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Financial regulation

From Wikipedia, the free encyclopedia

Financial regulation is a broad set of policies that apply to the financial sector in most jurisdictions, justified by two main features of finance: systemic risk, which implies that the failure of financial firms involves public interest considerations; and information asymmetry , which justifies curbs on freedom of contract in selected areas of financial services, particularly those that involve retail clients and/or Principal–agent problems. An integral part of financial regulation is the supervision of designated financial firms and markets by specialized authorities such as securities commissions and bank supervisors.

In some jurisdictions, certain aspects of financial supervision are delegated to self-regulatory organizations. Financial regulation forms one of three legal categories which constitutes the content of financial law, the other two being market practices and case law.[1]

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There are all kinds of businesses in our economy. They all have one thing in common: They want to earn money so they can run their operations, provide service for their customers, and get a reasonable return for their owners. A bank is no different. So, how does a bank earn money? It lends money to members of the community who can pay back what they borrow. These borrowers are charged interest. This is the main way banks make money and stay healthy. The Fed wants to keep the economy growing so that's why they want to make sure all banks stay healthy. The healthier the bank, the healthier the economy and the communities that it serves. The way the Fed supervises and regulates banks keeps evolving. Since the financial crisis of 2008, the Fed, along with other bank supervisors, conducts stress tests on the nation's largest financial institutions making sure they have the capital they need to stay healthy in case of an economic downturn. These days the Fed and other regulators are looking at risk across multiple banks, not just at individual institutions, watching out for the stability of the entire financial system. This broader review model is called macro-prudential regulation, and it makes the financial system more resilient to systemic shocks. That's why the Fed, along with other federal and state authorities, keeps an eye on banks. These agencies make sure banks do business safely and provide fair and equitable services to their communities. How? First, the Fed makes sure all deposits are safe by requiring all banks to keep a percentage of deposits in reserve as cash in their vaults or in accounts at a federal reserve bank. Then, to make sure banks stay safe and sound, the Fed sends out examiners to inspect banks, both big and small. They check on how well a bank is run by asking basic questions. For example, Does a bank make good investments? Does it take care of people's money? Does it follow safe banking rules? The Fed gets all this information from the banks in the form of Bank Call Reports. Fed examiners review these reports first off site, and then go on site to inspect bank records and facilities. Then the Fed examiners combine all this information to measure the health of the bank. Once the information is collected, the examiners study the bank's condition by applying the Camels Rating. Each letter stands for one of the 6 components of a bank's health. Capital adequacy: Do they have enough capital to do business? Capital acts like a cushion to absorb losses that could otherwise cause a bank to fail. Asset quality: Are their loans and other investments safe and sound? Management: Do their managers know what they're doing? Earnings: Are they making a profit? Liquidity: Do they have enough funds on hand to pay back their depositors? And Sensitivity to market risk: Do they make wise decisions based on their understanding of risk? This Camels Rating gives banks a confidential assessment from 1 to 5, with 1 being the top rating and 5 being the lowest. What happens if a bank gets a poor rating? The Fed goes back, does more examinations and offers guidance to the bank in question. Sometimes the Fed and the bank have written agreements on how to rectify the situation. If banks continue to perform badly, they can become insolvent and be shut down, but the depositors are protected. The FDIC ensures depositors' money from loss up to $250,000. Another part of ensuring that banks are serving their communities? Making sure banks are lending fairly. That's where the Fed's Consumer Compliance comes in. They make sure loan applications are judged on the consumer's ability to repay the loan, not on their race, religion or neighborhood. The Fed also makes sure banks are complying with consumer protection laws by disclosing the correct interest rate on loans. This is to make sure customers don't get charged any hidden fees when they borrow money. The Fed is committed to safe and sound banking, so if consumers have a complaint about a financial institution, they can contact the Federal Reserve. The Fed will look into banking practices and investigate those complaints keeping our banking system safe and sound and the economy and all communities growing. For more information, visit the Atlanta Fed online at


In the early modern period, the Dutch were the pioneers in financial regulation.[2] The first recorded ban (regulation) on short selling was enacted by the Dutch authorities as early as 1610.

Aims of regulation

The objectives of financial regulators are usually:[3]

  • market confidence – to maintain confidence in the financial system
  • financial stability – contributing to the protection and enhancement of stability of the financial system
  • consumer protection – securing the appropriate degree of protection for consumers.
  • reduce financial crime
  • regulate foreign participation

Structure of supervision

Acts empower organizations, government or non-government, to monitor activities and enforce actions.[4] There are various setups and combinations in place for the financial regulatory structure around the globe.[5][6]

Securities market regulation

Exchange acts ensure that trading on the floor of exchanges is conducted in a proper manner. Most prominent the pricing process, execution and settlement of trades, direct and efficient trade monitoring.[7][8]

Financial regulators ensure that listed companies and market participants comply with various regulations under the trading acts. The trading acts demands that listed companies publish regular financial reports, ad hoc notifications or directors' dealings. Whereas market participants are required to publish major shareholder notifications. The objective of monitoring compliance by listed companies with their disclosure requirements is to ensure that investors have access to essential and adequate information for making an informed assessment of listed companies and their securities.[9][10][11]

Asset management supervision or investment acts ensures the frictionless operation of those vehicles.[12]

Supervision of banks and financial services providers

Banking acts lay down rules for banks which they have to observe when they are being established and when they are carrying on their business. These rules are designed to prevent unwelcome developments that might disrupt the smooth functioning of the banking system. Thus ensuring a strong and efficient banking system.[13][14]

Financial regulatory authorities

See also


  1. ^ Joanna Benjamin 'Financial Law' Oxford University Press
  2. ^ Clement, Piet; James, Harold; Van der Wee, Herman (eds.): Financial Innovation, Regulation and Crises in History. (Routledge, 2014. xiii + 176 pp. ISBN 9781848935044)
  3. ^ UK FSA statutory objectives, 2016-04-20, archived from the original on 2017-07-07, retrieved 2012-08-21
  4. ^ De Caria, Riccardo (2011-09-23), What is Financial Regulation Trying to Achieve?, Riccardo De Caria, SSRN 1994472
  5. ^ Luxembourg CSSF structure and organisation
  6. ^ German BAFin supervision organisation, archived from the original on 2012-08-04
  7. ^ Suisse finma stock exchange supervision
  8. ^ German BAFin stock exchange supervision, archived from the original on 2012-07-22
  9. ^ Finland FSA supervion of listed companies, archived from the original on 2012-10-12, retrieved 2012-08-05
  10. ^ Saudi Arabia market supervision, archived from the original on 2013-05-18, retrieved 2012-08-05
  11. ^ Borsa Italiana listed stock supervision[permanent dead link]
  12. ^ US SEC Division of Investment Management
  13. ^ Reserve Bank of India, Department of Banking Supervision
  14. ^ Luxembourg CSSF Supervision of Banks, archived from the original on 2016-03-05, retrieved 2012-08-05

Further reading

External links

This page was last edited on 12 November 2023, at 22:14
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