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Dalvinder Singh provides an interdisciplinary analysis of the legal aspects of prudential supervision.

Lenders won’t get special treatment under the British government's proposal

This gives the reader a broader understanding of the core processes of banking supervision. By using the UK as a case study, a comparison is made with the US to illustrate the different ways of approaching the issues. The author examines the legal as well as the theoretical, economic, political and policy issues that underpin the purpose of prudential supervision, such as corporate governance, enforcement sanctions, the role of external auditors and accountability of financial regulators.

These are considered in the context of broad-policy considerations which render prudential supervision necessary, namely financial stability and depositor protection.


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The book will be of interest to academics, policymakers, regulators and practitioners, and equally will serve specialist undergraduate and postgraduate programmes in law, management and economics which focus on financial regulation. Search all titles.

Search all titles Search all collections. Your Account Logout. The first component, licensing, sets certain requirements for starting a new bank. Licensing provides the licence holders the right to own and to operate a bank. Licensing involves an evaluation of the entity's intent and the ability to meet the regulatory guidelines governing the bank's operations, financial soundness, and managerial actions.

The second component, supervision, is an extension of the licence-granting process and consists of supervision of the bank's activities by a government regulatory body usually the central bank or another independent governmental agency. Supervision ensures that the functioning of the bank complies with the regulatory guidelines and monitors for possible deviations from regulatory standards. Supervisory activities involve on-site inspection of the bank's records, operations and processes or evaluation of the reports submitted by the bank.

A national bank regulator imposes requirements on banks in order to promote the objectives of the regulator. Often, these requirements are closely tied to the level of risk exposure for a certain sector of the bank. The most important minimum requirement in banking regulation is maintaining minimum capital ratios. The regulator requires banks to publicly disclose financial and other information and depositors and other creditors are able to use this information to assess the level of risk and to make investment decisions.

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As a result of this, the bank is subject to market discipline and the regulator can also use market pricing information as an indicator of the bank's financial health. The capital requirement sets a framework on how banks must handle their capital in relation to their assets. Internationally, the Bank for International Settlements ' Basel Committee on Banking Supervision influences each country's capital requirements. In , the Committee decided to introduce a capital measurement system commonly referred to as the Basel Capital Accords.

The latest capital adequacy framework is commonly known as Basel III. The reserve requirement sets the minimum reserves each bank must hold to demand deposits and banknotes. This type of regulation has lost the role it once had, as the emphasis has moved toward capital adequacy, and in many countries there is no minimum reserve ratio. The purpose of minimum reserve ratios is liquidity rather than safety. Required reserves have at times been gold, central bank banknotes or deposits, and foreign currency. Corporate governance requirements are intended to encourage the bank to be well managed, and is an indirect way of achieving other objectives.

Banking Regulation of UK and US Financial Markets | Taylor & Francis Group

As many banks are relatively large, and with many divisions, it is important for management to maintain a close watch on all operations. Investors and clients will often hold higher management accountable for missteps, as these individuals are expected to be aware of all activities of the institution. Some of these requirements may include:. Among the most important regulations that are placed on banking institutions is the requirement for disclosure of the bank's finances. Particularly for banks that trade on the public market, in the US for example the Securities and Exchange Commission SEC requires management to prepare annual financial statements according to a financial reporting standard , have them audited, and to register or publish them.

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Often, these banks are even required to prepare more frequent financial disclosures, such as Quarterly Disclosure Statements. In addition to preparing these statements, the SEC also stipulates that directors of the bank must attest to the accuracy of such financial disclosures. Thus, included in their annual reports must be a report of management on the company's internal control over financial reporting. The internal control report must include: a statement of management's responsibility for establishing and maintaining adequate internal control over financial reporting for the company; management's assessment of the effectiveness of the company's internal control over financial reporting as of the end of the company's most recent fiscal year; a statement identifying the framework used by management to evaluate the effectiveness of the company's internal control over financial reporting; and a statement that the registered public accounting firm that audited the company's financial statements included in the annual report has issued an attestation report on management's assessment of the company's internal control over financial reporting.

Under the new rules, a company is required to file the registered public accounting firm's attestation report as part of the annual report. Furthermore, the SEC added a requirement that management evaluate any change in the company's internal control over financial reporting that occurred during a fiscal quarter that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting.

Banks may be required to obtain and maintain a current credit rating from an approved credit rating agency , and to disclose it to investors and prospective investors. Also, banks may be required to maintain a minimum credit rating. These ratings are designed to provide color for prospective clients or investors regarding the relative risk that one assumes when engaging in business with the bank.

The ratings reflect the tendencies of the bank to take on high risk endeavors, in addition to the likelihood of succeeding in such deals or initiatives. The rating agencies that banks are most strictly governed by, referred to as the "Big Three" are the Fitch Group , Standard and Poor's and Moody's.

Financial & markets regulation

These agencies hold the most influence over how banks and all public companies are viewed by those engaged in the public market. In recent years, following the Great Recession , many economists have argued that these agencies face a serious conflict of interest in their core business model. The question then is, to whom is the agency providing its service: the company or the market? Ironically, European governments have abdicated most of their regulatory authority in favor of a non-European, highly deregulated , private cartel.

Banks may be restricted from having imprudently large exposures to individual counterparties or groups of connected counterparties. Restricting disproportionate exposure to high-risk investment prevents financial institutions from placing equity holders' as well as the firm's capital at an unnecessary risk.

What's wrong with banking regulation today?

Roosevelt's under the New Deal enacted the Securities Act of and the Glass—Steagall Act GSA , setting up a pervasive regulatory scheme for the public offering of securities and generally prohibiting commercial banks from underwriting and dealing in those securities. As a result, distinct regulatory systems developed in the United States for regulating banks, on the one hand, and securities firms on the other.

Among the reasons for maintaining close regulation of banking institutions is the aforementioned concern over the global repercussions that could result from a bank's failure; the idea that these bulge bracket banks are " too big to fail ".


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The issue, as many argue, is that providing aid to crippled banks creates a situation of moral hazard. The general premise is that while the government may have prevented a financial catastrophe for the time being, they have reinforced confidence for high risk taking and provided an invisible safety net.