Banking Regulations

Trust 💰 🤝

Maintaining trust and confidence in the financial system is key to ensuring the stability of the system, and banking regulation play a major role in this.

Banking regulation serves two main roles 🏛:

1. Ensuring prudential soundness of banks (making sure they don’t go bust)
2. Managing the conduct of banks. More recently, there has been an increased emphasis on banks’ conduct and how they treat their customers in their day-to-day activities.

Global Regulator 🌏

These are the one who set standards for financial stability and securities markets:-

1. The Basel Committee on Banking Supervision which sets all of the standards around financial stability and safety and soundness
2. IOSCO (International Organization of Securities Commissioners) is the international organization of securities commissioners and they set the standards around all the securities markets in the world.

✅ Now, now they set those standards but they don’t have those standards as law.

✅ Those global standards will need to be written into the legislation of the country. But that means that there can be room for some interpretation and changes.

Regulation Models 🏹

There are 3 broad models that we can see for regulation around the world:-

1. Unified regulator:- Usually the central bank is doing everything. The best example of that is the monetary authority in Singapore
2. Twin peaks model:- Central banking and prudential concerns are dealt with usually by a central bank or a prudential regulator and then conduct is largely dealt with by a separate specialist conduct regulator. Examples of that would be the UK and Australia.
3. Functional regulators:- In some parts of the world regulation is split between the kind of product that we’re talking about whether it’s banking, insurance or something else. India follows this with RBI, SEBI, IRDIA and more.

Regulation Methodologies 🚨

In the same way that countries vary their models of regulation, they also use slightly different methodologies too

1. Rules-based regulation:- A set of rules you must follow to the letter of the law. Example: USA
2. Principles-based regulation:- The rule book is a set of 11 guiding principles which focus on the outcomes either for customers or for financial stability but they don’t tell the banks exactly what steps to take to get there. Example: UK.

🙌 The reason regulators are moving toward principle-based regulation is that it’s impossible to legislate for every situation.

👨‍💻 Fintechs love it because it allows for more room for innovation but may lack incentives for banks to innovate.

Tech in Regulations 👀

Post-Global Financial Crisis, the pendulum has swung again and regulators are becoming tougher in their approach to banking regulation, as to how could they allow such a disaster to happen.

Regulators must attempt to keep up with technological innovation and use techniques such as sandboxes to understand new technologies.

Sandbox is where a new technology is tested with real customers.

With technological innovation taking place rapidly, it is becoming increasingly difficult for regulators to stay technology neutral and keep up with changes in the banking system — making it harder to create a single global regulator that harmonizes regulation across countries and cultures.

Global harmonization of banking regulation is unlikely due to differing national interests, global competition, politics, and cultural factors.

Regulation will look very different in 50–100 years time, with an increased emphasis on individual consumer protection and technology-based regulation. The way banking system evolves will largely determine the nature of future regulation.