Question

Regulation of the banking system

a) Explain the different possible types of regulation

b)Discuss reasons why regulation may fail.

Answer 1

a) Bank regulations are certain form of restrictions , guidelines which are followed to create market transparency . It helps in risk reduction . Different possible types of regulations are accounted as : capital reuirement , reserve requirement , activity affilation restrictions , requirements to provide financial reports , corporate body governance etc . Making the deposits of the public insured , controlling money supply and controlling the activities of a bank are the main motives behind the regulations .

b) Regulations fail due to moral hazard problem . Every action of an agent ( customers ) cannot be anticipated by a principal ( bank ) . This creates several problems like NPA etc . So regulations fail in such cases .