits. For example, a policy might aim to
deter crime by increasing the perceived risk of getting caught (through harsher
punishments) or by making crime less profitable (through stricter gun control).
• Strengths: RCT offers a clear framework for analyzing policy impacts and predicting
individual behavior changes.
• Weaknesses: RCT can be overly simplistic. It doesn't fully account for factors like
emotions, limited information, or cognitive biases that can influence real-world decision-
making.
Evidence-Based Policy (EBP):
• Core Principle: Policy decisions are based on rigorous research and
data analysis to determine the most effective interventions for a
given problem.
• Policy Application: EBP involves gathering data on existing

policies, conducting evaluations of new proposals, and using
research findings to inform policy choices.
• Strengths: EBP promotes policies supported by concrete evidence

of their effectiveness, leading to more targeted and efficient
solutions.
• Weaknesses: Collecting and analyzing data can be time-consuming

and expensive. Additionally, not all policy goals are easily
measurable.
While RCT and EBP have distinct approaches, they can
be complementary:
• RCT can inform the design of interventions: By

understanding how individuals make choices,
policymakers can design policies that nudge people
towards desired behaviors.
• EBP can validate or challenge assumptions in RCT:

Real-world data can show how people actually
respond to policy changes, potentially revealing
limitations in the rational actor model.
Examples of Country-Specific
Policies:
• China: The government heavily influences the banking sector, directing credit
towards specific industries to achieve national economic goals.
• Germany: A strong focus on financial stability is reflected in conservative capital

adequacy requirements for banks.
• Kenya: Mobile money platforms have revolutionized access to financial services,

requiring innovative regulatory approaches.
By comparing public policies in banking across countries, we can gain insights into
how governments balance various objectives like financial stability, consumer
protection, and economic growth within their specific contexts.
Overall, public policy making and implementation in
banking is a dynamic process that requires ongoing
collaboration between governments, regulators, banks,
and other stakeholders to ensure a safe, stable, and
inclusive financial system.
Thank you
for listening!

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BANKS & PUBLIC

JUSTIN JAMES MARINAY BSBA FM

• Consumer Protection: Depositors and borrowers need safeguards. Public policy

• Regulation: This is the primary tool, encompassing capital

• Central Bank Policy: The central bank influences the banking

• Government Guarantees: Deposit insurance protects

Public policy making can be characterized as a

• Policy Formulation: Developing potential solutions, which can involve public

• Regulatory Agencies: Government agencies like the FDIC or a

• Industry Compliance: Banks need to adjust their internal policies

• Monitoring and Evaluation: Regulatory agencies monitor bank

• Balancing Interests: Finding a balance between protecting

• Globalized Market: Policymakers need to consider the

• The Dodd-Frank Wall Street Reform and Consumer Protection

• Open Banking Initiatives: Public policy can encourage open

• Data-driven policy making aims to make use of data and

• Policy Application: Policymakers design policies considering how individuals will

• Policy Application: EBP involves gathering data on existing

• Strengths: EBP promotes policies supported by concrete evidence

• Weaknesses: Collecting and analyzing data can be time-consuming

• RCT can inform the design of interventions: By

• EBP can validate or challenge assumptions in RCT:

• Germany: A strong focus on financial stability is reflected in conservative capital

• Kenya: Mobile money platforms have revolutionized access to financial services,

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