PDF Int Banking #10

PDF Int Banking #10 - MODULE 10 Supervision and Regulation...

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1 MODULE 10 – Supervision and Regulation Introduction In this Module, we will discuss supervision and regulation of the IB system. The Basel Committee and Basel Accord will be discussed comprehensively, especially the main pillars of the Basel Accord. Furthermore, we will discuss the role of the IMF and its guidelines for central bankers. A brief history of the Savings and Loan crisis of the 1980’s will be discussed. The issue of banking regulation, preventive measures taken to solve the Savings and Loan crisis will be discussed. The capital adequacy directive for the banking system through the Basel Accord will be reviewed. And finally, the credit risk issue for the banking system will be discussed and the student will be introduced to the VaR model. Objectives Upon successful completion of this module, the student should be able to: • Articulate on the Basel Accord and its pillars. • Discuss the role of the IMF and its guidelines for central bankers. • Elaborate on the Savings and Loan crisis in the U.S. in the 1980’s, especially the causes and the solution. • Examine the regulation of the banking system by the international regulatory authorities. • Describe the Basel Accord’s capital adequacy requirement and VaR measure. L ike every other entity, the IB system requires a series of supervisory and regulatory guidelines in order to avoid banking crises and enable banks to provide credit and services in their IB activity. It is essential for every international bank to ensure that their operation and activities are prudent, especially in cross-border lending. Lack of prudence and supervision may eventually result in a bank’s failure in its international operation. Empirical evidences indicate that every banking crisis started with a lack of supervision and prudence; and gradually the liquidity issue was compromised and the domino effect caused banks to fail, and subsequent panic led to contagion in the banking system. Therefore, the need for regulations and supervision guidelines led to the establishment of several regulatory agencies. The most notable one is the Basel Accord. Banking members, through this Accord, have agreed to and are bound by certain guidelines to ensure liquidity, and thus maintain a sufficient level of capital to avoid insolvency. The Accord agreement and its Committee, which is responsible for implementation of the Accord, operate in the town of Basel in Switzerland. Each central bank has representation on the Basel Committee, and there is also regulatory representation from each of the G10 industrial economies. The role of the Basel Accord is to enact supervisory guidelines and make recommendations for maintaining the capital adequacy requirement for all central bankers. Unfortunately, the Committee lacks enforcement power over central bankers, since each central
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This note was uploaded on 11/06/2011 for the course FIN 4634 taught by Professor Badet during the Fall '09 term at FIU.

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PDF Int Banking #10 - MODULE 10 Supervision and Regulation...

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