Banking supervision and regulation Flashcards
name 4 Areas of banking regulation
1) Regulation of entry into the banking market
2) Regulation of banks’ activities
3) Capital requirements
4) Deposit guarantees
what is the Regulation of entry into the banking market
- Restrictions on bank ownership
* Licenses
what are Regulation of banks’ activities
- Can banks trade securities on the open market
- Can they provide insurance services
- Can they finance real estate
what are Capital requirements
- Minimum reserve ratio
* Regulation of initial and in-business capital
whAT ARE THE Deposit guarantees
- What requirements must banks meet to be covered by the deposit guarantee
- What part of the assets is covered by the fund
HOW THE Banking supervision WORKS
1) Loan classification – when the loan is uncollectible
1) Securitisation – replacement of receivables in the form of negotiable debt with a negotiable security
2) Competitive pressure – competition through the quality of services
3) Oligopolistic structures
4) Too big to fall
Regulation of international banking
1) Basel Committee
EU regulations
Offshore Banking
basel i AND BASEL ii
2) Basel I
• 1988 - First Basel Agreement
• Minimum capital requirements
• International division of responsibilities for bank cooperation
3) Basel II
• 2004 - Second Basel Agreement
• Consideration of risk differentiation in capital requirements
• Refinement of risk quantification – operational, market, credit
• Limitation of Regulatory Arbitrage
Basel III
• 2012 – Third Basel Agreement
• Response to the financial crisis
• Countercyclical reserve of capital – reduction of pro-cyclicality in lending
• Stressed value at risk – banks tested for resilience to the crisis
• Tightening capital requirements
o Pillar I – Equity and balance sheet reserves
o Pillar II – instruments listed in the agreement, e.g. off-balance sheet capital
o Pillar III – increased capital requirements for banks trading in derivatives
EU regulations
1) European Banking Authority – created in 2011 (in response to the crisis)
2) Supervises European banks through, for example, resilience tests
3) In the event of a threat of bankruptcy, the Authority’s rules take precedence over national law.
4) Common reporting framework to facilitate supervision
Offshore Banking
1) Onshore – national banks operating under the jurisdiction of the country of origin
2) Offshore – domestic banks operating outside their own country
3) Onshore offshore – domestic banks operating in a given country but being outside its jurisdiction, e.g. international banking facilities
International banking and the globalisation of financial markets
1) Securitisation – replacement of receivables in the form of negotiable debt with a negotiable security
2) Competitive pressure – competition through the quality of services
3) Oligopolistic structures
4) Too big to fall
Difficulties in regulating international banking
1) Offshore Banking • No deposit insurance • No reserve requirement • Lender of last resort??? 2) National legislation 3) Emerging Markets 4) International activities of non-banking institutions
WHAT ARE Motives for Bank Internationalisation
- Risk diversification, internationalisation in order to diversify a banks risk, parallel to increase their profits
- Strategic asset seeking, entering a financial centre in order to access a currency or knowledge,
- Market seeking, expanding operations on an international basis to access new clients, and
- Follow the client or defensive expansion, to protect existing bank client relations
- market seeking banks as banks internationalising in order to serve new clients outside their home market.
- Deregulatory measures during the previous decades decreased the differences in laws and regulations faced by banks entering foreign markets
The role of international banking regulation ARE
- Ensuring safe and effective payment settlements
- Risk minimalization
- Ensuring international financial system stability
