FINS5550_International Banking_2007 Semester 1_Week 12 International Banking Regulation slide.pdf

? S.-J. Kim 1 Regulation of International Banking 2? S.-J. Kim 1. Introduction Financial market regulations are needed because (Financial) markets are incomplete market failures do occur banks are subject to asymmetric information and adverse selection problems and so they are more susceptible to market failure Consequences of financial market failure is economy wide 3? S.-J. Kim Banks deserve special regulatory attention because of the unique vulnerabilities and special roles they play. Banking sector solvency is vital for financial system stability and safety of payment system Transmission of monetary policy Credit allocation for special sectors 4? S.-J. Kim Contradiction between growth in banking (either deposit led or asset growth led) and solvency More credit creation Debt to equity ratio will rise growth may lead to a decline in profit margin and may lead to possible insolvency. Existence of deposit protection adds to moral hazard and leads to excessive risk taking Higher reliance on outside resources (mostly deposits) to finance assets lead to capital inadequacies and possible insolvencies when assets lose value. 5? S.-J. Kim Identified Risks of Banks are: Credit risk- default of counterparty to transaction Liquidity - insufficient funds when needed Interest-rate risk - value changes from interest rate Currency risk- value changes from exchange rates Country risk - counterparty unable to obtain forex Operation risk – mismanagement, fraud, computer failure, etc. 6? S.-J. Kim 2. Regulation types Safety and Soundness Solvency diversification of bank assets minimum requirements of capital or equity funds exposure limits (position risk) provision of guarantee funds (insurance) monitoring and surveillance (auditing and reporting) Liquidity liquidity ratios Better forecasts of liquidity outflows Access to liquidity transformation vehicles 7? S.-J. Kim Monetary Policy formal reserve requirements against deposits raises cost of funds for bank Banks a