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  • Bank Regulatory Environment: Why R Banks Regulated? Why Banks Fail? What Bank Regulators Do?

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    Muhammad Ashfaq
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    Banks are regulated to reduce systemic risk, guard against deposit insurance losses, and achieve social goals. Banks can fail due to credit, interest rate, and foreign exchange risks. When banks take on riskier loans and their loan portfolios grow without sufficient capital, it increases the chances of loan defaults and bank failure. Bank runs can also cause failure when depositors fear for the safety of their funds and make large withdrawals, creating a contagious effect. The State Bank of Pakistan regulates commercial banks and other financial institutions to achieve these objectives.

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    Banks are regulated to reduce systemic risk, guard against deposit insurance losses, and achieve social goals. Banks can fail due to credit, interest rate, and foreign exchange risks. When banks take on riskier loans and their loan portfolios grow without sufficient capital, it increases the chances of loan defaults and bank failure. Bank runs can also cause failure when depositors fear for the safety of their funds and make large withdrawals, creating a contagious effect. The State Bank of Pakistan regulates commercial banks and other financial institutions to achieve these objectives.

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    2 views8 pages

    Bank Regulatory Environment: Why R Banks Regulated? Why Banks Fail? What Bank Regulators Do?

    Uploaded by

    Muhammad Ashfaq
    Banks are regulated to reduce systemic risk, guard against deposit insurance losses, and achieve social goals. Banks can fail due to credit, interest rate, and foreign exchange risks. When banks take on riskier loans and their loan portfolios grow without sufficient capital, it increases the chances of loan defaults and bank failure. Bank runs can also cause failure when depositors fear for the safety of their funds and make large withdrawals, creating a contagious effect. The State Bank of Pakistan regulates commercial banks and other financial institutions to achieve these objectives.

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    of 8

    Bank Regulatory Environment

    Why r banks regulated? Why banks fail? What bank regulators do?

    Why r banks regulated?


    To reduce the risk of large scale failures
    Disruption of the economy & fin. markets Systemic risk to global market - contagious affect

    To Guard against deposit insurance losses


    Govt. surety to depositors for pubic interest Tax payers payment to depositors

    To achieve expected Social goals


    Allocation of credit for econ. growth Meeting the needs of customers and community

    Why banks fail?


    Three major reasons of bank failures
    Credit risk (high fin leverage) Interest rate risk Foreign exchange risk

    Bank growth and failure Bank runs

    Credit risk
    All stakeholders want the bank to grow in assets, loans and profits. Some bank loans can go bad overtime. Bank has excess concentration of loans Loans r not backed by collateral Loan to value ratio is 100%

    Bank growth and failure


    Bank growth and increase in loan portfolio Increased loan portfolio Riskier loans Riskier loans more chances of loan default Higher loan default lower bank capitalization bank failure

    Bank Runs
    Fear for safety and security of funds Large withdrawals Bank with limited cash Herd behavior of depositors to obtain limited cash in the bank Silent runs larger withdrawals from major creditors (banks, invest. Cos) Runs of one bank may spark runs on other bank contagious effect

    Banking in Pak (Money Market Str.)


    SBP - Regulatory authority Commercial Banks Exchange/Foreign Banks Cooperative Banks Cooperative Credit Societies Saving Banks Discount Houses Micro-finance Institutions SME Banks

    Functions of SBP
    Bank of issue Bankers to Govt. Advisor and agent to Govt. Bankers Bank Controller of credit and Bank rate Exchange control

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