Best Practice » Regulation
Regulation refers to a law, rule, or other order prescribed by authority. Financial regulations are a form of supervision which subjects financial institutions to restrictions, guidelines and certain requirements aimed at maintaining the integrity of the financial system. This may be handled by either a government or non-government organization.
Generally, the specific aims of financial regulators are:
1. To enforce applicable laws
2. To prosecute cases of market misconduct
3. To license providers of financial services
4. To protect clients, and investigate complaints
5. To sustain confidence in the financial system
Bank regulations, on the other hand, are a form of government regulations which subject banks to certain guidelines. The capital requirement sets a framework on how banks must handle their capital in relation to their assets. At an international level, the Bank for International Settlements’ Basel Committee on Banking Supervision influences each country’s capital requirements.
The most common objectives are:
1. Prudential- to reduce the level of risk bank creditors are exposed to
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, such as laundering the proceeds of crime
4. To protect banking confidentiality
5. Credit allocation- to direct credit to favored sectors
In this section we will discuss: