Documente Academic
Documente Profesional
Documente Cultură
- Thomas Jefferson
(3rd President of USA)
Banking Regulation
Significance
Money is the sensitive assets of bank
Banks involve only in monetary transaction
Finance ministry and Central bank are know as the
prime regulatory agencies for banking sector
Government provide permission for establishing
new Bank in country
Bank examines carefully and review the quality of a
bank loan.
S.B.Khatri
Regulations generally related
with:
Operations
Service offerings
Credit quality and quantity
Capital positions
Manner in which they grow and expand
Banking Regulations
Climate of extensive regulations
Designed primarily to protect the public interest
Eg. FDIC – Forever Demanding Increased Capital
(sarcastically put)
More capital, more reserves, more public service,
more reports
Extreme – bank owners cant even choose to close
its doors and leave industry unless they obtain
explicit approval
Banks are in essence the “kids” with the
strictest parents on the block.
Why banks are Heavily
Regulated: Pros and Cons
1. Banks are among the leading repositories of
the public’s savings – esp of families and
individuals
2. Loss of these funds due to bank failure or
bank crime would be catastrophic to many
individuals or families
3. Savers and Depositors lack the expertise
and depth of information needed to
correctly evaluate the riskiness of a bank.
Regulatory Agencies are charged
with the responsibility of
gathering and evaluating the
information needed to assess the
true condition of banks and other
financial institutions to protect the
public against loss
……..
4. Because of their power to create money in
the form of readily spendable deposits by
extending credits.
Changes in volume of money created by
banks appear to be closely correlated with
economic conditions, especially the growth of
jobs and the presence or absence of inflation.
5. They support consumption and investment
spending.
However, the fact that banks and many of
their nearest competitors create money,
which impacts the vitality of the economy
is not necessarily a valid excuse fo
regulating them.
S.B.Khatri
Cont…
3. “Edward Kane” agreed that adequate
regulating can increase customer confidences
in bank. Kane believe that regulators actually
compete with each other in offering
regulatory services in an attempt to broaden
their influences among regulated bank. He
also argues that there is an ongoing struggle
between regulated bank and regulators.
(regulatory dialectic)
S.B.Khatri
Once regulations are set in place, financial
service managers will inevitably search to
find ways around the new rules in order to
reduce costs and allow innovation to occur.
If they are successful in skirting existing
rules, then new regulations will be created,
encouraging financial managers to further
innovate to relieve the burden of the new
rules.
Thus, the struggle between regulated firms
and regulators go on indefinitely.
Kane also believes that regulations provide an
incentive for less regulated businesses to try
to win customers away from more regulated
firms, something that appears to have
happened in banking in recent years, as
mutual funds, financial conglomerates and
other less regulated financial firms have stolen
away many of banking’s best customers.
IMPACT OF GOVERNMENT POLICY &
REGULATION ON BANKING
1. Capital Adequacy
2. Loan Classification and Provisioning
3. Credit Concentration and Single Obligor Limit
4. Accounting Policy and Formats For Financial Statements
5. Management and Minimization of Risk
6. Good Corporate Governance
7. Compliance with the Directives issued in connection with Inspection and
Supervision
8. Provision related to Investment in Shares and Investments
9. Reporting Requirements
10. Provision related to Purchase & Sale of Promoter Shares
11. Others: Branch Expansion, Profitability, Dividends etc.
DIRECTIVES RELATED TO THE FOLLOWING
1. Capital Adequacy
From FY 2068/ 69
Minimum Capital Adequacy Requirement
• Core Capital: 6%
• Capital Fund: 10%
DIRECTIVES RELATED TO THE FOLLOWING
Core Capital:
• Paid-up capital
• Share Premium
• Non Redeemable Preference Share
• Statutory Reserve
• Retained Earnings
DIRECTIVES RELATED TO THE FOLLOWING
Supplementary Capital:
• General Loan Loss Provisioning
• Exchange Equalization Reserve
• Assets Revaluation Reserve
• Hybrid Capital Instruments
• Subordinated Term Debt
• Free Reserve
• Additional Loan Loss Provision
DIRECTIVES RELATED TO THE FOLLOWING
9. Reporting Requirements
•13 different forms to be filled
10. Provisions relating to purchase & sales of
Promoters Share
• 5 years restriction Clause
11. Others :
• Branch expansions, profitability,dividends etc.
