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{{Short description|Policy framework for credit institutions}}
{{More citations needed|date=September 2008}}
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'''Bank regulation''' is a form of [[government]] [[regulation]] which subjects [[bank]]s to certain requirements, restrictions and guidelines, designed to create [[Transparency (market)|market transparency]] between banking institutions and the individuals and [[corporation]]s with whom they conduct business, among other things. As regulation focusing on key actors in the financial markets, it forms one of the three components of [[financial law]], the other two being case law and self-regulating market practices.<ref>Joanna Benjamin, ''Financial Law'' (2007, Oxford University Press), 7</ref> ▼
'''Banking regulation and supervision''' refers to a form of [[financial regulation]] which subjects [[bank]]s to certain requirements, restrictions and guidelines, enforced by a [[financial regulatory authority]] generally referred to as '''banking supervisor''', with semantic variations across jurisdictions. By and large, banking regulation and supervision aims at ensuring that banks are safe and sound and at fostering [[Transparency (market)|market transparency]] between banks and the individuals and [[corporation]]s with whom they conduct business.
Given the interconnectedness of the banking industry and the reliance that the national (and global) [[economy]] hold on banks, it is important for regulatory agencies to maintain control over the standardized practices of these institutions. Another relevant example for the interconnectedness is that the law of financial industries or financial law focuses on the financial (banking), capital, and insurance markets.<ref>{{Cite journal|last=Vértesy|first=László|date=2007|title=The Place and Theory of Banking Law - Or Arising of a New Branch of Law: Law of Financial Industries|url=https://papers.ssrn.com/abstract=3198092|journal=Collega|language=en|location=|volume=Vol 2-3. XI|pages=|via=}}</ref> Supporters of such regulation often base their arguments on the "[[too big to fail]]" notion. This holds that many financial institutions (particularly [[investment banking|investment banks]] with a [[commercial bank|commercial]] arm) hold too much control over the economy to fail without enormous consequences. This is the premise for government [[bailout]]s, in which government financial assistance is provided to banks or other financial institutions who appear to be on the brink of collapse. The belief is that without this aid, the crippled banks would not only become bankrupt, but would create rippling effects throughout the economy leading to [[Systemic banking crisis#Systemic banking crises|systemic failure]]. Compliance with bank regulations is verified by personnel known as [[bank examiner]]s.▼
Its main component is '''prudential''' regulation and supervision whose aim is to ensure that banks are viable and resilient ("safe and sound") so as to reduce the likelihood and impact of bank failures that may trigger [[systemic risk]]. Prudential regulation and supervision requires banks to control risks and hold adequate capital as defined by [[capital requirements]], liquidity requirements, the imposition of concentration risk (or large exposures) limits, and related reporting and public disclosure requirements and supervisory controls and processes.<ref>{{Cite book|title=The Law of Financial Services Groups|last=Morris|first=CHR|publisher=Oxford University Press|year=2019|isbn=978-0-19-884465-5|location=|pages=57}}</ref> Other components include supervision aimed at enforcing [[consumer protection]], sometimes also referred to as '''conduct-of-business''' (or simply "conduct") regulation and supervision of banks, and [[anti-money laundering]] supervision that aims to ensure banks implement the applicable [[AML/CFT]] framework. [[Deposit insurance]] and '''resolution authority''' are also parts of the banking regulatory and supervisory framework. Bank (prudential) supervision is a form of "microprudential" policy to the extent it applies to individual credit institutions, as opposed to [[macroprudential regulation]] whose intent is to consider the [[financial system]] as a whole.
