Banking Regulation
How rules and oversight keep the financial system safe from crises
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0 / 5 completedWhy Banking Regulation Exists
Banks operate with incredible leverage—holding just $10 in capital for every $100 in assets. This makes them powerful engines of economic growth but also dangerously fragile. Banking regulation exists to prevent bank failures from cascading into economic catastrophe.
The Regulatory Response to Crises
After Great Depression: Separated commercial and investment banking. Created FDIC insurance. Prevented banks from gambling with deposits.
First global capital standards. Required banks to hold 8% capital against risk-weighted assets. Created level playing field internationally.
After 2008 crisis: Created stress tests, living wills, Volcker Rule. Designated systemically important banks. Enhanced consumer protection.
Strengthened capital requirements. Added liquidity requirements (LCR, NSFR). Introduced leverage ratio. Better quality capital definitions.
Three Pillars of Bank Regulation
Banks must hold enough capital to absorb losses. Basel III requires 10.5%+ of risk-weighted assets.
Regular exams, stress tests, and living wills ensure banks can survive crises without bailouts.
CFPB and other agencies protect consumers from predatory lending, hidden fees, and unfair practices.
Regulation is always reactive—new rules come after crises reveal weaknesses. The challenge is staying ahead of innovation and complexity.