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Bank regulations are implemented by the government. They are subject to specific guidelines, restrictions and requirements. These regulations are meant to preserve and promote the best practice of transparency in transactions carried out between banks and their customers (i.e. corporations and individuals).

The fact remains that the global and national economy of individual countries depends on the banking industry. This is why it is important that regulatory agencies are empowered with regulations and standards. This means that best practices surrounding standardization of procedures must be controlled. Though there have been times where failure to endure compliance has taken economies and banking systems to the verge of collapse.

A bank with failed compliance with banking regulations is crippled and will be close to bankruptcy. Though it may not entirely become penniless, the bank’s infrastructure will totally collapse. This will subsequently create a rippling effect throughout the country’s economy.

Instruments of Banking Regulations

1.  Capital Requirement: This instrument defines the framework with which the bank must tackle assets and capital investment. The Bank for International Settlements’ Basel Committee on Banking Supervision plays an important part at an international level. It was in 1988 that this committee took the initiative to use the capital investment system for banking. The system has since been known as “the Basel Capital Accords”. The most recent framework for best practices in capital adequacy framework is well-known as Basel III.

2.  Reserve Requirement: This instrument defines the limit of reserves (banknotes and deposits) any bank can hold at any given time. Though this regulation became less important because in recent times, emphasis has shifted to capital adequacy. In the past, the concept of reserve requirements has controlled demand and stock of bank deposits and banknotes.

3.  Corporate Governance: This instrument is meant to encourage banks to improve management through compliance with best practices. Three of these improvements include:

• To become a corporate enterprise
• To become locally incorporated
• There must be directors to ensure governance.

4.  Disclosure and Financial Reporting: Disclosing the bank’s finances is one of the most significant best practices. Banks that buy and sell in public market are particularly expected to present an annual or quarterly financial statement. This best practice has been implemented by the Securities and Exchange Commission (SEC). The Sarbanes-Oxley Act of 2002 was established to outline details that must be part of the financial report.

5.  Credit Rating System: Banks are expected to obtain and implement the current credit rating and inform investors about it. This can be obtained from any approved credit rating agency.  Besides, some banks are expected to maintain a minimum credit rating.

Conclusively, compliance with bank regulations is a best practice that impacts the economy of individual countries. A failed system subsequently leads to a global impact, because investors are indirectly affected.

Further reading: Corporate Governance | Audit | Performance Improvement