Financial regulation and supervision create the environment in which banks can offer essential intermediation services sustainably; however, these efforts face many hurdles.
New trade deals that are being negotiated pose an imminent risk to financial regulation and limit states’ capacity for future regulation, so these should not be signed as is.
Regulation
International markets rely on an intricate web of laws, regulations and policy enforcement. Financial regulators must craft laws to meet current and future economic needs while protecting market participants from fraud, misconduct and abuse. They also must establish consistent standards and allocate resources efficiently so as not to burden small firms or impede economic development.
Financial regulators must not only enforce applicable laws and prosecute market misconduct, but must also educate the public through encouraging transparency. Disclosure can help mitigate bank failure risks by alerting depositors and creditors of potential problems before it’s too late – something SVB’s collapse and Signature Bank’s closing illustrate. Regulatory disclosures also help identify conflicts of interest which might derail market integrity or compromise financial stability – regulatory disclosure helps create level playing fields between participants.
Supervision
Supervision refers to the practice of overseeing financial institutions by overseeing, inspecting, and assessing them on an ongoing basis. This typically entails meeting with key decision-makers, evaluating business practices, and judging whether they operate safely and responsibly. Supervision can vary according to size and complexity of firms in order to minimize risks to broader financial systems.
Financial intermediation regulation aims to promote more resilient financial intermediation that can better withstand shocks and contribute to long-term economic growth, but this requires great finesse: distinguishing intended effects of supervision/regulation from unintended ones which undermine its goals is of critical importance.
As an example, the European Central Bank oversees banks in the euro area through its banking supervisory arm (ECB Banking Supervision), in cooperation with national competent authorities and banking supervisory bodies known as national competent authorities. Furthermore, the Basel Committee on Banking Supervision established a capital measurement framework which influences regulatory capital requirements across individual countries; this is known as Basel Accords.
Cooperation
An international trade agreement can go well beyond being simply an economic arrangement: it can also have significant ramifications on financial regulations and supervision, which is especially significant when international cooperation efforts involve regulatory harmonization efforts.
Letters of credit (LCs) provide an international agreement can offer solutions to risks that might thwart transactions such as currency, political and sovereign risk and financial instability issues in any one country.
Additionally, these agreements can be negotiated in private negotiations influenced by industry lobbyists that can compromise or undermine regulatory initiatives. As a result, they could end up weakening or even dismantling regulatory efforts altogether.
In an increasingly complex and chaotic financial landscape, supervision provides a complementary role to regulation by quickly adapting to financial innovations. For instance, it could limit risk-weighted asset variations by placing restrictions on model inputs or stricter criteria for model approval; this would enable supervisors to identify potentially destabilising behaviour and act against it, ultimately contributing to more secure and robust financial systems.
Compliance
Protecting investors and improving corporate governance are two major benefits of regulation; however, its implementation also adds another task for people charged with upholding them. For example, the Sarbanes-Oxley Act held stock market companies accountable for their financial statements while simultaneously increasing internal controls – but at a considerable expense to company efficiency.
Effective supervision and regulation strengthen the resilience of financial institutions, enabling them to provide critical intermediation services across a spectrum of potential economic and financial conditions for households and businesses alike. To do so effectively requires distinguishing between intended and unintended effects of regulatory decisions through data analysis.
Compliance requirements require banks and trade finance providers to conduct extensive due diligence checks on international trade partners, including verifying legal structures, screening for politically exposed persons and monitoring transactions real time for sanctions violations. While compliance may slow transactions down or incur extra costs when handled improperly by trade finance providers, when managed appropriately compliance can actually facilitate international trade.