Foundations and Architecture of Banking Regulation

Introduction

Banking regulation is the organized system of laws, rules, supervisory practices, institutional arrangements and market disciplines used to govern banks and protect the financial system. It exists because banking is not an ordinary commercial activity. Banks accept deposits that are payable on demand or at short notice, transform maturities, create credit, operate payment systems and are closely connected to households, firms, governments and other financial institutions.

A bank may therefore be privately owned, but its failure can impose costs on people who were not parties to its decisions. Depositors may lose access to essential funds; payment transactions may be disrupted; credit supply may contract; confidence may spread from one institution to another; and public authorities may face pressure to provide emergency support. Banking regulation attempts to manage these consequences without eliminating legitimate risk-taking or competition.

Regulation is consequently a balancing exercise. Excessively weak regulation permits unsafe conduct and exploitation. Excessively rigid regulation can suppress innovation, increase costs, reduce access to finance and encourage activity to migrate into less regulated sectors. The central task is to design rules and institutions that preserve trust, resilience, fair dealing and economic usefulness.

Learning Objectives

After studying this chapter, the learner should be able to:

1. Explain why banks require a distinctive regulatory framework.
2. Analyse information asymmetry, adverse selection, moral hazard and systemic risk.
3. Compare public interest, public choice and private interest perspectives on regulation.
4. Distinguish prudential, conduct, structural and macroprudential regulation.
5. Identify the principal legal sources of banking regulation.
6. Explain the mandates of central banks, supervisory authorities, deposit insurers and resolution authorities.
7. Describe the contribution of the Basel Committee, Financial Stability Board and other international standard-setting bodies.
8. Apply the regulatory architecture to a banking-failure scenario and evaluate its limitations.

1. Why Banks Are Regulated

1.1 Banks as special financial intermediaries

Banks perform four related functions:

• Deposit-taking: They hold money belonging to customers and promise repayment according to contractual terms.
• Maturity transformation: They commonly fund longer-term loans with shorter-term deposits.
• Credit allocation: They assess borrowers and allocate funds among households, businesses and governments.
• Payment and settlement: They enable transfers, clearing, card payments and other forms of economic exchange.

These functions generate social value but also vulnerability. A bank’s assets are often longer-term and less liquid than its liabilities. If many depositors demand repayment simultaneously, a fundamentally solvent bank may nevertheless lack immediately available cash. This is the classic liquidity problem associated with a bank run.

A simplified balance-sheet identity is:

Assets include cash, securities and loans. Liabilities include deposits and wholesale borrowings. Equity is the residual claim of owners and absorbs losses before creditors. The identity is an accounting relationship, not a guarantee of solvency. A bank can satisfy it while having insufficient liquidity, and it can be liquid today while its assets are worth less than its liabilities.

1.2 Information asymmetry

Information asymmetry exists when one party to a transaction has better information than another. In banking, borrowers generally know more about their projects, financial condition and willingness to repay than lenders do. Bank managers know more about the institution’s risk profile than depositors, while bank supervisors may know less than management about rapidly changing exposures.

Two consequences are especially important:

• Adverse selection occurs before a transaction. If a lender cannot distinguish safe from risky borrowers, high-risk borrowers may be disproportionately attracted to credit.
• Moral hazard occurs after a transaction. Once funds have been advanced, a borrower may take greater risks because some losses are borne by the lender. Bank managers may also increase risk when shareholders, creditors or the state bear much of the downside.

Banks reduce information problems through screening, monitoring, collateral, covenants and relationship lending. Regulation supplements these private mechanisms through disclosure, accounting standards, capital requirements, governance rules, licensing and supervision.

1.3 Externalities and systemic risk

An externality arises when an institution’s actions impose costs on others that are not fully reflected in its private decisions. A bank may choose a funding strategy that appears profitable but increases the likelihood of a disruptive failure. If its failure affects payment systems, counterparties or confidence in other banks, the social cost exceeds the private cost considered by management.

Systemic risk is the possibility that distress or failure in one part of the financial system impairs the functioning of the system as a whole. It may arise through:

• direct contractual exposures;
• common exposures, such as concentrated holdings of property or government debt;
• payment and settlement links;
• funding-market dependence;
• correlated behaviour and rapid asset sales; and
• loss of confidence and information contagion.

