Banking regulation

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Banking regulation is the activity of the state to set standards that define its role in the banking sector, in particular regulations on the supervision of credit institutions . The terms banking supervision and regulation are not sharply separated from one another and are sometimes used as synonyms. Here we understand banking regulation to mean laying down general rules, while banking supervision means enforcing them. The aim of banking regulation is usually to strengthen the stability of the financial system, but there can also be social and industrial policy motives. The banking system belongs to the developed countries to the regulated strongest submarkets of an economy.

General

An economic system oriented towards the market economy is mainly characterized by the principles of freedom of decision and freedom of contract on the one hand and personal responsibility on the other. With the autonomy of being able to make one's own economic decisions, there is also the obligation to be responsible for the consequences of one's own decisions. One aspect of this freedom of contract is the freedom of trade , i.e. the freedom to operate commercial enterprises (such as credit institutions) without special state requirements. That is why large parts of western economies are allowed to operate commercially in the markets without special state supervision. The trade regulations of 1869 still only subject a few trade activities to special (trade police) control; banking activity as such was, in any case, favored by unrestricted freedom of trade.

Reasons for banking regulation

Severe economic crises such as those of 1837 , 1857 or the Great Depression , each of which spread to a greater or lesser extent on the financial markets, showed the governments that market failure can occur. Explanations for this observation are sought in banking theory . Since, at the same time, the functioning of modern economies is absolutely inconceivable without credit institutions , a way had to be found to maintain the functionality of the credit system. Therefore, as a result of the German banking crisis in 1931, the first Banking Act was passed in Germany in January 1934.

From a regulatory point of view, there are the following reasons for monitoring credit institutions by state institutions:

If a bank were to go bankrupt , investors would lose (part of their) deposits. Since many banks could be affected at the same time because of the mutual dependencies and interdependencies, a general banking crisis can be triggered. This would destroy large parts of the national wealth and endanger the entire national economy. In order to guarantee the protection of investors, national deposit insurance systems have been created around the world .
In an ideal world, competition would result in bank customers avoiding banks with risky business policies and investing their money in banks that operate well. In practice, however, it is difficult for the investor to recognize the actual risk of the bank's business policy due to a lack of transparency. It is therefore considered necessary to enforce the necessary transparency through accounting and disclosure regulations.
All cash and cashless payment transactions in an economy are organized and processed by banks. This payment traffic would be severely disrupted by banking crises, so that the functioning of an economy would be at least considerably impaired.

Regulatory levels of banking regulation

In Germany, Austria and Switzerland, banking regulation is organized in two ways. On the one hand, the legislature has passed bank-specific laws that limit the type and scope of banking transactions ; on the other hand, compliance with these laws is monitored by state institutions.

Laws and Regulations

A large number of laws and regulations, which only apply in the relationship between credit institutions and banking supervisors, intervene in the banking system in detail. In Germany this is particularly the case

In the United States, the Dodd – Frank Act is particularly relevant.

Banking supervision

Goals of banking regulation

“BaFin only performs its tasks and powers in the public interest” ( Section 4 (4) FinDAG). On the one hand, this principle expresses the regulatory thought that there is no general state liability in favor of depositors; on the other hand, the focus exclusively on the public interest is an expression of the consideration that it is not the direct protection of depositors but the remedying of functional deficiencies in the banking market that is a state task .

The main objectives of banking supervision are  summarized in Section 6 of the KWG. The banking regulation should then counteract grievances in the credit system

  • jeopardize the security of the assets entrusted to the institutions,
  • impair the proper conduct of banking business or
  • can have considerable disadvantages for the economy as a whole.

The KWG specifies rules for financial institutions that they must observe both when setting up and when running their business. These rules are designed to prevent undesirable developments that could disrupt the smooth functioning of the banking system. How closely banks are supervised depends on the type and scope of the business they conduct. The main focus of the supervisory authority is to ensure that institutions hold sufficient equity capital and liquidity and that appropriate risk control mechanisms are in place.

Bank regulation cannot (and should not) prevent bankruptcy in every case . As a preventive measure , Sections 46 , 46a and 46b of the KWG provide the banking supervisory authority with opportunities to intervene in the event of emerging crises.

criticism

The not very widespread idea that one can do without banking regulation is discussed under the heading of free banking . Even among the laissez-faire proponents, only a minority is in favor of realizing free banking.

literature

  • Charles Albert Eric Goodhart: Financial Regulation . 1998

Web links

References and comments

  1. ^ Charles Albert Eric Goodhart: Financial Regulation . 1998, p. Xvii
  2. ↑ An example of social policy through banking regulation is the Community Reinvestment Act .
  3. ^ Wolfgang Stützel: Banking policy today and tomorrow . 1964/1983, p. 9
  4. ↑ the interbank loans, i.e. mutual lending among the banks, reach almost 30% of the balance sheet total at universal banks; see. Deutsche Bundesbank: Banking Statistics, December 2008 , p. 6
  5. ↑ so knows the commercial code with the §§ 340 ff. HGB special regulations for the accounting at credit institutions
  6. ↑ Werner Neus u. a .: Basics of banking regulation in Germany . March 2007, p. 15
  7. ↑ BaFin on banking supervision ( memento of the original dated June 9, 2009 in the Internet Archive ) Info: The archive link was inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this notice.  @1@ 2Template: Webachiv / IABot / www.bafin.de
  8. ^ Melvin W. Reder, Economics: The Culture of a Controversial Science , The University of Chicago Press, 1999, ISBN 0-226-70609-5 , p. 253