Bank Regulations and Supervision Bank regulations are a form of government regulations which subject banks to certain requirements, restrictions and guidelines, aiming to uphold the soundness and integrity of the financial system (Answers.com, Undated). It is considered healthy that governments “get in the way” of banks and Financial Institutions as a measure of financial control being both directly or indirectly through regulators for the best interest of the country’s economy and customer protection. Banking regulations can vary widely between countries but they all address similar policy goals and requirements. The following are the basic banking requirements for Financial Institution to operate in a healthy environment: The Reserve Requirements determines the amount of funds that a bank must hold in reserve against deposits made by its customers. The reserve requirement is one of the 3 main tools of the monetary policy together with ‘Open Market Operations’ (the buying and selling of government securities in the open market) and the ‘Discount Rate’ (the interest rate charged by a central bank on loans to its member banks).
Capital Requirements determines how much liquidity is required to be held for a certain level of assets through regulatory agencies. These requirements are put into place to ensure that these institutions are not participating or holding investments that increase the risk of default and that they have enough capital to sustain operating losses while still honouring withdrawals (Investopedia, Undated). Internationally, the Bank for International Settlements' Basel Committee on Banking Supervision influences each country's capital requirements. The latest capital adequacy framework is commonly known as Basel II.
The Lending Limit is the maximum amount a bank can lend to a single borrower which is a measure for risk reduction.
The Deposit Insurance provides three important benefits to the economy: It assures small depositors that their deposits are safe, and that their deposits will be immediately available to them if their bank fails. It maintains public confidence in the banking system, thus fostering economic stability. Without the confidence of the public, banks could not lend money, but would have to keep depositors' money on hand in cash at all times. It supports the banking structure. Deposit insurance makes it possible for a country to have a system of both large and small banks; if there were no deposit insurance, the banking industry would probably be concentrated in the hands of a very few large banks.
The Bank Secrecy Act requires financial institutions to assist government agencies to detect and prevent money laundering and to report suspicious activity that might signify money laundering, tax evasion, or other criminal activities. (Answers.com, Undated)
All these requirements and regulations if well administered and supervised will help in the control and in the sustainability of banking operations. Other general banking rules and regulations include: Bank supervision rules. Basic rules for internal control of financial institutions. Guidelines for detection and prevention of illegal capital movement. Guidelines for credit granting to individuals or corporate entities, linked to ownership or management of financial institutions. Guidelines for the regulations of bank supervision with external and internal auditors of financial institutions. Minimum plan of accounts and information system for bank supervision. Regulations on capital adequacy regulation. Regulations on risk accumulation. Rules for asset rating and provision policy. Rules for the granting, control and repayment of financings. Rules to determine the minimum liquidity ratio. Rules to establish minimum capital to start operations etc...
These rules and regulations in essence are essential to safeguard and ensure soundness and stability in Financial Institutions.
Bank Regulations and Risk Management Bank regulations help Financial Institutions better manage their risks and daily operations. Salient points in regulations vis-à-vis risk management are the following: Good risk management is essential for a sound, vibrant banking system and is important to bank regulators. Good regulations are there to support the bank’s objectives and should not be considered as an annoyance or a compliance exercise for risk managers. Aligning regulations with good risk management practices enables Financial Institutions accomplish their objectives with lower compliance burden. Basel II is built on a foundation of modern risk management practices and is a good example of interplay between risk management and regulations. Basel II contribute towards the development of better risk management practices in order for banks to gain the required comfort in ensuring that the capital levels under Basel II are in fact adequate for the risks. The interaction between regulation and risk management helps both sides do a better job.
Banking Supervision Banking supervision by governmental or regulatory bodies ensures transparency and compliance with banking regulations and policies thus nurturing customers’ confidence which is the key for survival for any Financial Institution. Banking supervision should not be considered as a means of governmental intrusion but as an assurance of good banking practice to its customers as opposed to unregulated institutions. It is of common understanding that governmental intervention is essential for the protection of both the customers and the Financial Institutions. The main objective of any Financial Institution is to control and reduce risk such as: Capital Risk which is the risk of insolvency or ultimate failure Credit Risk - assets losing value Crime Risk – fraud or misappropriation Compliance Risk – violations of rules and regulations Exchange Risk – foreign currency dealings exchange risks Interest Rate Risk – risk borne by an interest-bearing asset Legal Risk – legal related risks Liquidity Risk – not having enough cash to meet obligations & withdrawals Market Risk – decrease in investment’s value Operational Risk – discontinued service such as system failures Price Risk – decline in price for a security or portfolio Strategic Risk – variation in earnings due to adverse business decisions
Lack of supervision may give rise to bad banking practice, uncertainty and bad decision making thus putting investments and investors at risk. The main goal of Financial Institutions is maximising shareholder’s wealth and without adequate supervision, management may be tempted to take additional risks in exchange of a better return on investment since the return on investment is proportional to the risk factor. | 