Systemic risk is not simply the risk that one large bank fails. A small institution can also be systemically important if it performs a critical function or is closely connected to other institutions. Conversely, size is only one dimension of systemic importance; substitutability, complexity and cross-border activity also matter.

1.4 Public confidence and the payments system

Money deposited in a bank is used by households and businesses for wages, purchases, tax payments and investment. Confidence in deposit convertibility is therefore economically significant. A loss of confidence can cause customers to withdraw funds even when the bank’s long-term assets remain sound.

Payment systems create additional interdependence. If one participant cannot settle, other participants may face liquidity shortages. Regulation addresses this risk through payment-system oversight, settlement rules, operational resilience requirements and access to central-bank liquidity where legally permitted.

2. Theories That Justify Banking Regulation

2.1 Public interest theory

Public interest theory views regulation as a response to market failures. Under this perspective, the state regulates where unregulated outcomes are likely to be inefficient, unstable or unfair. Banking provides a strong case because information asymmetry, externalities, collective-action problems and public reliance are persistent features of the sector.

The public interest rationale supports:

• minimum capital and liquidity standards;
• licensing and fit-and-proper requirements;
• depositor protection;
• consumer protection and fair disclosure;
• lender-of-last-resort arrangements;
• resolution regimes; and
• macroprudential tools that address system-wide vulnerabilities.

2.2 Public choice and regulatory capture

Public interest theory does not explain every regulatory outcome. Public choice theory emphasizes that regulators are also influenced by political incentives, organized interests and institutional self-interest. Banks may lobby for rules that protect incumbents, raise rivals’ costs or preserve implicit government support. Regulators may become dependent on the institutions they supervise, particularly where specialized expertise and frequent interaction are required.

Regulatory capture occurs when regulatory decisions systematically favour the regulated industry rather than the public purpose. Capture may be direct, through lobbying or conflicts of interest, or indirect, through shared professional assumptions and the movement of personnel between regulators and industry.

Safeguards include transparent rule-making, public consultation, independent oversight, cooling-off periods, disclosure of meetings, parliamentary accountability and strong internal ethics systems.

2.3 Private interest and market discipline

A private-interest perspective emphasizes the role of contracts, reputation, information production and market discipline. Depositors, creditors, shareholders, rating agencies and counterparties may monitor banks and price risk.

Market discipline is valuable but incomplete. Small depositors may lack information or incentives to monitor; deposit insurance reduces their incentive to do so; and creditors may believe that a large bank will receive public support. Market prices can also become procyclical, rewarding risk during booms and withdrawing funding abruptly during stress. Regulation should therefore complement—not assume away—private discipline.

3. Regulatory Objectives and Categories

A coherent regulatory framework begins by identifying objectives. Common objectives include:

1. Safety and soundness: reducing the probability that banks fail because of inadequate capital, liquidity, governance or risk management.
2. Financial stability: limiting disruptions that threaten the wider financial system.
3. Depositor protection: protecting eligible depositors from loss or delayed access to funds.
4. Consumer protection: promoting fair treatment, suitable products, transparent pricing and effective complaints handling.
5. Market integrity: preventing fraud, manipulation, money laundering and misuse of confidential information.
6. Competition and efficiency: preventing unjustified barriers to entry and abusive market power.
7. Financial inclusion: supporting reasonable access to useful and affordable financial services.
8. Operational resilience: ensuring that banks can withstand cyber incidents, technology failures and other disruptions.

These objectives can conflict. Strong capital requirements may improve resilience but increase lending costs. Strict customer-identification requirements support financial crime prevention but may make account opening more difficult for underserved groups. Effective regulation therefore requires proportionality, risk sensitivity and explicit prioritization.

3.1 Microprudential and macroprudential regulation

Microprudential regulation focuses on the safety and soundness of individual institutions. Typical instruments include capital adequacy, liquidity requirements, large-exposure limits, governance standards, stress testing and supervisory review.

Macroprudential regulation focuses on the financial system as a whole. It addresses interconnectedness, common exposures and procyclicality. Instruments may include countercyclical capital buffers, sectoral lending limits, systemically important institution surcharges, loan-to-value limits and dynamic provisioning where permitted by law.

