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Bank Regulation
Bank Regulation
Bank regulations are a form of government regulation which subject banks to certain requirements, restrictions and guidelines.
Minimum requirements
Requirements are imposed on banks in order to promote the objectives of the regulator. The most important minimum requirement in banking regulation is maintaining minimum capital ratios.
Supervisory review
Banks are required to be issued with a bank license by the regulator in order to carry on business as a bank, and the regulator supervises licenced banks for compliance with the requirements and responds to breaches of the requirements through obtaining undertakings, giving directions, imposing penalties or revoking the bank's licence.
Market discipline
The regulator requires banks to publicly disclose financial and other information, and depositors and other creditors are able to use this information to assess the level of risk and to make investment decisions. As a result of this, the bank is subject to market discipline and the regulator can also use market pricing information as an indicator of the bank's financial health.
Reserve requirement
Main article: Reserve requirement The reserve requirement sets the minimum reserves each bank must hold to demand deposits and banknotes. This type of regulation has lost the role it once had, as the emphasis has moved toward capital adequacy, and in many countries there is no minimum reserve ratio. The purpose of minimum reserve ratios is liquidity rather than safety. An example of a country with a contemporary minimum reserve ratio is Hong Kong, where banks are required to maintain 25% of their liabilities that are due on demand or within 1 month as qualifying liquefiable assets. Reserve requirements have also been used in the past to control the stock of banknotes and/or bank deposits. Required reserves have at times been gold coin, central bank banknotes or deposits, and foreign currency.
Corporate governance
Corporate governance requirements are intended to encourage the bank to be well managed, and is an indirect way of achieving other objectives. Requirements may include: 1. To be a body corporate (i.e. not an individual, a partnership, trust or other unincorporated entity) 2. To be incorporated locally, and/or to be incorporated under as a particular type of body corporate, rather than being incorporated in a foreign jurisdiction. 3. To have a minimum number of directors 4. To have an organisational structure that includes various offices and officers, e.g. corporate secretary, treasurer/CFO, auditor, Asset Liability Management Committee, Privacy Officer etc. Also the officers for those offices may need to be approved persons, or from an approved class of persons. 5. To have a constitution or articles of association that is approved, or contains or does not contain particular clauses, e.g. clauses that
enable directors to act other than in the best interests of the company (e.g. in the interests of a parent company) may not be allowed.