The Bank Regulatory

Environment
Unit II
 The Need For Regulation (Why are banks regulated?)

• To protect the safety of the public’s savings.

• To control the supply of money and credit in order to achieve a nation’s
broad economic goals (such as high employment and low inflation).
• To ensure equal opportunity and fairness in the public’s access to credit
and other vital financial services.
• To promote public confidence in the financial system, so that savings
flow smoothly into productive investment, and payments for goods and
services are made speedily and efficiently .
• To avoid concentration of financial power in the hands of a few
individuals and institutions.
• To help sectors of the economy that have special credit needs (such as
housing, small business, and agriculture .
 Regulators

• Office of the Comptroller of the Currency

• Established 1863. Charter national banks (about 1/3 of total banks).
Examine national banks and has the power to approve or disapprove their
merger applications
• Federal Reserve System ( Central Bank)
• Regulate all national banks are members of the Fed and 992 state banks
have chosen to become members.
•  Federal Deposit Insurance Corporation (FDIC)
• Ensures the deposits of member banks. Levies insurance premiums,
manages the deposit insurance fund, and carries out bank examinations.
 The role of Nepal Rastra Bank in the regulation of commercial banks.

• Control of the money supply

• Stabilizing the money and capital markets
• Lender of Last resort
• Maintaining and improving the payments mechanism
• Maintaining a sound banking and financial system
• Carrying out monetary policy
• Providing information to the public
 Control of the money supply:

Central bank plays several important role in a modern economy. The 
most important role is control of the money supply. Which is for,
•  To control the inflation 
•  To change the economic activity
•  To influence the growth rate of economy as a whole .
 Stabilizing the money and capital markets
  Another  important  role  of  central  bank  is  stabilizing  the  money  and 
capital markets.
 If the financial markets are unruly, with more fluctuation in interest 
rates  and  securities  prices  or  financial  institutions  are  likely  to  to 
frequent collapse, public confidence in the financial system might be 
lost. 
The flow of funds would dry up, resulting in a drastic slowing in the 
rate of economic growth and a rise in unemployment.  
Central bank play a vital role in fostering the mature development of 
financial markets and in ensuring a stable flow of funds through those 
markets.
 Lender of Last resort
Sometime, financial institutions may face the problems of funds. When 
alternative  sources  of  funds  dried  up,  the  central  bank  provides  the 
funds  to  the  financial  institutions  as  per  their  needs  at  the  time  of 
financial crisis to solve the problem. 
Maintaining and improving the payments mechanism

Maintaining and improving the payments mechanism: 
• This involves clearing cheques 
• Providing adequate currency 
• Wiring funds 
• Preserving confidence in the value of monetary units.
Maintaining a sound banking and financial system:

Maintaining a sound banking and financial system:
•  By serving as a lender of last resort
• By providing reserves to depositary institutions
 Carrying out monetary policy

Various tools are used to carry out the monetary policy:

 Deposit reserve requirement
 Discount rates
 Open market operation etc.
 Providing information to the public
Providing information to the public:
  Information related current economic and financial developments 
and changes in policies etc. 
 Daily, weekly, monthly, quarterly etc.