Answer to Question #114147 in Economics for zero

Question

Discuss the underlying rationale for regulating banks and examine the potential costs associated with regulations.

Answer 1

Bank is a financial institution and there is need for them to be regulated by the government. It subjects banks to certain conditions requirements and guidelines in order to create a transparent atmosphere between banks ,corporate institutions , and individuals . For instance they must be regulated in order to avoid charging more interest rates on loans than required therefore they are regulated these interest rates.

Bank regulation is concerned mainly with ensuring that banks are financially stable.

Regulations are based on the following key points;

1)     Financial law.

2)      Case laws.

3)     Self-regulating market prices.

Bank regulations include;

         Licensing and supervision.

Licensing gives the guidelines for starting a new bank that is the right to own and operate a bank. The licensing process is specific to the regulatory environment of the country it is located .If you meet the set guidelines then you are in a position to run and operate the bank. The bank will then be issued with the license but if it goes against the set guidelines then there are penalties imposed or its license can be revoked.

 Supervision ensures that the functioning of the bank complies with the set guidelines by the regulatory body and monitors for possible deviations from regulatory standards. Supervisory activities involve inspection of the bank's records, operations and evaluation of the reports submitted by the bank to the relevant authorities .An example of a supervisory authority is the Federal Reserve System.

       Market discipline banks are required to publicly disclose financial and other information and depositors and other creditors are able to use this information to assess the level of risk in order to make investment decisions. The bank is subject to market discipline and the regulator can also use market pricing information to show the bank's financial health.

Reserve requirement acts as shock absorbers they sets the minimum reserves each bank must hold to demand deposits and bank notes. Credit rating requirements banks are required to set an average or reasonable credit rating system .They are also required to obtain the current credit rating system and it should be approved. Credit rating is very important because it provides investors with information when they are taking a loan from the bank in order the investor to engage business with the bank.

      Regulations helps to ensure that banks have good management so that when those investments  that are too risky they will not make bad decisions.

Regulations are used to make sure that people will not withdraw their money unexpectedly. There is a deposit guarantee of insuarance scheme that ensure that even if bank fails all deposits under a certain amount will be protected.

1)     Banks will also have to hold cash to cover the unexpected withdraws.

A key part of bank regulation is to make sure that banks hold enough capital to ensure continuation of a safe and efficient tackle.

Since a competitive banking system is a healthy banking system banking regulators often monitor United States banking markets for a competitiveness and can deny bank mergers and acquisitions.

The Federal Reserve is a lender is a lender of last resort to the U.S banking system. Regulations often protects the Fed and the FDIC against losses that might occur to them when the Fed lends to banks that later fail.

Potential costs associated with Banking Regulations.

Operating costs arise from requirements that banks perform certain actions for example reporting to government agencies providing disclosures to customers and meeting certain operating standards.

There are two types of operating costs incurred for banking regulations;

1)     Ongoing

2)     Start-up refers to the one- time costs of implementing charges to conform to the requirements of the regulation. They include;

Legal expenses for interpreting the regulation advising managers and reviewing procedure forms.

Costs for designing new forms and destroying obsolete forms.

Managerial expenses for monitoring employee compliance.

Training expenses.

Labor expenses for preparing reports for preparing reports and disclosure statements and responding to customer queries.

Printing and postage expenses to provide written disclosures to customers.