Jan 6, 2016
Banks are usually held to different standards because of the volume of money that flows through them. In the most recent fiscal crisis, we frequently heard this term “too big to fail” in reference to banks. Banking regulation aims to provide some guidelines and frameworks banks can work within to prevent this kind of thing from happening. They are not always successful, and some of these regulations can be rather knee jerk, but they come from a place of wanting to preserve the integrity and credibility of our financial system.
Three basic principles guide the concepts involved with banking regulation.
The Minimum
It’s typical for banking regulations to lay out some minimum requirements that help to telegraph the objectives of the regulation. The one most commonly used is maintaining minimum capital ratios, but regulations usually apply to whichever parts of the bank stand to be exposed to the most risk. US banks have quite a bit of control during this process, and typically work closely with regulators on this aspect.
Review by Supervisor
Every bank is required to hold a license to operate. Those licenses are overseen by a regulatory supervisor, whose job it is to monitor the activity of registered banks. Regulatory supervisors also respond when there is a breach or a crisis at the bank. They are empowered to issue fines, give direction or revoke the bank’s license in extreme cases.
Discipline
Banks with discipline aren’t simply fiscally responsible; they have to disclose their financial information. That aspect is crucial when assessing risk, as is the market price. Together, that data signals the financial health of the institution.
About the Author: Samuel Phineas Upham is an investor at a family office/ hedgefund, where he focuses on special situation illiquid investing. Before this position, Phin Upham was working at Morgan Stanley in the Media and Telecom group. You may contact Phin on his Samuel Phineas Upham website or Twitter.