Teacher: Student

Bank regulation
Bank regulation is a form of government regulation which subjects banks to certain requirements, restrictions and guidelines, designed to create market transparency between banking institutions and the individuals and corporations with whom they conduct business, among other things. As regulation focusing on key factors in the financial markets, it forms one of the three components of financial law, the other two being case law and self-regulating market practices.¹
Considering the banking industry's interconnection and the national (and worldwide) economy's reliance on banks, it's critical for regulatory bodies to keep control over these institutions' standardized processes. The law of financial sectors, often known as financial law, focuses on the financial (banking), capital, and insurance markets, which is another example of interconnection. The concept of "too large to fail" is frequently used by proponents of such legislation. Many financial organizations (especially investment banks with a commercial component) have too much sway over the economy to fail without catastrophic consequences, according to this theory. This is the basis for government bailouts, which involve the government providing financial aid to banks or other financial organizations that appear to be on the verge of failing. The notion is that without this assistance, the damaged banks would not only go bankrupt, but would also have far-reaching consequences throughout the economy.
The objectives of bank regulation, and the emphasis, vary between jurisdictions. The most common objectives are:

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  prudential—to reduce the level of risk to which bank creditors are exposed (i.e. to protect depositors)
  
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  systemic risk reduction—to reduce the risk of disruption resulting from adverse trading conditions for banks causing multiple or major bank failures^[4]
  
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  to avoid misuse of banks—to reduce the risk of banks being used for criminal purposes, e.g. laundering the proceeds of crime
  
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  to protect banking confidentiality
  
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  credit allocation—to direct credit to favored sectors
  
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  it may also include rules about treating customers fairly and having corporate social responsibility.
  

Bank regulation is a complex process and generally consists of two components:

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  licensing, and
  
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  supervision.
  

The first component, licensing, sets certain requirements for starting a new bank. Licensing provides the licence holders the right to own and to operate a bank. The licensing process is specific to the regulatory environment of the country and/or the state where the bank is located. Licensing involves an evaluation of the entity's intent and the ability to meet the regulatory guidelines governing the bank's operations, financial soundness, and managerial actions.^[6] The regulator supervises licensed banks for compliance with the requirements and responds to breaches of the requirements by obtaining undertakings, giving directions, imposing penalties or (ultimately) revoking the bank's license.
The second component, supervision, is an extension of the licence-granting process and consists of supervision of the bank's activities by a government regulatory body (usually the central bank or another independent governmental agency). Supervision ensures that the functioning of the bank complies with the regulatory guidelines and monitors for possible deviations from regulatory standards. Supervisory activities involve on-site inspection of the bank's records, operations and processes or evaluation of the reports submitted by the bank. Examples of bank supervisory bodies include the Federal Reserve System and the Federal Deposit Insurance Corporation in the United States, the Financial Conduct Authority and Prudential Regulation Authority in the United Kingdom, the Federal Financial Markets Service in the Russian Federation, the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) in Germany.