Financial regulation relates to laws and rules that govern what financial institutions such as banks, brokers and investment companies can do. These may be set though legislation or be stipulated by the relevant regulatory agency, for instance the FSA in the UK . Regulation is needed to ensure consumer’s confidence in the financial sector . It does this by providing smaller retail clients with protection against potential losses and by protecting consumers against monopolistic exploitation , e.g. makes sure product pricing doesn’t happen.
There are several types of regulation . Systematic Regulation is concerned with the safety and soundness of the financial system. It relates to Deposit insurance , which is a guarantee that all or part of the amount deposited in a bank will be paid if the bank fails . Also, it relates to the Lender of last resort , in its role as a LOLR the central bank will provide reserves to a bank experiencing serious financial problems caused by a sudden withdrawal of funds by depositors , or when the bank cannot find liquidity anywhere else .However, these kind of safety-net arrangements create moral hazard. With 100% deposit insurance , depositors won’t be concerned about the bank’s behaviour and the belief that LOLR will bail them out , can encourage institutions to take greater risks when lending.
Prudential Regulation is concerned with consumer protection . It relates to monitoring and supervision of financial institutions( asset quality and capital adequacy ). It is undertaken by the FSA and aims to ensure that firms a financially sound , e.g. specifying standards covering risk management .
Finally , Conduct of Business Regulation focuses on how banks conduct their business. It establishes rules to reduce the likelihood that consumer receive bad advice , supplying institutions become insolvent before contract matures , contracts turn out to be different from what the customer was anticipating , fraud and misrepresentation happening or employees of financial intermediaries act incompetently. All these services are expensive. Cost of compliance will be passed on to consumers, resulting in higher costs of financial services.
The Financial Services Authority (FSA) is an independent non-governmental Regulating body for all providers of financial services in the United Kingdom that has the objective to maintain confidence in the UK financial system, to promote public understanding of the financial system , to secure an appropriate degree of protection for consumers and to reduce the scope for financial crime.
The Basel Accords are a set of agreements implemented in the EU by the Basel Committee on Bank Supervision to ensure financial soundness of credit institutions and investment firms. They set requirements on banking regulations in regards to capital risk, market risk and operational risk. The purpose of the accords is to ensure that financial institutions have enough capital on account to meet obligations and absorb unexpected losses. Basel I, was issued in 1988 and focuses on the capital adequacy of financial institutions. Basel II (2007), focuses on three main areas, including minimum capital requirements, supervisory review and market discipline, which are known as the three pillars. The focus of this accord is to strengthen international banking requirements as well as to supervise and enforce these requirements.
A well designed regulatory framework is necessary to ensure consumers’ confidence in the financial sector. The absence of such regulations would produce sub-optimal results and reduce consumer welfare. For instance, Last 2 years we could observe a lack of good regulation during the UBS rogue trader scandal , when Kweku Adoboli managed to loose over 2 billion dollars, due to unauthorized trading . As a result UBS has improved its internal monitoring and some deficiencies in the financial reporting control system have been addressed, says Sergio Ermotti, CEO of UBS.
University/College: University of Arkansas System
Type of paper: Thesis/Dissertation Chapter
Date: 2 January 2017
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