A bank can be safe in isolation but contribute to systemic risk when all banks follow the same strategy. Macroprudential policy is designed to address this collective dimension.

3.2 Prudential, conduct and structural regulation

These categories overlap. For example, governance rules are prudential because they affect safety, conduct-related because they affect customer treatment and structural because they shape institutional responsibilities.

4. The Architecture of Banking Regulation

Banking regulation is an architecture rather than a single statute. It includes legal rules, regulators, supervisory techniques, safety nets and private governance mechanisms.

4.1 Legal sources

The exact hierarchy differs by jurisdiction, but common sources include:

• Constitutional provisions: defining public authority, central-bank independence or property rights.
• Primary legislation: establishing banks, licensing powers, supervisory mandates, deposit insurance and resolution regimes.
• Regulations and delegated legislation: detailed requirements made under statutory authority.
• Central-bank and supervisory rules: prudential standards, reporting requirements and interpretive guidance.
• Court decisions: clarifying statutory meaning, administrative powers and contractual rights.
• Administrative decisions: licensing, enforcement and individual supervisory measures.
• International commitments: treaties, financial-sector assessments and regional instruments.
• Soft law: principles, codes and standards that may not be directly binding but influence domestic rules and supervisory expectations.
• Private law: contract, company, insolvency, property, security and consumer law.

A postgraduate analysis should distinguish legal force from practical influence. A Basel standard may not itself be enforceable against a bank, but it can shape domestic legislation, supervisory assessment and international comparisons.

4.2 Institutional mandates

Central bank. A central bank commonly conducts monetary policy, provides or oversees payment infrastructure, acts as lender of last resort under defined conditions and may supervise banks. Combining these roles can improve information sharing but can also create conflicts between monetary policy, financial stability and supervisory priorities.

Prudential supervisor. The supervisor licenses institutions, assesses governance and risk management, conducts inspections, reviews reports, imposes corrective measures and may withdraw authorization. Effective supervision is judgment-intensive; compliance with rules does not automatically establish that a bank is safe.

Conduct authority. A conduct regulator focuses on customer outcomes, market behaviour, disclosure, sales practices and complaints. In some countries these responsibilities are combined with prudential supervision; in others they are institutionally separate.

Deposit insurer. A deposit insurer protects eligible deposits up to a statutory limit and helps maintain confidence. It must be funded and operationally prepared. Poorly designed insurance can generate moral hazard by reducing depositor monitoring and encouraging banks to take risks.

Resolution authority. A resolution authority manages the failure of a bank in a way that preserves critical functions and limits taxpayer exposure. Tools may include transfer to another institution, a bridge bank, asset separation, temporary public ownership where legally permitted, or bail-in of eligible liabilities.

Finance ministry and legislature. The finance ministry may manage public finances, propose legislation and coordinate crisis responses. The legislature establishes the legal mandate and holds institutions accountable. Neither role should remove the operational independence needed for credible supervision.

4.3 Supervisory methods

Supervision commonly combines:

• Off-site supervision: analysis of returns, capital, liquidity, asset quality, governance and risk indicators.
• On-site supervision: inspections, interviews, file reviews, model assessments and testing of controls.
• Risk-based supervision: allocating supervisory resources according to the probability and impact of failure.
• Prompt corrective action: escalating intervention as weaknesses become more serious.
• Thematic reviews: examining a risk across multiple institutions, such as cyber resilience or commercial real-estate exposure.
• Stress testing: assessing whether capital and liquidity remain adequate under adverse scenarios.

A useful conceptual distinction is between rules and principles. Rules provide certainty and comparability, while principles allow adaptation to different business models. Excessively detailed rules can encourage box-ticking; excessively broad principles can create uncertainty and inconsistent enforcement.

5. International Standard-Setting

Banking is cross-border, so purely national regulation can create gaps and inconsistencies. International bodies promote common standards, cooperation and information exchange.

Basel Committee on Banking Supervision

The Basel Committee develops global standards for bank capital, liquidity, supervision and disclosure. Its frameworks are not automatically domestic law. Their effectiveness depends on adoption and implementation by national authorities. The Basel framework generally rests on minimum requirements, supervisory review and market discipline.

