Banking and Financial Regulation

This chapter focuses on the universal principles of banking and financial regulation. Banking and financial regulation is needed to protect the financial system, which provides functions essential to economic development. Traditionally, financial regulation focused on banking because banks historically have aggregated moneys (primarily by taking deposits from customers) and then allocated those monies (by making loans to borrowers). Traditional financial regulation is geared toward ensuring that deposit-taking banks can continue to perform these functions efficiently. In recent years, however, shadow banking has begun to overtake traditional banking. Financial regulation has two overall goals: to ensure that the components of the financial system—firms and markets—can efficiently perform their underlying economic functions, and to ensure the financial system’s ability to itself function as a network within which those components can operate.