Global Banking Regulation and Basel-III

The role of banks in global and national economies is very important. The banking industry holds reliance of the entire economy and it is important for the authorities to maintain control over the practices of banks. The most common objectives of banking regulations are

  • Prudential Objectives: to reduce the level of risk to bank creditors i.e. to protect the depositors.
  • Systemic risk reduction—to reduce the risk of failure of banks
  • Avoid misuse of banks—to reduce the risk of banks being used for criminal purposes such as money laundering
  • To protect banking confidentiality
  • Credit allocation—to direct credit to favored sectors

General Principles of Banking Regulation

The general principles that deal with the banking regulation include Minimum requirements, supervisory review and market discipline. They have been discussed below:

Minimum requirements

Certain minimum requirements are imposed on banks, which are closely tied to the level of risk exposure for a certain sector of the bank. The most important minimum requirements include the Capital Requirements and Reserve Requirements.

  • Capital Requirements:The capital requirement sets a framework on how banks must handle their capital in relation to their assets. The first international level capital requirements were introduced by the Basel Capital Accords in 1988. The current framework of capital requirements is called Basel III.
  • Reserve Requirements: The reserve requirement sets the minimum reserves each bank must hold to demand deposits and banknotes. Reserve requirements have also been used in the past to control the stock of banknotes and/or bank deposits. Required reserves have at times been gold coin, central bank banknotes or deposits, and foreign currency.

Supervisory review

This includes licensing by the regulator, obtaining undertakings, giving directions, imposing penalties or revoking the bank’s license.

Market discipline

The central bank requires the banks to publicly disclose financial and other information, and depositors and other creditors. The bank is thus made subject to market discipline.

Basel Committee on Banking Supervision

The secretariat of Bureau of International Settlement (BIS); which fosters co-operation among central banks with a common goal of financial stability and common standards of banking regulations; are located in Basel, a city in Switzerland. The Basel Committee on Banking Supervision (BCBS) is a committee of banking supervisory authorities established in 1974 by the governors of the central banks of G-10. This committee provides a forum for regular cooperation on banking supervisory matters. Its objective is to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide.  It has 27 members including India and major economies of the world.

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