Banking Regulation – An Introduction

The global financial crisis catapulted the previously uninteresting topic of banking regulation into the mainstream media. The crisis demonstrated that banks’ stability affects not only the financial markets, but the broader ‘real’ economy. Most market economies recognize the need for private shareholders to be compensated, but the stability of the system is paramount. Because of this, regulators often face a balancing act between these two objectives.


This course examines how performing this balancing act throws up key questions that regulators must address. For instance, how can they best supplement capital adequacy requirements with specific rules covering key aspects of banking, such as liquidity and leverage? How should regulators deal with banks operating in multiple jurisdictions? Are the same regulations appropriate for all types of financial institution or do they need to be customized? These and other issues are considered in this course.


    On completion of this course, you will be able to:

    Describe the key role played by banks in the smooth running of an economy

    Explain why extensive bank regulation is widely believed to be necessary

    Describe some key regulatory concepts and challenges, along with the various tools available to bank regulators


    Topic 1: The Role of Banks

    Why Banks Matter!

    o Provision of Credit & Capital

    o Money Transfer

    What is a bank?

    o Commercial vs. Investment Banking

    Financial Conglomerates

    Creating Money – The Money Multiplier

    Who Owns The Banks?

    o Private Ownership

    o Mutual Ownership/Cooperative

    o State Ownership

    Who Cares About Banks?

    o Shareholders

    o Borrowers

    o Lenders/Depositors

    o Government/Taxpayers

    Topic 2: The Need for Regulation

    Key Drivers

    o Systemic Stability

    o Nature of Financial Contracts

    • Information Asymmetry

    • Adverse Selection

    • Moral Hazard

    • Principal-Agent Problem

    o Problems of Gridlock

    Topic 3: Key Regulatory Concepts, Tools, Challenges

    Central Banking is Not Banking Regulation

    Who is the Regulator?

    Types of regulation

    Key Regulatory Tools

    o Capital Adequacy Requirements

    o Minimum Liquidity Requirements

    o Leverage Restrictions

    o Information, Disclosure, and Business Conduct Requirements

    o Deposit insurance

    Lender of Last Resort (LOLR) Facilities

    Regulatory Challenges

    o Growing Complexity

    o ‘One Size Does Not Fit All’

    o Procyclicality



    75 Minutes

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