Banking law

Banking law and financial regulation set minimum standards on the amounts of capital banks must hold, and rules about best practice for investment. This is to insure against the risk of economic crises, such as the Wall Street Crash of 1929.

Objectives of Bank Regulation

The objectives of bank regulation, and the emphasis, varies between jurisdiction. The most common objectives are:

1. Prudential -- to reduce the level of risk bank creditors are exposed to (i.e. to protect depositors)
2. Systemic risk reduction -- to reduce the risk of disruption resulting from adverse trading conditions for banks causing multiple or major bank failures
3. Avoid Misuse of Banks -- to reduce the risk of banks being used for criminal purposes, e.g. laundering the proceeds of crime
4. To protect banking confidentiality
5. Credit allocation -- to direct credit to favoured sectors

General Principles of Bank Regulation

Banking regulations can vary widely across nations and jurisdictions. This section of the article describes general principles of bank regulation throughout the world.

Minimum Requirements

Requirements are imposed on banks in order to promote the objectives of the regulator. The most important minimum requirement in banking regulation is minimum capital ratios.

Supervisory Review

Banks are required to be issued with a bank licence by the regulator in order to carry on business as a bank, and the regulator supervises licenced banks for compliance with the requirements and responds to breaches of the requirements through obtaining undertakings, giving directions, imposing penalties or revoking the bank's licence.

Market Discipline

The regulator requires banks to publicly disclose financial and other information, and depositors and other creditors are able to use this information to assess the level of risk and to make investment decisions. As a result of this, the bank is subject to market discipline and the regulator can also use market pricing information as an indicator of the bank's financial health.