chapter  2
30 Pages

The Bank Regulatory Framework and Formation and Conveyance of Regulatory Expectations

ByAlexander Dill

Chapter 2 covers the statutory and regulatory framework governing banks, the objectives of financial regulation, the supervisory structures of oversight prevalent worldwide, the jurisdiction of the federal financial regulatory agencies, the formation of regulatory expectations, and the myriad ways by which regulators convey these expectations. The primary objectives of financial regulation are financial stability, safety and soundness of individual financial institutions, and fair and transparent business conduct. The financial crisis made the first the foremost objective in global policymaking. The chapter explores how the inefficiencies or obsolescence of a given supervisory structure – such as the US’s highly fragmented, institutional system – can impose significant compliance costs and compliance risks on firms due to a lack of clarity in expectations or unpredictability of supervisory actions. These factors complicate firms’ risk-return calculus in pursuit of shareholders’ profit. Also relevant are the attributes of ‘regulatory design’, the choice of a rules-based or principles-based approach or a mixture of both, which play a role in communicating regulatory expectations. These attributes also can affect the compliance cost and risk variables. Cross-border comparisons in the areas covered by the chapter are made to the UK and EU.