Learning Objectives:

  • Explain the economic and legal rationale for banking regulation.

  • Understand systemic risk, moral hazard, and information asymmetry.

  • Describe the core principles of financial regulation and supervision.

1.1 Why Regulate Banks?

The regulation and supervision of banks is essential to maintain the stability and integrity of the financial system . As the UCD module notes, financial regulation explores “the principles of regulation which protect the safety and soundness of the financial system and which protect consumers” . The University of Chester module covers “the analysis and evaluation of the role of banks and other financial institutions in society” and “critical analysis of the regulatory framework underpinning the banking environment” .

Key rationales include:

  • Systemic Stability: Preventing the failure of individual institutions from triggering a broader crisis.

  • Protection of Depositors: Safeguarding depositor funds.

  • Consumer Protection: Preventing unfair, deceptive, or abusive practices.

  • Market Integrity: Ensuring fair and transparent financial markets.

  • Prevention of Financial Crime: Combating money laundering, terrorist financing, and fraud.

1.2 Systemic Risk and Moral Hazard

The EM Normandie module identifies “key financial crises shaping regulation” as a core topic . Two key concepts are:

Systemic Risk: The risk that the failure of one financial institution can trigger a cascade of failures throughout the financial system. This interconnectedness is a key rationale for regulation.

Moral Hazard: The risk that banks may take excessive risks because they believe they will be protected from failure (e.g., by deposit insurance or “too big to fail” policies).

1.3 Core Principles of Financial Regulation

The EM Normandie module covers “core principles of financial regulation and supervision” . Key principles include:

  • Prudential Regulation: Ensuring banks hold sufficient capital and manage risks effectively.

  • Conduct Regulation: Ensuring fair treatment of customers and market integrity.

  • Resolution: Providing mechanisms for the orderly resolution of failing banks.

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