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Give A Brief Analysis Of Current Banking Regulation Within The United Kingdom, With Particular Reference To The Threat Of Systemic Risk.

1904 words - 8 pages

Bank regulation TechniquesFinancial regulation and supervision within the United Kingdom has a history of being very informal, though this could be argued to be more efficient . Regulation can be seen as "the narrower process of setting rules, both by supervisors and by law" , though it should be noted that regulation should not have the effect of guaranteeing that firms will never fail. The specific purpose of regulation is to "ensure the safety and soundness of the financial system and economic neutrality in the allocation of credit with the ultimate goal to safeguard confidence in the banking system" . As an upshot of the secondary banking crisis in the early 1970's the 1979 Banking Act was introduced . This set out the first regulatory requirements which banks had to adhere to . The collapse of Bearings and the Bank for Credit and Commerce International (BCCI) prompted further regulations to be introduced and this was through the Banking Act 1987 . The current legislation is under the Financial Services and Markets Act 2000 which came into force on 1 December 2001. This transferred the task of regulating the banking industry from the Bank of England to the Financial Services Authority (FSA), and treats core banking as "just one more financial service to be regulated" . The Memorandum of Understanding (MOU) was also introduced which details the interaction between the Bank of England, the FSA and the Treasury in ensuring financial stability within the economy. There are four main objectives of banking regulation which are to prevent systemic risk, to protect consumers, the prevention of fraud plus money laundering and to encourage competition.The desired method of prudential regulation is to prevent unstable banks from actually entering the market place. This within the banking sector is known as screening. There are standards of entry that a bank has to meet in order for it to obtain a licence to trade. This includes the four eye requirement and a capital adequacy requirement of at least 5 million euros. Howard Davies within his speech outline 3 different effects that requiring banks to hold regulatory capital will have,1) First, it provides a buffer to absorb unexpected losses. The risk of insolvency is therefore reduced, even if the behaviour of management does not change2) Second, if the regulatory capital requirement exceeds what the firm would voluntarily hold, the cost of its failure to equity holders increases, the cost of failure is thus shifted towards the owners and away from the other firms and their customers3) Market confidence and public confidence may be higher in a firm that is know by markets and customers to be well capitalisedBanks should continuously demonstrate that they are still worthy of the authorisation. The FSA should constantly monitor and supervise the banks to ensure they are conducting their business with integrity and in compliance with proper standards . The CAMEL form of prudential regulation has been...

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