Bank regulation is a form of regulation by the government which subjects banks to certain guidelines, restrictions, and requirements, meant to create market transparency between banks and corporations or individuals with whom they conduct business.
A system of bank regulation is required to ensure that no financial institutions have such a concentrated amount of risk that could be detrimental to the financial system. Many people depend on the reliable functioning of the banking system to pay bills, provide their families, and invest. When banks fail to fulfil their duties to the economy due to poor risk assessment or over speculation, it is regulators’ role to step in right the banking industry.
It can be argued that banking regulation prevents growth and innovation. This hurts development and curtails financial institutions to engage in more profit-making arrangements. On the other hand, regulation of banks is necessary to prevent any abusive practice and guarantee fair access for all people. This enables increased opportunities for lending to underserved and poor communities.
It is possible to both under-regulate and overregulates. The government may become too lax in its oversight roles and fail to implement basic provisions of the law. The government can also put in place numerous banking rules that increase banks’ administrative coasts. To positively affect the economy, it is the government’s role to strike a proper balance between laissez-faire and regulation.