Central Banks and Banking Regulations (Thesis Sample)

Central Banks and Banking Regulations
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Central Banks and Banking Regulations
Acknowledgement
I would like to acknowledge my professors, family, and friends for the continued support in the course of the study.
Table of Contents
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Acknowledgement  PAGEREF _Toc430869121 \h
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Table of Contents  PAGEREF _Toc430869122 \h
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1.0 Introduction  PAGEREF _Toc430869123 \h
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2.0 The Main Principles of Banking Supervision  PAGEREF _Toc430869124 \h
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2.1 Principles of Banking Regulation and Roles of Central Banks  PAGEREF _Toc430869125 \h
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2.1.1 Principles of Banking Supervision  PAGEREF _Toc430869126 \h
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2.1.2 Duties of Central Bank  PAGEREF _Toc430869127 \h
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2.1.3 Banking Supervision in USA  PAGEREF _Toc430869128 \h
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2.2 Overview of Banking Supervision / Regulation  PAGEREF _Toc430869129 \h
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2.2.1 Allocation of Supervision  PAGEREF _Toc430869130 \h
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2.2.2 Need for Risk Sensitivity  PAGEREF _Toc430869131 \h
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2.2.3 Importance of Financial Infrastructure  PAGEREF _Toc430869132 \h
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2.2.4 Core Principles of Financial Infrastructure  PAGEREF _Toc430869133 \h
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2.2.5 Methodology and Assessment  PAGEREF _Toc430869134 \h
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2.2.6 Tools for Banking Supervision  PAGEREF _Toc430869135 \h
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3.0 Challenges of the Banking Supervision  PAGEREF _Toc430869136 \h
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3.1 Is Banking Supervision Necessary?  PAGEREF _Toc430869137 \h
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3.1.1 Basel 1  PAGEREF _Toc430869138 \h
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3.1.2 Basel II and its Pillars  PAGEREF _Toc430869139 \h
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3.1.3 Risk - Weighted Assets  PAGEREF _Toc430869140 \h
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3.1.4 Basel II  PAGEREF _Toc430869141 \h
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3.1.5 Main Banking Regulatory Body in the United States of America  PAGEREF _Toc430869142 \h
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3.2 Challenges of Banking Supervision during the 2008 Financial Crisis  PAGEREF _Toc430869143 \h
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3.3 Need for Reinforced Banking Supervision  PAGEREF _Toc430869144 \h
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3.4 Roles Played by the Central Banks in the Last Financial Crisis  PAGEREF _Toc430869145 \h
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4.0 Conclusion  PAGEREF _Toc430869146 \h
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References  PAGEREF _Toc430869147 \h
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Appendices  PAGEREF _Toc430869148 \h
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Appendix 1:  PAGEREF _Toc430869149 \h
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1.0 Introduction
This paper seeks to address banking supervisions, banking regulations, and the roles played by central banks in the same. Bank regulation refers to the written rules that provide for the acceptable code of conduct and behavior for financial institutions, while bank supervision is the enforcement of these rules (Tsingou, 2008). Central bank and governmental regulators do bank regulation and supervision, which involves monitoring the operations and financial performance of banks to ensure that they are following the rules and regulations that are laid down, and that they operate safely and soundly. Generally, bank regulation and supervision are done to ensure that the banks do not fail.
Banking sector is an important sector in any given economy since the effectiveness of any monetary policy and the economic well being of any given economy is dependent on, and is determined by its financial system. Economies with weak financial systems have, in most cases, been experiencing high inflation rates, which is an indication of depreciation in monetary value. This in turn results into a low exchange rate of the economy’s currency in the international market. On the other hand, economies with strong financial systems are always associated with strong economic base and do experience an incline in economic growth. This implies that role played by the central banks in strengthening the financial system of their respective economies cannot be overemphasized, as it enhances economic growth in the economies.
The banking sector is one of the most regulated economic sectors and nevertheless this regulation does not seem to have proved to be efficient or appropriate enough as many banking crisis occurred in many countries. For instance, in the 21st century, a number of banking and financial crises have occurred in different economies of the world. These include the Uruguay Banking Crisis of 2002, subprime mortgage crisis in the U.S that started in the year 2007, 2008-2009 Belgian Financial crisis, 2008-2012 Spanish Financial crisis, and 2009 United Kingdom bank rescue among others. These happened yet the Basel Committee on Banking Supervision (BCBS) had the second Capital Accord known as Basel II in place. BCBS refers to a group of international banking authorities that work in order to strengthen the supervision, practices, and regulation of banks, and to improve worldwide financial stability (Goodhart, 2011). The establishment of the BCBS was done in 1960s with an aim of helping the banks to deal with globalization, and it is located in Basel, Switzerland. The activities of BCBS focus on information exchange on issues related to banking supervisory and national techniques and approaches. It develops guidelines and supervisory standards for the banking system. Legal force does not back the decisions of the BCBS as it lacks formal authority.
The work of the BCBS is organized under four main subcommittees. These include the Policy Development Group, the Standards Implementation Group, the Accounting Task Force, and the Basel Consultative Group (Goodhart, 2011). The Standards Implementation Group was established in order to promote consistency in, and to share information on, the Base II Framework’s implementation. However, in 2009, its goals were broadened to enhance the implementation of the general standards and guidelines of the BCBS. The Policy Development Group is charged with the mandate of reviewing and identifying the supervisory issues that emerge. It is also mandated to develop and propose policies that are designed to create supervisory standards and sound banking systems.
The Accounting Task Force is charged with the mandate of ensuring that practices and standards of international auditing and accounting promote management of risks at the banks (Goodhart, 2011). It is also mandated to develop reporting guidance and to take an active role in the development of the international auditing and accounting standards. Lastly, the Basel Consultative Group is charged with the mandate of facilitating supervisory dialogue with non – member countries on the committee’s new initiatives through engaging the senior representatives of different international institutions, regional banking supervisors, and countries that are non – members of the committee.
With the aforementioned situations, this paper seeks to address banking supervisions, banking regulations, and the roles played by central banks in the same. This paper divided into three sections. The first section is the introduction, which describes the importance and the challenges of banking. The second section of this paper, which is its main body, is dived into two parts with the first part focusing Principles of banking regulation and the overview of the banking supervision, and second part discussing the need for banking supervision and its challenges. The third section, which is the last section of this paper, is the conclusion section, which gives the general review of the bank regulation and banking supervision.
The Main Principles of Banking Supervision
2.1 Principles of Banking Regulation and Roles of Central Banks
Banking supervision is very important as it helps in controlling the financial system of an economy. The central banks or any other governmental regulatory body that has been mandated by the law to do such usually does the supervision and the regulation of banks.
Brunnermeier, Crockett, Goodhart, Persaud, and Shin, (2009), proposed seven principles upon which better regulation and supervision of banking is pegged. First in the list is that central banks or any government regulatory agency that is charged with regulation and supervision of banking should be in charge of macro – prudential supervision and should have a mandate of maintaining financial stability in the economy. The second principle of banking regulation is that recapitalization of the banks should not be done using monetary policy as it is not an appropriate tool. Thirdly, all the institutions that carry out banking activities should form part of supervision and regulation process. In addition, there should be a risk premium to cover the expected losses of liabilities that are guaranteed by the government. The risk premium should be determined by the market and should be based on the risk that has been assumed by the institution.
Another principle of banking regulation is that there should be regulation of the financial institutions that play key roles in the financial system to ensure that there is internali...