Financial Regulation

Introduction

30,000. That is roughly the number of pages in MiFID II (a legislative framework in the EU aimed at regulating financial markets)! And that is just one of many recent initiatives. All in all, the rule books that govern conduct by banks and other financial institutions are absolutely staggering and it’s probably fair to say that no one can be an expert in all aspects of financial regulation.

In order to not get too lost or confused, it’s important to understand the big picture. That way, when confronted with actual financial regulation, we should be more able to understand what it is trying to achieve. Understanding at least the fundamentals of financial regulation is crucial in any finance career.

In our new online Bank Regulations course, we explain some of the fundamental ideas that you need to understand in order to navigate the regulatory waters.

Key Learning Points

• Financial regulations provide frameworks to help ensure efficient capital and credit allocation
• There are many rules and regulations in place which cover systematic risk control, prudential oversight, avoiding misuse of the system and maintaining confidentiality
• Capital and liquidity initiatives govern how much capital banks must hold in relation to the risks they take (riskiness of the assets held)

So, Why Do We Have Financial Regulation?

The overriding principle of financial regulation is to help ensure efficient capital and credit allocation. If credit is efficiently allocated, then there is a fair chance that money ends up where it provides most good (i.e. “leading to economic growth”). In order to ensure this overriding principle, there are several factors to look at, such as systemic risk control, prudential oversight, avoiding misuse of the system, maintaining confidentiality in the system and making sure that market participants are treated fairly.

What Are the Key Recent Initiatives?

Recent regulatory initiatives are plentiful, but they tend to be divisible into three relatively distinct parts.

The first part is “Capital and Liquidity” initiatives. These are rules that, for example, govern how much capital banks must hold in relation to the risks they take. Essentially, this means the Basel accords.

Another type of initiative is “Structural” reform. This attempts to change the functioning of the market by making relatively simple adjustments to the rules. A recent example of structural reform is the Volcker rule, which prevents deposit-taking institutions from engaging in proprietary trading. A historical example was the Glass-Steagall Act in the US which separated investment banking from deposit.

The third type of initiative is the behemoth pieces of regulation, recently launched such as MiFID2 and the Dodd-Frank Act, which both cover huge parts of the financial markets and are sometimes called “Infrastructure and Transparency” initiatives.

In our online course, we look at how historical regulations have shaped the global financial markets and specific details about the initiatives listed above, and more. You will also learn about who the key global regulators are and some of the fundamental tools that they use.