Finance Banking

Banking And Supervision

Published at 07/14/2011 22:24:13

Banking and the Supervisory Bodies over Them

Since time immemorial, banks have played an important role in the way individuals and corporations manage and access money, but overtime, there have been a few cases of mismanagement and malpractices which have led to major losses and even the liquidation of banks. These prompted various banking associations and governments to establish various regulatory authorities and policies, as a means to curb malpractice in banking. We shall therefore endeavor to look at the measures taken by the major regulators, in order to safeguard the interests of both banks and their stakeholders.  

Banks generally operate by accepting deposits, and lending out these monies for the sake of earning an interest. Because of this important function, they do tend to be highly regulated. These regulations can vary from one region to the next, but they tend to have some common features which we shall look at. The measures regulators will take include:

· Prudential risk management: This covers the risk that bank creditors (depositors) are exposed to. According to Basle 2 standards, supervisors should regularly perform an assessment of a bank’s liquidity risk management framework and liquidity position. This will help to ensure banks have the adequate levels of liquidity to survive any stress levels as a result of strenuous market conditions.

· Credit allocation: Regulators will sometimes intervene, to direct credit to some favored sectors.

· Manage misuse of bank facilities: They will also take the necessary measures to safeguard banks from misuse, especially to do with money laundering activities.

· Systemic risk management: Systemic risk refers to the risk of disruptions due to adverse market conditions, which can sometimes cause bank failures.

Banks are also subject to capital adequacy requirements, which stipulate how they should manage their capital, i.e. the balance between capital reserves and liabilities. Banks are also required to disclose their financial records publicly, often on a quarterly basis, for the purposes educating depositors and other creditors on the financial standing of the bank, so that they can assess the safety and security of their funds. Regulators may also use rating agencies, by requiring banks to obtain and maintain a credit rating, from an approved credit rating agency, and to disclose this information to depositors, and other stakeholders.

Tips and comments:

Banks play a major role in the management and safeguarding of funds under their care. But this responsibility demands a huge amount of responsibility, which can be best checked on by external agents. This is why various supervisory bodies play such an important in the safeguarding of the public’s equity. But it is still important that banking institutions and regulators work together, for the sake of the public’s trust.