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Bank regulation

Bank regulation Definition

The banking industry are under certain regulations and requirements that aim to uphold the soundness and integrity of the financial system.

Reserve requirements

This type of regulation have perhaps lost the role it once had in places like for example the United States. Today (2004) deposits in United States banks are roughly $8 trillion while central bank "reserves of depository institutions" are less than $50 billion. Since reserve requerments apply to just "transaction deposits" today.

The reason for these reserves are both to put a limit on how much the supply of deposits (money and credit) can grow. And to work as a cushion in case of a severe recession that leads to a "bank run" ("run on the bank").

Capital requirements

Internationally, the Bank for International Settlements's Basel Committee on Banking Supervision influence each country's capital requirements. In 1988, the Committee decided to introduce a capital measurement system commonly referred to as the Basel Capital Accord. The latest capital adequacy framework is commonly known as Basel II.

In the United States, "depository institutions" are subject to risk-based capital guidelines issued by the Board of Governors of the Federal Reserve System (FRB).

Bank run

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