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What is a Bank Regulation?

Gerelyn Terzo
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Updated: May 17, 2024
Views: 6,312
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Bank regulation reflects a legal structure by which financial institutions must abide in a particular region. Although these rules vary based on the region in which a company is based, they are in place to provide a level of transparency and access to capital for investors. Financial fraud occurs even under the protection of bank regulation, but these laws are in place to mitigate unethical practices and promote transparent banking conduct. A severe breach in these laws might warrant an overhaul of the regulatory environment in a region's banking system.

Financial institutions can have some of the largest balance sheets, or lists of assets and liabilities, of companies in any industry. Not only do banks generate large sums of money through deposits, but financial institutions are largely responsible for lending money to other businesses, which impacts their own credit. Without proper bank regulation in a region, banks have the ability to trigger a systemic risk in a regional economy. Systemic risk represents the possibility that a bank failure will have a trickle-down affect on other sectors of the economy and lead to a broader financial failure.

Another purpose of bank regulation is to detect and prevent fraud from occurring among financial institutions. Even in the the most developed of economies, bank regulation is sometimes insufficient. In 2008, Bernard L. Madoff was arrested and eventually convicted for deceiving investors out of billions of U.S. dollars (USD) in a Ponzi scheme. Although his firm was a broker dealer and not a bank, it was regulated under the U.S. Securities and Exchange Commission, the same regulatory body that oversees banks in the United States. Madoff's fraud originally went undetected for decades, and it led to an overhaul of financial oversight in the U.S. that followed.

Banking laws also are in place to provide a level of transparency to investors. A regulatory body in a major economy requires that certain disclosures be made on a quarterly basis. A bank must disclose debt relative to equity so that customers and other members of the investment community are aware of the potential risks associated with the bank. Additionally, there are certain banking laws that require banks to maintain minimum capital ratios, which are a measure of a bank's financial stability typically in relation to its debt obligations.

Regulation in the banking industry also is in place so that regulators can keep tabs on financial institutions. Regulators gain access to data for each bank that is registered. This is a useful tool in keeping track of the various banks operating in a region and of the executives overseeing those financial institutions.

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Gerelyn Terzo
By Gerelyn Terzo
Gerelyn Terzo, a journalist with over 20 years of experience, brings her expertise to her writing. With a background in Mass Communication/Media Studies, she crafts compelling content for multiple publications, showcasing her deep understanding of various industries and her ability to effectively communicate complex topics to target audiences.

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Gerelyn Terzo
Gerelyn Terzo
Gerelyn Terzo, a journalist with over 20 years of experience, brings her expertise to her writing. With a background in...
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