Impact of Deregulation on Banks Performance &
Growth
YES
But Efficiently, Exact Adequatey
George Benston
It is time we recognize that financial
institutions are simply businesses with only
a few special features that require
regulation
Depository institutions, for e.g., should be
regulated no differently from any other
corporation with no subsidies or other
special privileges.
He contends that the historical reasons for
regulating the financial sector – taxation of
monopolies in supplying money, prevention of
centralized power, preservation of solvency to
mitigate the adverse impact of financial firm
failures on the economy, and the pursuit of social
goals are no longer relevant today.
Moreover, regulations are not free: they impose
real costs in the form of taxes on money users,
production inefficiencies and reduced competition.
The trend under way today all over the
globe is to free financial service firms
from the rigid boundaries of regulation;
however, much still remains to be done
if we wish to enhance the benefits of
free competition to financial institutions
and the public they serve.
Regulation must be balanced
and limited so that:
a) Banks can develop new services that the
public demands
b) Competition in financial services remains
strong enough to ensure reasonable prices
and an adequate quantity and quality of
service to the public
c) Private sector decisions are not distorted in
ways that misallocate and waste scarce
resources
Impact of Regulations on
Banks
Brings benefits in terms of monopolistic rents,
because, regulations block entry into the regulated
industry.
Regulations shelters a firm from changes in
demand and cost, lowering its risk.
Regulations increase public confidence in banks
Provide incentive to less regulated businesses to
try to win customers away from regulated
businesses.
Regulatory Dialectic
Ongoing struggle between regulated firms and the
regulators
Once regulations are drafted and set in place, banks
will inevitably search to find ways around the new
rules through innovation in order to maximize the
value of each banking firm.
If bankers are successful in skirting around existing
regulations, then new rules will be created,
encouraging banks to seek future innovations in
services and methods.
The Central Banking System
Central bank is the supreme monetary
institution
It control, supervise and regulate other banks
the country
“Central Bank is the lender of last resort”
by: Hawtre
Cont…
“Central Bank is a bank which constitutes
the apex of the monetary and banking
structure of the country”
By: De kock
“The Central Bank stands to the member
banks in exactly the same relation as the
member banks themselves to the public”
By: Crowther
S.B.Khatri
Major Function of Central
Bank
Issue of notes
Manage foreign currency
Developing banking and financial system
Lender at last resort
Mobilizing capital
Government banker
Banker’s bank
Implementation of policy and development
S.B.Khatri
Main objectives of NRB
Promote efficiency of commercial bank to
operate in profit
Ensure adequate fund to meet all cash
demand
Maintain clear and fraud free financial
transaction
Record all financial transcation as per the
banking rules
S.B.Khatri
Impact of Central bank
Bank and Financial system are the backbone for
development of country
Monitoring system is a check and follow up
system
NRB monitors bank & financial institution
Bank & financial institution are involved in
deposit and loan process
NRB also provide advices and instruction
S.B.Khatri
Procedures of supervisory and
monitoring system
Off-site supervision
On-site supervision
Special supervision
S.B.Khatri
Principal tasks of Central bank
Issue of note
Bankers’ bank
Banker, Agent and Adviser to the government
Lender at Last Resort
Clearing Agent
Custodian of Foreign Exchange Reserves
Controller of Credit
S.B.Khatri
Cont…
Development Role
Control and Supervise Financial
Institution
Other miscellaneous function
S.B.Khatri
Role and Need of central bank
in Economy
Traditional Role
Economic Growth
Price stability
Development of Banking System
Branch Expansion
Development of Financial Institution
Promoting the Banking habits
Training Facilities
S.B.Khatri
Cont…
Proper Interest rate structure
National Debts Management
Balance of payment
Credit control
Monetization of economy
Implementation of monetary
Other promotional roles
S.B.Khatri