Financial Stability Board

The Financial Stability Board coordinates recommendations concerning global financial stability, including systemically important institutions, resolution, non-bank financial intermediation and crisis-management cooperation. It also monitors implementation of agreed reforms.

International Monetary Fund and World Bank

The IMF conducts surveillance, provides technical assistance and may assess financial-sector vulnerabilities through programs such as Financial Sector Assessment Programs, often jointly with the World Bank. The World Bank supports institutional development, financial inclusion and legal and supervisory capacity.

Financial Action Task Force

The FATF develops standards for combating money laundering, terrorist financing and proliferation financing. Banking regulation therefore includes customer due diligence, beneficial-ownership identification, transaction monitoring, suspicious-activity reporting and sanctions compliance.

Other relevant bodies

The Committee on Payments and Market Infrastructures develops standards for payment, clearing and settlement systems. The International Organization of Securities Commissions addresses securities markets and may be relevant to banks’ investment and capital-markets activities. The International Association of Deposit Insurers develops deposit-insurance principles.

International standards improve consistency but do not eliminate differences. Countries vary in legal systems, market structures, fiscal capacity, institutional independence and political priorities. Transplanting a standard without adapting it to domestic conditions may produce formal compliance without effective supervision.

6. A Framework for Analysing Regulatory Design

A practical regulatory analysis can proceed through six questions:

1. What market failure or public objective is involved? For example, is the issue liquidity risk, fraud, consumer exploitation or systemic contagion?
2. Which institution has the legal mandate? Authority must be clear, coordinated and reviewable.
3. What instrument is proportionate? Options include disclosure, capital, prohibition, supervision, insurance or resolution powers.
4. Who bears the cost and who receives the benefit? Consider banks, customers, taxpayers, competitors and the wider economy.
5. What behavioural response may the rule create? A requirement can reduce one risk while encouraging regulatory arbitrage elsewhere.
6. How will effectiveness be measured? Indicators may include loss rates, complaints, reporting quality, recovery time, capital resilience and market access.

This framework prevents regulation from becoming a collection of disconnected compliance obligations.

7. Applied Case: The Failure of NorthRiver Bank

The following is an illustrative case, designed to integrate the chapter’s concepts. It is not a description of a particular real bank.

Background

NorthRiver Bank is a rapidly growing mid-sized institution. It funds long-term commercial property loans with concentrated corporate deposits and short-term wholesale borrowing. Its reported capital ratio meets the statutory minimum. The bank has also invested heavily in a digital platform and relies on a small number of technology providers.

Problem

A fall in commercial-property prices causes losses on several loans. At the same time, a widely circulated social-media message alleges that NorthRiver is insolvent. Large depositors withdraw funds electronically. The bank has sufficient high-quality assets in the long term, but its immediately available liquidity is inadequate. Several counterparties delay settlement because they are uncertain about the bank’s condition.

Analysis

The case illustrates several failures and vulnerabilities:

• Information asymmetry limited depositors’ ability to assess asset quality.
• Maturity transformation created liquidity risk.
• Concentration in one property sector generated common-factor risk.
• Management may have underestimated the speed of digital withdrawals.
• Deposit insurance protected eligible retail depositors but not all corporate balances.
• Public statements and disclosure were insufficient to restore confidence.
• Operational and payment-system dependencies increased contagion risk.

The bank’s compliance with a minimum capital ratio did not eliminate liquidity or systemic risk. This demonstrates the difference between a regulatory threshold and comprehensive risk management.

Approach and solution

The supervisor should require immediate liquidity reporting, assess collateral and funding assumptions, and impose restrictions if risk-taking continues. The central bank may consider emergency liquidity assistance subject to legal conditions, adequate collateral and a credible recovery or resolution plan. The deposit insurer should prepare to reimburse covered depositors if the bank is closed. The resolution authority should determine whether NorthRiver can be sold, transferred to a bridge bank or recapitalized through loss allocation.

The authorities must coordinate communications. A credible explanation of the protection available to depositors can limit panic, while inaccurate guarantees may create future moral hazard. After stabilization, an investigation should examine governance, risk models, related-party transactions, supervisory escalation and the resilience of digital channels.

