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Crizette Garcia Finance 2
2-BF2 10-11:30AM Maam Elizabeth Banan
Chapter 7
Bank Regulation and Supervision
Regulation relates to the setting of specific rules of behavior
that firms have to abide by.
Monitoring process whereby the relevant authority assesses
financial firms to evaluate
whether these rules are being employed.
Supervision the general oversight of the behavior of financial
firms.
Free Banking argues that the financial sector would work better
without regulation,
supervision and central banking.
Bank Cotagion the interconnection of banks.
According to Llewellyn (1999), the main reasons for financial
sector regulation are:
To ensure systematic stability; To provide smaller, retail
clients with protection; and To protect consumers against
monopolistic exploitation.
3 different types of bank regulation:
1. Systematic regulation;2. Prudential regulation;3. Conduct of
business regulation.
Systematic Regulationregulation concerned mainly with the safety
and soundness of the
financial system.
Government Safety Netall public policy regulation designed to
minimize the risk of banks
runs.
Deposit Insurance The lender-of-the-last-resort (LOLR)
Prudential regulationmainly concerned with consumer protection.
It relates to the
monitoring and supervision of financial institutions, with
particular attention paid to asset
quality and capital adequacy.
Agency Capturethe regulatory process can be captured by
producers and used in their own
interest rather than in the interests of consumers.
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Causes of Regulatory Reform:
Internationalization Globalization Financial Innovation
Hedge Funds Are private investment funds that trade and invest
in various assets such as
securities, commodities, currency and derivatives on behalf of
their clients.
UK Financial Services Authority (FSA) an independent
non-governmental body, a limited
company financed by levies on the industry, accountable to
Treasury ministers and to
Parliament.
FSA Objectives:
To maintain confidence in the UK financial system; To promote
public understanding of the financial system; To secure an
appropriate degree of protection for consumers while recognizing
their
own responsibilities;
To reduce the scope for financial crime.FSA Main REGULATORY
Responsibilities:
Lloyds insurance market The code of market product Unfair terms
in consumer contracts Recognized overseas investment exchanges
Regulation of certain aspects of mortgage lending Supervision of
credit unions
FSA Main Responsibilities
Authorization Setting standards Supervision Enforcements
Financial Ombudsman Service and Financial Services Compensation
Scheme
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Main arguments about the creation of a single
super-regulator:
The blurring of distinctions bet. Services offered by different
institutions; The increasing presence of financial conglomerates;
and The possibility of exploiting economies of scale in regulation
and monitoring.
The elements of capital:
Tier 1:
1. Ordinary paid-up share/common stock2. Disclosed reserves
Tier 2:
1. Undisclosed reserves2. Asset revaluation reserves3. General
provisions/general loan loss reserves4. Hybrid capital
instruments5. Subordinated term debt
Basle II Main Pillars:
Pillar 1: deals with the quantification of new capital charges
and relies heavily on banks
internal risk-weighting models and on external rating
agencies;
Pillar 2: defines the supervisory review process; and
Pillar 3: focuses on market discipline, imposing greater
disclosure standards on banks in order
to increase transparency.