==Semantics==
Banking supervision and regulation are closely intertwined, to the extent that in some jurisdictions (particularly the United States) the words "regulator" and "supervisor" are often used interchangeably in its context. Policy practice, however, makes a distinction between the setting of rules that apply to banks (regulation) and the oversight of their safety and soundness (prudential supervision), since the latter often entails a discretionary component or "supervisory judgment". The global framework for banking regulation and supervision, prepared by the [[Basel Committee on Banking Supervision]], makes a distinction between three "pillars", namely regulation (Pillar 1), supervisory discretion (Pillar 2), and [[market discipline]] enabled by appropriate disclosure requirements (Pillar 3).{{cn|date=November 2023}}
Bank licensing, which sets certain requirements for starting a new bank, is closely connected with supervision and usually performed by the same public authority. Licensing provides the licence holders the right to own and to operate a bank. The licensing process is specific to the regulatory environment of the jurisdiction where the bank is located. 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 supervisor monitors licensed banks for compliance with the requirements and responds to breaches of the requirements by obtaining undertakings, giving directions, imposing penalties or (ultimately) revoking the bank's license. Bank supervision may be viewed as an extension of the licence-granting process. Supervisory activities involve on-site inspection of the bank's records, operations and processes or evaluation of the reports submitted by the bank.<ref>Richard Apostolik, Christopher Donohue, and Peter Went (2009), ''Foundations of Banking Risk''. Hoboken, New Jersey: John Wiley and Sons, p. 62-63.</ref> Arguably the most important requirement in bank regulation that supervisors must enforce is maintaining [[capital requirement]]s.<ref>[http://www.investopedia.com/terms/c/capitalrequirement.asp#axzz1VlEWDmPf Investopedia:Capital Requirement]</ref>
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==History==
Banking regulation and supervision has emerged mostly in the 19th century and especially the 20th century, even though embryonic forms can be traced back to earlier periods. Landmark developments include the inception of U.S. federal banking supervision with the establishment of the [[Office of the Comptroller of the Currency]] in 1862; the creation of the U.S. [[Federal Deposit Insurance Corporation]] as the first major deposit guarantee and bank resolution authority in 1934; the creation of the [[Belgian Banking Commission]], Europe's first modern banking supervisor in 1935; the start of formal banking supervision by the [[Bank of England]] in 1974, marking the eventual generalization of the practice among jurisdictions with large financial sectors; and the emergence of supranational banking supervision, first by the [[Eastern Caribbean Central Bank]] in 1983 and the [[Banking Commission of the West African Monetary Union]] in 1990 and then, at a much larger scale, with the start of [[European Banking Supervision]] in 2014.
==Objectives==
▲Given the interconnectedness of the [[banking industry]] and the reliance that the national (and global) [[economy]] hold on banks, it is important for regulatory agencies to maintain control over the standardized practices of these institutions. Another relevant example for the interconnectedness is that the law of financial industries or financial law focuses on the financial (banking), capital, and insurance markets.<ref>{{Cite journal|last=
The objectives of bank regulation, and the emphasis, vary between jurisdictions. The most common objectives are:
* prudential—to reduce the level of risk to which bank creditors are exposed (i.e. to protect depositors)<ref>{{cite web|last=Federal Deposit Insurance Corporation|title=Risk Management Manual of Exam Policies, Section 1.1|url=http://www.fdic.gov/regulations/safety/manual/section1-1.html#rationale|
* [[systemic risk]] reduction—to reduce the risk of disruption resulting from adverse trading conditions for banks causing multiple or major bank failures<ref>{{cite web|last=Section 115, Dodd–Frank Wall Street Reform and Consumer Protection Act|title=Pub. L. 111-203|url=http://www.gpo.gov/fdsys/pkg/BILLS-111hr4173enr/pdf/BILLS-111hr4173enr.pdf|
* to avoid misuse of banks—to reduce the risk of banks being used for criminal purposes, e.g. [[Money laundering|laundering the proceeds of crime]]
* to protect [[bank secrecy|banking confidentiality]]
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* it may also include rules about treating customers fairly and having [[corporate social responsibility]].
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|bulge bracket banks]] are "[[too big to fail]]".<ref>{{Cite book|url=https://books.google.