Outcome and learning points

Assume the authorities transfer critical deposits and payment functions to a bridge bank, impose losses on shareholders and certain uninsured creditors, and later sell the viable business. Covered depositors retain access to funds, payment services continue and taxpayer support is limited.

The case demonstrates that effective regulation requires more than capital rules. It requires sound liquidity management, credible supervision, deposit-insurance preparedness, resolution powers, operational resilience and clear accountability. It also shows why regulation must consider speed: digital banking can accelerate both withdrawals and contagion.

8. Contemporary Challenges and Limitations

Digitalization and artificial intelligence

Digital banking increases convenience but creates dependence on cloud services, application interfaces, automated decision systems and data networks. Artificial intelligence can improve fraud detection and credit assessment, yet it may reproduce biased data, obscure decision logic or create model-risk concentrations. Supervisors therefore need expectations concerning data governance, explainability where appropriate, validation, human oversight, cybersecurity and third-party risk.

Climate and environmental risk

Climate-related physical events can damage collateral and impair borrowers. Transition policies can affect the value of carbon-intensive assets. Regulators increasingly expect banks to identify, measure and manage these risks, although debates remain about scenario design, time horizons and the boundary between prudential supervision and public policy.

Crypto-assets and non-bank finance

Financial activities may move outside the regulated banking perimeter. Stablecoins, digital-asset platforms, private credit funds and other non-bank intermediaries can perform bank-like functions or create bank-like risks. A central challenge is preventing regulatory arbitrage while preserving innovation. Regulation should focus on economic function and risk, not merely institutional labels.

Procyclicality and unintended effects

Capital and provisioning rules may amplify a downturn if banks reduce lending when measured risks rise. Disclosure can improve discipline but may also trigger destabilizing withdrawals if information is misunderstood. Deposit insurance reduces runs but can weaken monitoring. Every regulatory instrument should therefore be evaluated for second-order effects.

Accountability and legitimacy

Regulators exercise significant public power. Their decisions can affect property rights, competition and access to finance. Legitimacy requires clear statutory objectives, procedural fairness, reasons for decisions, independent review, transparency compatible with supervisory confidentiality, and accountability for failure to act.

Best-Practice Principles

A sound banking-regulation architecture should:

• define objectives clearly and manage conflicts explicitly;
• preserve supervisory independence while ensuring accountability;
• combine microprudential, macroprudential and conduct perspectives;
• use proportionate, risk-sensitive requirements;
• maintain reliable data and strong reporting systems;
• test recovery, resolution and operational-continuity plans;
• coordinate domestic authorities and international counterparts;
• monitor regulatory arbitrage and emerging non-bank risks;
• protect whistle-blowers and challenge groupthink; and
• review rules after crises and significant technological change.

Chapter Summary

Banks are regulated because they combine public reliance, information asymmetry, maturity transformation, payment-system functions and interconnected risk. Adverse selection affects lending before contracts are made, while moral hazard affects behaviour after funds are provided. Externalities and systemic risk mean that a bank’s private decisions can impose costs on the wider economy.

Public interest theory explains regulation as a response to market failure, while public choice theory warns that regulation can be captured or distorted. Market discipline is useful but incomplete because depositors may lack information, deposit insurance may weaken monitoring and markets can become procyclical.

Banking regulation pursues safety and soundness, financial stability, depositor and consumer protection, market integrity, competition, inclusion and operational resilience. Its architecture includes primary legislation, delegated rules, supervisory standards, private law, international standards and institutional mandates. Central banks, prudential supervisors, conduct authorities, deposit insurers, resolution authorities, finance ministries and legislatures must coordinate while retaining clear responsibilities.

Microprudential regulation addresses individual institutions; macroprudential regulation addresses system-wide vulnerabilities. International bodies—including the Basel Committee, Financial Stability Board, IMF, World Bank, FATF and payments and securities standard-setters—promote common standards, but domestic implementation remains essential. Effective regulation is not mere compliance with ratios. It requires sound judgment, credible intervention, crisis preparedness, proportionality and continuous adaptation to digital, climate and non-bank risks.

Key Terms

Information asymmetry: A situation in which parties to a transaction possess unequal information.

Adverse selection: A pre-contract problem in which riskier participants are more likely to seek or obtain funding when quality is difficult to observe.

Moral hazard: A post-contract incentive to take greater risks because another party bears part of the consequences.

