Question

describe the regulation process of financial institutions

Answer 1

Financial regulations are laws and rules that govern financial institutions. Regulations of financial institutions focus on providing stability to the financial system, fair competition, consumer protection, and prevention and reduction of financial crimes.Successful financial regulation prevents market failure, promotes macroeconomic stability, protects investors, and mitigates the effects of financial failures on the real economy. Financial regulation can also be used to improve market transparency and to protect investors.

Regulatory Powers Regulators implement policy using their powers, which vary by agency. Powers can be grouped into a few broad categories:

• Licensing, Chartering, or Registration: A starting point for understanding the regulatory system is that most activities cannot be undertaken unless a firm, individual, or market has received the proper credentials from the appropriate state or federal regulator. Each type of charter, license, or registration granted by the respective regulator governs the sets of financial activities that the holder is permitted to engage in. For example, a firm cannot accept federally insured
• Rulemaking:Regulators issue rules (regulations) through the rulemaking process to implement statutory mandates.5 Typically, statutory mandates provide regulators with a policy goal in general terms, and regulations fill in the specifics. Rules lay out the guidelines for how market participants may or may not act to comply with the mandate.
• Oversight and Supervision: Regulators ensure that their rules are adhered to through oversight and supervision. This allows regulators to observe market participants’ behavior and instruct them to modify or cease improper behavior. Supervision may entail active, ongoing monitoring (as for banks) or investigating complaints and allegations ex post (as is common in securities markets). In some cases, such as banking, supervision includes periodic examinations and inspections, whereas in other cases, regulators rely more heavily on selfreporting. Regulators explain supervisory priorities and points of emphasis by issuing supervisory letters and guidance
• Enforcement:Regulators can compel firms to modify their behavior through enforcement powers. Enforcement powers include the ability to issue fines, penalties, and cease and desist orders; to undertake criminal or civil actions in court, or administrative proceedings or arbitrations; and to revoke licenses and charters. In some cases, regulators initiate legal action at their own bequest or in response to consumer or investor complaints. In other cases, regulators explicitly allow consumers and investors to sue for damages when firms do not comply with regulations, or provide legal protection to firms that do comply.
• Resolution: Some regulators have the power to resolve a failing firm by taking control of the firm and initiating conservatorship (i.e., the regulator runs the firm on an ongoing basis) or receivership (i.e., the regulator winds the firm down). Other types of failing financial firms are resolved through bankruptcy, a judicial process.