==Instruments and requirements==
{{Specific Banking Frameworks Sidebar}}
===Capital requirement===
{{Main|Capital requirement}}
The capital requirement sets a framework on how banks must handle their [[Capital (economics)|capital]] in relation to their [[asset]]s. Internationally, the [[Bank for International Settlements]]' [[Basel Committee on Banking Supervision]] influences each country's capital requirements. In 1988, 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]].<ref>{{cite web| url= http://www.bis.org/publ/bcbs128b.pdf |page= 86 |title= Basel II Comprehensive version part 2: The First Pillar – Minimum Capital Requirements |date=November 2005
===Reserve requirement===
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===Financial reporting and disclosure requirements===
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|Securities and Exchange Commission (SEC)]] requires management to prepare annual financial statements according to a [[International Financial Reporting Standards|financial reporting standard]], have them audited, and to register or publish them. Often, these banks are even required to prepare more frequent financial disclosures, such as [[Form 10-Q|Quarterly Disclosure Statements]]. The [[Sarbanes–Oxley Act]] of 2002 outlines in detail the exact structure of the reports that the SEC requires.<ref>{{Cite web|last=Oxley|first=Michael G.|date=2002-07-30|title=H.R.3763 - 107th Congress (2001-2002): Sarbanes-Oxley Act of 2002|url=https://www.congress.gov/bill/107th-congress/house-bill/3763|access-date=2021-03-06|website=www.congress.gov}}</ref>
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 [[accountant|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 year|fiscal quarter]] that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting.<ref>{{cite web|last=Section 404, Management's Report on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports|title=Final Rule|url=https://www.sec.gov/rules/final/33-8238.htm|
===Credit rating requirement===
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 (credit rating agencies)|"Big Three"]] are the [[Fitch Group]], [[Standard and Poor's]] and [[Moody's]]. 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 [[Late-2000s financial crisis|Great Recession]], many economists have argued that these agencies face a serious conflict of interest in their core business model.<ref>{{cite news|last=The Guardian|title=Ratings agencies suffer 'conflict of interest', says former Moody's bos|url=https://www.theguardian.com/business/2011/aug/22/ratings-agencies-conflict-of-interest|
European [[financial economics]] experts – notably the [[World Pensions & Investments Forum|World Pensions Council (WPC)]] have argued that European powers such as France and Germany pushed dogmatically and naively for the adoption of the "[[Basel II]] recommendations", adopted in 2005, transposed in European Union law through the [[Capital Requirements Directive]] (CRD). In essence, they forced European banks, and, more importantly, the [[European Central Bank]] itself, to rely more than ever on the standardized assessments of "credit risk" marketed aggressively by two US credit rating agencies – Moody's and S&P, thus using [[public policy]] and ultimately taxpayers' money to strengthen anti-competitive duopolistic practices akin to [[exclusive dealing]]. Ironically, European governments have abdicated most of their regulatory authority in favor of a non-European, highly [[deregulated]], private [[cartel]].<ref>M. Nicolas J. Firzli, "A Critique of the Basel Committee on Banking Supervision" ''Revue Analyse Financière'', Nov. 10 2011 & Q2 2012</ref>
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In the US in response to the [[Great depression]] of the 1930s, [[President of the United States|President]] [[Franklin D. Roosevelt|Franklin D. Roosevelt's]] under the [[New Deal]] enacted the [[Securities Act of 1933]] 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. GSA prohibited affiliations between banks (which means bank-chartered depository institutions, that is, financial institutions that hold federally insured consumer deposits) and securities firms (which are commonly referred to as [[investment banking|“investment banks”]] even though they are not technically banks and do not hold federally insured consumer deposits); further restrictions on bank affiliations with non-banking firms were enacted in [[Bank Holding Company Act]] of 1956 (BHCA) and its subsequent amendments, eliminating the possibility that companies owning banks would be permitted to take ownership or controlling interest in insurance companies, manufacturing companies, real estate companies, securities firms, or any other non-banking company. As a result, distinct regulatory systems developed in the United States for regulating banks, on the one hand, and securities firms on the other.<ref>Carpenter, David H. and M. Maureen Murphy. "The “Volcker Rule”: Proposals to Limit “Speculative” Proprietary Trading by Banks". Congressional Research Service, 2010.</ref>
==Bank supervisors==
{{See also|List of financial regulatory authorities by jurisdiction}}
▲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|bulge bracket banks]] are "[[too big to fail]]".<ref>{{Cite book|url=https://books.google.de/books?hl=de&lr=&id=n_KG3ftI4_sC&oi=fnd&pg=PR5&dq=bank+regulation++rochet&ots=Sq1l5aBWiR&sig=WiCDjoV8ijX59XJm3LG6GrmT4j0#v=onepage&q=bank%20regulation%20%20rochet&f=false|title=Why Are There So Many Banking Crises?: The Politics and Policy of Bank Regulation|last=Rochet|first=Jean-Charles|date=2009|publisher=Princeton University Press|year=|isbn=9781400828319|location=|pages=|language=en}}</ref> The objective of federal agencies is to avoid situations in which the government must decide whether to support a struggling bank or to let it fail. 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. This can lead to a vicious cycle, wherein banks take risks, fail, receive a bailout, and then continue to take risks once again.
