Copy of Legal Framework Assignment 2.docx
- 1. EMBF batch (10), Group 4, Assignment 2 1 What is functional regulation? Functional regulation refers to the process by which a regulatory authority oversees and controls the activities of a specific industry or sector to ensure that it operates in a manner that is fair, efficient, and in the best interest of the public. This type of regulation focuses on the functions and operations of the industry rather than specific rules or requirements. The goal of functional regulation is to promote competition, protect consumers, and maintain the stability and integrity of the industry. It involves setting standards, monitoring compliance, enforcing regulations, and addressing any issues or concerns that may arise. Functional regulation can be found in various sectors such as telecommunications, energy, finance, healthcare, and transportation. What is institutional regulation? Institutional regulations for the banking industry are the rules and guidelines that banks and other financial institutions must follow in order to run smoothly. The goal of these rules is to protect customers' interests, keep the economy stable, and make sure that the banking system is stable, honest, and open. Some institutional rules that apply to the banking business are: Capital Adequacy Requirements: Banks must keep a certain amount of capital on hand to cover possible losses and keep their finances stable. Basel III gives rules for making sure that a bank has enough cash. Needs for Liquidity: Banks must keep enough cash on hand to meet their short-term commitments. Regulatory officials tell banks what liquidity ratios they need to follow. Risk Management: Banks must set up strong risk management systems and procedures to find, evaluate, and lower different types of risk, like financial risk, market risk, and operational risk. Know Your Customer (KYC) and Anti-Money Laundering (AML) Rules: Banks are required to take steps to stop illegal actions like money laundering, funding for terrorism, and more. KYC rules make sure that banks have checked the identities of their customers. Consumer Protection: There are rules in place to protect the rights and interests of bank customers. These rules include fair loan practices, clear fees and charges, and ways for customers to file complaints. Supervision and Reporting: Regulatory officials keep a close eye on banks and other financial institutions to make sure they follow the rules. Banks have to send in reports and statements on a regular basis to be open and responsible. It's important to keep in mind that rules about institutions may be different in different countries and areas. So, if you want to know more about banking rules in your country, you should talk to the regulatory officials or central banks of that country. Financial regulation is a subset of institutional regulation that focuses on the regulation and supervision of financial firms and institutions. Institutional rules, on the other hand, cover a wide range of organizations and their governance, and financial institutions are only one of many types.
- 2. EMBF batch (10), Group 4, Assignment 2 2 Objectives and regulatory authorities vary depending on the specific type of organization being regulated. Financial Stability vs. Asset Price Stability: Understanding the Distinctions In the vast realm of economics and finance, the concepts of financial stability and asset price stability stand out as critical benchmarks for assessing the health of an economy. While both terms relate to the steadiness and predictability of economic elements, they cater to different dimensions and have distinct implications. This essay delves into the fundamental differences between these two concepts, touching upon their definitions, implications, and the tools utilized to achieve them. What is Financial Stability?: The Backbone of a Resilient Economy Financial stability, at its core, concerns the resilience of the financial system against external shocks. It ensures that the system continues to function optimally even under challenging economic conditions. A financially stable environment is characterized by a smooth and efficient flow of funds, facilitated by well-functioning financial institutions, markets, and infrastructures. The main objective of financial stability is to ensure the smooth functioning of the financial system, minimize the risk of financial crises, and promote sustainable economic growth. The absence of such stability can lead to severe disruptions like bank runs, systemic defaults, and contagion effects, all of which can profoundly destabilize the broader economy. To safeguard against such threats, central banks and regulatory bodies employ various tools. In most countries central banks are the regulators that command necessary knowledge, expertise, and resources to promote financial stability. As a result, promoting financial stability has become part of the mandates of many central banks around the globe. Capital adequacy requirements, liquidity provisions, and macroprudential policies are some notable strategies that ensure the soundness of the financial system. What is Asset Price Stability? Asset price stability refers to a condition within financial markets where the prices of various assets, such as equities, bonds, real estates, and commodities, remain relatively consistent over time, exhibiting minimal fluctuations and avoiding sharp, unpredictable movements. Maintaining asset price stability is often a goal of central banks and regulatory authorities as it contributes to overall economic stability, sustainable growth and the prevention of financial crises. To achieve asset price stability, monetary policy adjustments, such as altering interest rates, and sector- specific macroprudential measures are often put into play. Conclusion In essence, while financial stability focuses on the broader health of the financial system, ensuring its capability to withstand adverse conditions, asset price stability is preoccupied with the consistent and true representation of asset values. Both are pivotal in their rights, safeguarding the economic ecosystem from potential pitfalls. Recognizing the nuances between them is crucial for
- 3. EMBF batch (10), Group 4, Assignment 2 3 policymakers, investors, and stakeholders to make informed decisions and craft strategies that bolster the economy's overall well-being. Ref: Willem H. Buiter, a former chief economist at Citibank and former member of the Monetary Policy Committee of the Bank of England, is an independent economic adviser. https://www.project-syndicate.org/commentary/can-central-banks-fight-inflation-without-crushing-banks- by-willem-h-buiter-2023-03