The legal and statutory framework of banks activities
Category: General Banking
The statutory framework
In every country, bank activities are strictly regulated.
Why is this necessary? What is the content of the regulation? Such questions have to be answered.
During the second half of last century, it seems that economic crises have had a financial and banking dimension. Public authorities then noticed the magnifying role played by Banks crises over the general economic situation; this is the main reason why banks are strictly regulated.
Controls of banking systems can vary a lot depending on what type of financial system they come under, but, at the moment, it appears that banking regulations are mainly a safety net.
In a free-banking system, there was a natural selection of banks, the strongest survived. The theory of the last resort lender makes a difference between liquidity and solvency; due to the appearance of financial markets, there has been liquidity crisis, putting the stability of the banking system in danger.
The last resort lender, i.e. the Central Bank, has then to help Banks meet a liquidity problem and not those whose assets have lost value; so these now ball effect of the crisis is stopped.
A second approach applies to better organised banking systems, with a higher degree of organisation. The existence of large banks appear to be the best protection against bank failures because risks can be divided and savings account holders think that the government will not let a large Bank go bankrupt.
Bank regulations as a safety net are seen as necessary because deregulation and changes have increased and diversified risks.
The regulation applies to:
Monetary policy, since the banks are the main creators of money and their interest rates influence financial attitudes.
Prudential control over credit institutions so as to limit excess risks.
Modernisation of banking sector to match the rules with changing operators and operations.
Appropriate measures if a bank, despite these regulations meets difficulties.
The regulatory bodies
Because its financial system is highly developed, France has developed a set of regulatory bodies with various responsibilities, for example:
National Authority for credit, in charge of Monetary policy, and operating conditions for banks.
Credit Institution Committee in charge of agreements and authorisations for banking operations.
Committee for banking regulations in charge of controlling bank business.
Banking Commissions in charge of checking if banks comply with regulations.
Objectives of banking regulations are as follows:
Harmonisation of competition conditions
Modernisation of operating procedures according to the evolution of the markets
Strengthening of banking security
Improvement of relationship with customers.
Main points of a Banking regulation system (in E C)
Access to banking activities: necessary agreements for minimum capital and a business project.
A unique agreement valid in the E C, giving the right to operate in every banking field of activity
A control by the country of origin.
Bank operations — For most operations, Banks can work out their own rules; but in some cases, conditions are given by financial authorities:
Resources collected from customers
Mergers and acquisitions
Organisation of the Monetary Market — Regulation decides who can operate and which products can be offered
Bank accounting
Setting up evaluation and accounting rules
Publicity
Consolidated accounts
Information to the financial Authorities
Management rules
Liquidity
Solvency
Management control
Monetary policy (compulsory reserves)
Management of Banks in a difficult situation
System of deposit-insurance — This system is quite satisfactory in France as it is not frequently used unlike in the USA.
Local Banking system security
The obligations of share-holders: it is more of an invitation than an obligation to give support to banks.
There is a community of interest if not a solidarity between banks that will help the bank in trouble.
The last resort lender, i.e. the Central Bank, can intervene, but does not do it too often because it might encourage banks to choose risky strategies.
The role of a central Bank
The Central Bank decides upon the monetary policy and organises it.
The Central Bank looks upon the rates between the local currency and the foreign currency.
The Central Bank looks after the state reserves in gold and foreign currencies.
The Central Bank looks after the mechanisms of exchange of payments
The Central Bank can finance other credit institutions.
The Central Bank manages different information services about the economy, firms, risks, etc.…
The Central Bank is in charge of fiduciary circulation
The Central Bank reports to the state government (reporting)
The Central Bank computes the Balance of Payments.