Question

What is the chief goal of bank regulation and how is it related to what appears on a bank balance sheet?

Answer 1

On several occasions the U.S government has decided to regulate the banks. With the hot experience of Great Depression in 1930’s U. S molded many new banking regulations. After the financial crisis, many regulations affecting the banking and other financial enterprises were implemented. But the majority of laws and regulation introduced to control this financial sector were complex and confusing. But these regulation policies were focused on certain fundamental objectives. There objectives are:-

1. Enlarging confidence of depositors.

One of the basic objectives that compelled the U.S government to regulate to control financial institutions after the Great Depression was to ensure endless confidence to depositors. After the Great Depression the people had fear regarding the money deposited in banks. This lack of confidence quickly reduced the financial reserves of banks. To maintain high reserve thereby sound financial system, the banks has to attain depositor’s confidence. With an effective control on the financial institutions by the bank the government can win the confidence of the depositors and can establish a well sound financial structure.

2. Prevention of Risky Behaviors

The bank’s profit depends on profit that make by lending the deposited money to in the form of loans to business and individuals. The profit is maximum in risky investment. So the banks will be greedy in making profit irrespective of risk factors. This may endanger the financial system of the country. Thus the banks should be controlled in investing the deposit of the public.

3. Prevention of criminal activity

Under the banks regulations banks require to notify the government the deposit or suspicious banking activities. The object is to prevent limit the financial freedom of criminals and terrorist organizations from taking the advantage of financial transactions. By regulating the banks the government can ensure that the banks are knowingly or unknowingly helping the criminal groups.

4. Directing credit.

Under the banking regulations the banks are expected to extent their credit to certain typical types of industries and certain social classes that are socially desirable. As per the banking regulations banks required to extent loans to minority owned businesses and students for higher education.

A bank’s balance sheet provides a sketch on its client relationship including corporate enterprises. By supervising over the balance sheet the new regulations will create unique balancing with corporate client relationship and earn sufficient income on their assets.

The increased regulation on banks means higher workload for the financial institutions. Moreover implementing these regulations are more expensive which will affect the portfolio managements of banks.

The regulations on banks increase the confidence of the public and investors. But during economic recession and other problems the banks cannot expand their deposit due to the elaborated regulatory framework. This will cause severe economic crisis in the economy.

There are many regulations and as many organisation to regulate the banks in U S. The regulatory authorities are Federal Reserve, the Treasury departments, the Securities and Exchange Commission, the Commodity Future Trading Commission etc.

The regulations by this organism will affect the balance sheet of many banks. Under the tight control by the government the banks lack freedom of investing their money profitably. This will decrease the balance in the asset side of balanesheet.

Especially in stock market the stock brokers need instant financial assistance. If the banks are unable to give assistance in time due to elaborated regulations, it will reduce the brokers profit as well as the banks.