Most jurisdictions designate one public authority as their national prudential supervisor of banks: e.g. the [[National Administration of Financial Regulation]] in [[China]], the [[Financial Services Agency]] in [[Japan]], or the [[Prudential Regulation Authority (United Kingdom)|Prudential Regulation Authority]] in the [[United Kingdom]]. The [[European Union]] and [[United States]] have more complex setups in which multiple organizations have authority over bank supervision.
==
The [[European Banking Authority]] plays a key role in EU banking regulation, but is not a banking supervisor. In the [[banking union]] (which includes the [[euro area]] as well as countries that join on a voluntary basis, lately [[Bulgaria]]), the [[European Central Bank]], through its supervisory arm also known as ECB Banking Supervision, is the hub of banking supervision and works jointly with national bank supervisors, often referred to in that context as "national competent authorities" (NCAs). ECB Banking Supervision and the NCAs together form [[European Banking Supervision]], also known as the Single Supervisory Mechanism. Countries outside the banking union rely on their respective national banking supervisors.
===United States===
* Switzerland: [[List of Swiss financial market legislation]] and [[Swiss Financial Market Supervisory Authority]]▼
* United Kingdom: [[United Kingdom banking law]]▼
▲* United States: [[Bank regulation in the United States]]
The United States relies on state-level bank supervisors (or "state regulators", e.g. the [[New York State Department of Financial Services]]), and at the federal level on a number of agencies involved in the prudential supervision of credit institutions: for banks, the [[Federal Reserve]], [[Office of the Comptroller of the Currency]], and [[Federal Deposit Insurance Corporation]]; and for other credit institutions, the [[National Credit Union Administration]] and [[Federal Housing Finance Agency]].
==See also==
{{Portal|Banks}}
▲*
* [[Financial regulation]]▼
* [[Financial repression]]
* [[
* [[Moral hazard]]
* [[Too big to fail]]
▲** [[ISO 9362]] – Standard format of Business Identifier Codes to identify Banks also known as [[Bank Identifier Code|BIC]]
==References==
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*[http://www.arabianbusiness.com/banking_finance/ Middle East Banking & Finance News] – ''ArabianBusiness.com''
*[http://www.bankinginsurancesecurities.com/ Banking & Finance News] – ''BankingInsuranceSecurities.com''
*[https://bankonlineusa.com/2021/08/30/the-rise-of-online-banking-features-a-comprehensive-guide/ Online Banking Features and Benefits] - ''Detailed overview of various features and benefits of online banking''
===Reserve requirements===
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=== Agenda from ISO ===
* [http://www.iso.org/iso/en/CatalogueDetailPage.CatalogueDetail?CSNUMBER=33285&ICS1=3&ICS2=60&ICS3= ISO/TR 17944]
{{Law}}
{{Portal bar|Business and economics|Law}}
{{Authority control}}
{{DEFAULTSORT:Bank Regulation}}
[[Category:Bank regulation| ]]
[[Category:Banking|Regulation]]
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