Why Commercial Banks Should Be Strictly Regulated?

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Why Commercial Banks should be strictly regulated? ABSTRACT The purpose of this paper is to discuss one of the most critical issues in the banking and financial system of a country: 'why banks should be strictly regulated?' The paper starts with a brief introduction to the banking and financial sector and its role in an economy and proceeds by discussing the need for strict bank regulation under three major heads; bank failures, bank supervision, and bank examination. The 'bank failure' section highlights the major causes which can put the banks into serious operational and financial difficulties and the steps which regulatory authorities take to save them from these difficulties and ensure a sound banking and financial system in the country. The 'banking supervision' and 'examination' sections explicate the need for strict regulation by the regulators by discussing the significance of banks for the economy, the forces which impact their functionality and profitability, and the major economic aspects which they focus in their operations. INTRODUCTION Banking and financial sector is considered as the backbone of an economy. It not only facilitates the regular supply and flow of money for the general public in a country, but also helps all the manufacturing and service sectors in the growth and promotion of their businesses (Honohan 1997). An effective and transparent functioning of the banking and financial sector of a country is under the supervision of its Federal

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