Question

question 3 (10 in a panel discussing the need, the role and the importance of regulations in a banking r role in the panel to justify to the audience the ne different types of regulations, and ed for regulations, to highlight the to highlight their uses. Required: a) What are the primary reasons behind the need for regulations? b) Name the different types of regulations and explain the concerns tackled by each? c) What are the limitations of regulations?

Answer 1

Answers:

1. Reasons behind the need for regulation

Following are the reasons for regulation:

• Financial stability: instability in the banking & financial system can have negative impact on other domestic & international financial sectors. Hence the enforcement of these regulations can ensure financial stability.
• For protecting the federal deposit insurance fund: Since Jan. 1, 1934, the Federal Deposit Insurance Corp. has insured the deposits held in U.S. banks up to a defined amount (currently $250,000 per depositor per bank). The federal government serves as a backstop to the insurance fund.

In exchange for this insurance guarantee, banks pay an insurance premium and are also subject to safety and soundness examinations by state and/or federal regulators. Oversight of individual financial institutions by banking regulators is called micro-prudential supervision.

While the insurance fund protects depositors, it does not protect shareholders of banks. When inappropriate risks are taken and prove unsuccessful, banks will fail and be liquidated.

• For consumer protection: the banking regulations help in protecting the customers & promoting fair & equal access to credit. Banks conduct financial regulations with consumers directly & indirectly. These regulations can enforce consumer protection by reviewing the lending & deposit operations & investigating consumer complaints.
• Competition: these regulators help in actively monitoring the US banking markets for the purpose of competition & can deny mergers or acquisitions that can have a negative impact on the availability & pricing of banking services.

2. Following are some of the banking statutes:

• The national bank act of 1863 that created the basic framework for US banking system & chartering of national banks.
• The Federal Reserve act enacted in 1914 created the Federal Reserve act.
• The federal deposit insurance act created to act as the receiver of failed banks.
• The bank holding company act of 1956 requires the Federal Reserve approval for a company to acquire the bank. It also requires approval to acquire interest in additional banks & certain non bank companies.
• Bank secrecy act 1970 requires the banks to create an internal control system for preventing money laundering & terrorist financing.
• The Gramm-leach-Bliley act enacted to separate investment banks from commercial banks & authorised creation of FHC’s.
• The Dodd frank act of 2010 was enacted with which numerous changes were made to the US bank regulatory framework.

3. Limitations of banking regulation:

Following are the drawbacks of banking regulation:

1. Less Profit

Unnecessary control and heavy regulation may restrict banks to perform their tasks freely. So, banks cannot earn adequate profit.

2. Failure

Banking regulation may control unnecessary banking activities but it cannot prevent bank failure.

3. Costly And Time Consuming

Bank regulation is very costly and time consuming process.