Learning Objectives:

  • Understand the rationale for banking regulation.

  • Explain the banker-customer relationship.

  • Describe key regulatory bodies and their functions.

6.1 The Rationale for Banking Regulation

Two characteristics are underlined in the study of commercial banking: state regulation, primarily dictated by concerns about banks’ position as deposit takers, and banks’ role in the financing of industry and economic growth . The regulation of commercial banks is essential to protect depositors and maintain financial system stability.

6.2 The Banker-Customer Relationship

The banker-customer relationship is a fundamental aspect of commercial banking. It is a contractual relationship governed by common law and statutory regulations. Key elements include:

  • The bank’s duty of secrecy and confidentiality.

  • The bank’s duty of reasonable care and skill.

  • The customer’s duty to act in good faith.

  • The bank’s right to charge interest and fees.

6.3 Key Regulatory Bodies

Commercial banks are subject to oversight from multiple regulatory agencies :

United States:

  • Federal Reserve: The central bank, responsible for monetary policy and regulating bank holding companies.

  • Office of the Comptroller of the Currency (OCC): Charters, regulates, and supervises all national banks.

  • Federal Deposit Insurance Corporation (FDIC): Insures deposits and supervises financial institutions for safety and soundness.

Europe:

  • European Central Bank (ECB): Supervises significant banks in the Eurozone.

  • European Banking Authority (EBA): Develops regulatory technical standards and promotes supervisory convergence.

UK:

  • Bank of England: The central bank, responsible for monetary policy and financial stability.

  • Prudential Regulation Authority (PRA): Regulates banks and insurance companies.

  • Financial Conduct Authority (FCA): Regulates conduct and consumer protection.

6.4 Regulatory Frameworks

The Basel Accords, developed by the Basel Committee on Banking Supervision, provide a global framework for capital adequacy and risk management. The University of Edinburgh course includes “capital adequacy” as a key topic .

 

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