Bank Regulation

Role of Banks
Creation of Money
Depositories of the public’s financial
savings
The primary allocator of credit
The Managers of the country’s payment
system (Polizatto, 1990)
 Bank regulation
Bank Regulation are intended:
To control the supply of money;
Prevent systematic instability
Meliorate concerns about efficiency and
equity of financial intermediation.
(Polizatto, 1999).
Reasons for bank regulations
Customer need a degree of comfort and
confidence that can be provided by
regulation
There is a possibility of the bank being
tempted to adopt short-tem strategies to
maximise return.
Moral hazard ( other firms are induced to
behave badly when they see bad
behaviours in others.
 Types of Regulations
Prudential regulations
Is applied to assist the customers when
facing asymmetrical information problems
where customers are not in a position to
judge the safety and soundness of banks.
The banks perform fiduciary roles for
depositors.
 Prudential Regulation
Covers an area:
Liquidity
Solvency
Risk exposure
Soundness of individual institutions and
the whole market
 Types of supervision
Conduct of business regulation
It includes information disclosure
The honesty and integrity of firms and
Their employees
The level of competence of firms
Fair business practices etc.
 Regulation
There should be new legal enforcement
rules on:
Company disclosure
Improvements in corporate governance,
Higher discipline on corporate reporting
Transparencies to proper government
authorities and the general investing public
 Types of legislation
Also, domestic savings should be
mobilised through appropriate legislation
and incentives so as to minimise the
dependence on foreign capital.
 Bank regulation
Llewllyn (2002) highlights the potential problems
of relying on a capital adequacy framework, as
the main instrument for regulating bank
activities. It was suggested that, ‘Systematic
stability and the safety and soundness of banks
need to be considered in a wider regulatory
regime framework which should include official
supervision, market disciple, incentive structure
for banks and corporate government
arrangements for banks.