Question

You have been asked by a Finance Club at a University to enter an essay competition that should evaluate and examine the existing laws and regulations that governs commercial banking activities in your current jurisdiction. . For the essay competition they have outlined the following key points of focus: • Outline and discuss three reasons why it is necessary to regulate banks.

• Provide and evaluate three reasons why some banks have failed within your jurisdiction. Instructions: Essay should be between 1000 -1200 words. Make any assumptions where necessary and note that the word limit is not inclusive of bibliography and cover page. Ensure that your references and assignment are based on APA citation rules, double spaced and 12 pt font Times New Roman.)

Answer 1

Commercial Bank:

• Commercial banks offer consumers and small to mid-sized businesses with basic banking services including deposit accounts and loans.
• These banks make money from a variety of fees and by earning interest income from loans.
• Banks have traditionally been located in physical locations, but a growing number now operates exclusively online.
• Commercial banks are important to the economy because they create capital, credit, and liquidity in the market.

Functions of commercial Bank:

The functions of commercial banks are classified into two main division:

(a) Primary functions:

• Accepts deposits.
• Provides loans and advances.
• Credit cash.

(b) Secondary functions:

• Discounting bills of exchange.
• Overdraft facility.
• Purchasing and selling of the securities.
• Locker facilities.
• Paying and gather the credit.

Types of Commercial Bank:

There are four types of commercial bank in the USA:

• Private bank.
• Public bank.
• Foreign bank.

Existing laws and regulations that governs commercial banking activities:

Who regulates the banks in the US?

The Board of Governors of the Federal Reserve oversees state-chartered banks and trust companies that belong to the Federal Reserve System. The Federal Deposit Insurance Corporation regulates state-chartered banks that do not belong to the Federal Reserve System.

Which banks does the Federal Reserve regulate?

The Federal Reserve System is one of several banking regulatory authorities. The Federal Reserve regulates state-chartered member banks, bank holding companies, foreign branches of U.S. national and state member banks, Edge Act Corporations, and state-chartered U.S. branches and agencies of foreign banks.

(a) Why it is necessary to regulate banks?

When a bank fails, it can create problems for the wider economy.

People and businesses can lose money they have placed with the bank. This can mean they also lose confidence in banks so are unwilling to bank with them again. It can also disrupt the services that banks provide to customers. For example, payments systems – you might not be able to use your account for a while if your bank failed.

1. Regulation helps make sure that banks have good management so they don’t make bad investments or are too risky.

2. Regulations help to reduce many of the problems that could get a bank into financial difficulty. This will mean there will be fewer bank failures in the future.

3. Financial crisis can cause people to lose their jobs, or face pay cuts, and many more will suffer from a higher cost of living. On their own, banks don’t take this into account when making the decisions-regulation helps make sure they do.

(b) Why some banks have failed?

1. Asset/liability mismatch: When a bank’s assets are unmatched to the liabilities supporting them, severe problems can arise.

2. Risk management decision: All large banks have extensive risk management groups that constantly quantify the absolute level of risk in the bank’s portfolios. They measure risk from every conceivable perspective including interest rate risk, foreign debt risk, investment risk and much more. When miscalculations occur in conjunction with a significant market movement, huge losses are possible.

3. Inappropriate loans to bank insiders: sometimes, many savings and loan banks made risky loans to directors and insiders for real estate and many other projects that were ill-conceived. These transactions resulted in huge losses and many bank failures.

CONCLUSION:

Banks are temperamental and sensitive businesses because they operate with significant leverage. For this reason, in the U.S. they are highly regulated and not permitted to engage in any number of financial activities.

Most important is the fact that many banks are too big to fail and will receive federal support if they have serious problems.