Key Supervisory Issues And Improvement Of Banking Regulation

The banking industry has undergone major upheaval in recent years, largely due to the lingering recessionary environment and increased regulatory environment. Many banks have failed in the face of such tough environmental conditions. These conditions

Regulations of financial institutions have always followed financial crisis and failures. Market failures and crisis are the primary triggers of that lead to the development of regulations of financial markets and institutions (Howells and Bain, 2004).

Basel III is a regulatory reform measures to improve the banking regulation, supervision and risk management. Basel III was published in 2009 and mainly because of widespread of credit crisis of global banking system. Therefore, the banks must maintain sufficient capital and proper leverage at any point in time. We also know that Basel III is implemented right after Basel I and II, its main changes are to enhance the stability of banking system when facing financial crisis and economic downturn. Apart from that, the content of banks’ risk management and transparency are also strengthened. The volatility of banking system can thus be reduced through strictly enforced Basel III standard and requirements.

Basel III is a global comprehensive collection of restructured regulatory standards on bank capital adequacy and liquidity. It was developed by the Basel Committee on Banking Supervision to strengthen the regulation, supervision and risk management of the banking sector (bis.org, 2010). It introduces new regulatory requirements on bank liquidity and bank leverage in response to the financial downturn caused by the Global Financial Crisis. Stefan Walter, Secretary General of the Basel Committee on banking supervision said in November 2010:

Firstly, the Dodd–Frank Act pushes forward the reformation of America's financial regulatory system. Several new regulatory authorities are set up to enhance the government supervision and administration of the industry. The Financial Stability Oversight Council is established to identify material risks to financial stability, with the support from Office of Financial Research. Moreover, Fed is entitled to exercise additional superintendence beyond banks.

Since the onset of the financial crisis 2008, the sovereign debt crisis in western economies and the new financial regulation with Basel III coming up, the financial industry faces the challenge of reinventing itself. The ring-fence for Commercial and Investment Banking, and new economic and regulatory capital requirements will determine the kinds of products banks will be able to distribute. It will have a huge impact in the Investment Banking business, which will suffer tough regulation and supervisory procedures. At the same time, credit risk models will be reviewed because they have failed to predict the crisis of 2008. The current financial and economic crisis doesn’t have any precedent in the past.

The reality of systemic risk made the task of regulating the financial system increasingly complicated, as the crises aren’t contained in one country or market. The extreme inter-dependence between the different agents is the main reason why we need regulation today, as some misconducts can cause a domino effect, affecting markets globally. The structure of the banking system in itself explains this process. In the finance industry, banks borrow money from other banks. If one bank fails, the one who lent the funds in the first place might also follow the same path, creating panic in the markets. The government’s first prerogative is to protect its citizens from these

First, high capital requirements could enable institutions to be more flexible facing financial stress and crises. Second, the CFPB strengthens the oversight responsibilities, lessens the regulatory infrastructure risky gaps, and improves the protection for consumers. Third, the Federal Deposit Insurance Corporation’s (FDIC) single-point-of-entry strategy installs standard procedures to wind down failed financial institutions,

The 2008 financial crisis should not be the last one readers will experience, but this paper would like to present a picture of how it unfolded and where went wrong, so that hopefully we can learn from it. This paper will address some post-crisis regulations and why regulators responded this way. It concludes that the key is to carry out reforms addressing the moral hazard issue deeply in our current financial system.

The American Banking system has always focused on order, resiliency and the ability to withstand the storm. When comparing banking systems, it is required analyze both the strengths and the weaknesses of each system. While examining the American banking system, a key strength that is presented is the pride if its resiliency, “these improvements in the resiliency of the banking system have been reinforced by a series of key capital and liquidity rules that have been enacted in the United States, including the Basel III capital and liquidity frameworks as adopted in more stringent form” (The State of American Banking).

The phased introduction of new banks in the private sector and expansion in the number of foreign banks provided for a new level of competition. Furthermore, increasingly tight capital adequacy norms, prudential and supervision norms were to apply equally across all banks, regardless of their ownership. [34]

In the aftermath of the 2008 financial crisis, Congress recognized the need to regulate nonbank institutions. Many of the financially distressed institutions were not regulated by the same standards bank holdings were. As a result The Financial Stability Oversight Committee was created under Title I of the Dobb-Frank Wall Street Reform and Consumer Protection Act. The committee was signed into law by Barack Obama on July 21, 2010 and serves three primary purposes. One is to authorize and determine nonbank financial institutions that if under material financial distress or failure, can threaten the financial stability of the United States. The designated institutions are referred to as systematically important financial institutions (SIFIs) and are subject to the regulation and supervision of the Federal Reserve System (Board of Governors). Another purpose of the committee is to promote market discipline and eliminate the expectation of companies stakeholder’s relying on the U.S. government bailout as safeguard from failure or loss. Last but not least the committee is also expected to recommend standards and safeguards for U.S. and global financial systems. In the executive summary of the 2014/15 annual reports, the committee continues focusing on three areas of financial risk: cyber security, foreign markets and the housing finance reform.

Intervention by the central bank is warranted to avoid welfare loss for the institution’s stakeholders since it may be that due to access to supervisory information, the authorities are in a better position to evaluate the financial position of a bank rather than the inter-bank market. The other situation in which the central bank may be the LOLR is when the stability of the entire financial system may be threatened following the failure of a solvent bank. This widespread financial instability may put to risk the ability of the financial system to carry out its primary functions.

Financial crises have plagued the international financial system for many decades. Indeed, they are becoming quite common lately. This quasi-permanent and problematic aspect of the global financial system can be highlighted by the problems regarding the sovereign debts of Asia, Africa, Central Europe, Latin America and the Middle East in the 80s, the 1987 stock market crash, the European foreign exchange crisis in 92-93, the bond market shock in 94, the financial problems that affected Asia, Brazil, Mexico and Russia in the mid-1990s , and more recently with the 2008 global financial collapse. This paper addresses the need for a globalized approach aimed at establishing a well-crafted legal framework capable of dealing with crises within the banking system, hence being able to protect the entire economy of the detrimental cascading effect that those instabilities can create. It compares the approach taken by the UK against the efforts being directed by the G-20 nations. It sheds light on the perspective that several important areas, such as systemic risk, consumer protection, market integrity, macro-prudential and micro-regulatory policies, as well as international competitive equality and shadow banking need to be scrutinized if we are to establish an effective international legal structure.

Basel III is a set of proposed changes to international capital and liquidity requirements and some other related areas of banking supervision. It is the second major revision to an original set of rules, now known as Basel I, which was promulgated by the Basel Committee in 1988. The committee was established in the mid‐1970’s, after the failure of a small German bank (Herstatt) sent shudders through the global financial system as a result of poor coordination between national regulators. The Basel Committee is composed of banking regulators from a number of industrialized countries, with a core membership concentrated in the traditional banking powers within Europe, plus the US and