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6 views

Presentation 2

Uploaded by

fsnoobplayz
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Presentation

Topic
Financial Regulation

Presented by: Fareh Salman


What Is Financial Regulation?

• Financial regulation refers to the laws and


rules that govern the financial industry,
including banks, investment firms, and
insurance companies. These regulations are
designed to protect customers, maintain the
financial system’s stability, and promote fair
competition.
Government Safety Net

• Government safety net also known as deposit


insurance s the government’s guarantee that an
account holder’s money at an insured bank is safe up
to a certain amount, currently $250,000 per account.
Deposit insurance is provided by the
Federal Deposit Insurance Corporation (FDIC), a
government agency that collects fees – insurance
premiums – from banks.
How does FDIC work?

• Historically, the FDIC pays insurance within a few


days after a bank closing, by either (1) providing each
depositor with a new account at another insured bank
in an amount equal to the insured balance of their
account at the failed bank, or (2) by issuing a
payment to each depositor for the insured balance of
their account at the failed bank
Restrictions on Asset Holdings

• The moral hazard associated with a


government safety net encourages too much
risk taking on the part of financial institutions.
Bank regulations that restricts assets holdings
are directed at minimizing this moral hazard.
Continued

• Attempts to restrict financial institutions form


too much risk taking

Bank Regulations
• Promote diversification
• Prohibit holdings of common stock or equity.
Capital Requirements
• Government-imposed capital requirements are
another way of minimizing moral hazard at
financial institutions.

• Based on leverage ration, the amount of capital


divided by the bank’s total assets: to be
classified as well capitalized a bank’s leverage
ratio should exceed 5%.
Prompt Corrective Action

• If the amount of a financial institution’s capital


falls to low levels, serious problem occurs.

• To prevent this, The Federal Deposit Insurance


corporation improvement act 1991 adopted
prompt corrective action provisions that
required the FDIC to intervene earlier and more
vigorously when a bank gets into trouble.
Assessment of Risk Management

• Greater emphasis on evaluating soundness of


management process.
• Trading Activities Manual of 1994 for risk
management was based on:
1) Quality of oversight provided.
2) Adequacy of policies and limits for all risky activities.
3) Quality of risk management and monitoring systems.
4) Adequacy of internal controls.

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