Question

How does bank regulation differ from bank supervision? What are the main roles and functions of bank regulators? Discuss.

Answer 1

Bank regulation refers to the written rules established by bank regulators.These rules define the acceptable behavior and conduct of the financial institutions.These are in the form of Govt. regulation which subjects banks to certain requirements,restrictions and guidelines.Example of bank regulation is maintaining the minimum capital ratios.

On the other hand bank supervision makes sure that the rules which are established by the bank regulators are followed and also see whether banks are complying with the existing laws.

The main role and function of bank regulators are as follows:

• To protect the depositors/creditors: One of the role of bank regulators is to reduce the level of risk to which bank creditors are exposed.
• To reduce the risk of disruptions resulting from adverse trading conditions for banks causing  a major bank failure.
• To avoid misuse of banks i.e reduce the risk of banks being used for carrying out criminal activity like laundering illegally obtained money.
• To protect banking confidentiality.
• Credit allocation: direct banks to lend to certain sectors of the economy which are considered socially important.
• may also include rules that require the banks to treat their customers fairly and to do corporate social responsibility.