Systemic risk: The risk that distress in one institution or market disrupts the financial system as a whole.

Maturity transformation: Funding longer-term assets with shorter-term liabilities.

Liquidity risk: The risk that an institution cannot meet obligations when due without unacceptable loss.

Solvency: The condition in which the value of assets is sufficient to cover liabilities.

Prudential regulation: Rules and supervision designed to promote the safety and soundness of financial institutions.

Microprudential regulation: Regulation focused on the resilience of individual institutions.

Macroprudential regulation: Regulation focused on system-wide financial stability.

Market discipline: Monitoring and risk pricing by investors, creditors, depositors and counterparties.

Regulatory capture: The distortion of regulation in favour of regulated interests.

Deposit insurance: A statutory arrangement protecting eligible deposits up to a specified limit.

Lender of last resort: Emergency liquidity support provided under defined conditions to institutions facing temporary funding stress.

Resolution: The orderly management of a failing bank while preserving critical functions and limiting wider disruption.

Bail-in: The allocation of losses to specified creditors by converting or writing down their claims.

Regulatory arbitrage: Avoiding a regulatory burden by shifting activities, structures or risks to a less-regulated area.

Operational resilience: The capacity to continue critical services during disruption and recover within acceptable limits.

Soft law: Non-binding principles or standards that influence behaviour and supervisory practice.

Review Questions

Short Answer Questions

1. Why does maturity transformation make banks vulnerable to liquidity runs?
2. Distinguish adverse selection from moral hazard.
3. What is the difference between microprudential and macroprudential regulation?
4. Why is deposit insurance capable of creating moral hazard?
5. Identify three international bodies relevant to banking regulation and state one function of each.

Long Answer Questions

1. Explain the public interest justification for banking regulation and critically evaluate its limitations.
2. Analyse the relationship between information asymmetry, market discipline and prudential supervision.
3. Describe the legal and institutional architecture required for effective bank supervision and resolution.
4. Compare prudential, conduct, structural and resolution regulation, using examples of instruments for each.
5. Discuss how digitalization, climate risk and non-bank finance challenge traditional banking regulation.

Analytical / Application Questions

1. A bank satisfies its minimum capital requirement but relies heavily on overnight wholesale funding and has concentrated commercial-property exposures. Identify the principal risks and propose a proportionate supervisory response.
2. A rumor causes rapid electronic withdrawals from a solvent bank. Analyse the roles of the central bank, supervisor, deposit insurer and resolution authority.
3. Evaluate whether a new rule requiring detailed disclosure is likely to improve market discipline. Consider information quality, depositor incentives, procyclicality and possible unintended consequences.

Multiple Choice Questions with Answers

Question 1

Which problem occurs when borrowers take greater risks after receiving a loan because the lender bears part of the potential loss?

A. Adverse selection

B. Moral hazard

C. Market liquidity

D. Regulatory capture

Correct Answer: B. Moral hazard

Question 2

What is the primary focus of macroprudential regulation?

A. The profitability of one bank’s branches

B. The conduct of individual bank employees only

C. Risks to the financial system as a whole

D. The tax treatment of household deposits

Correct Answer: C. Risks to the financial system as a whole

Question 3

Which institution normally protects eligible deposits up to a statutory limit?

A. Deposit insurer

B. Credit-rating agency

C. Stock exchange

D. External auditor

Correct Answer: A. Deposit insurer

Question 4

Which is an example of maturity transformation?

A. Funding long-term loans with short-term deposits

B. Exchanging one currency for another

C. Recording an asset at historical cost

D. Increasing a bank’s number of branches

Correct Answer: A. Funding long-term loans with short-term deposits

Question 5

Why can a bank be solvent but illiquid?

A. Its liabilities are legally void

B. Its long-term assets may exceed liabilities, but it lacks cash available immediately

C. It has no shareholders

D. It has excessive accounting profit

Correct Answer: B. Its long-term assets may exceed liabilities, but it lacks cash available immediately

Question 6

Which body develops global standards for bank capital, liquidity and supervision?

A. Basel Committee on Banking Supervision

B. World Trade Organization

C. International Labour Organization

D. United Nations Security Council

Correct Answer: A. Basel Committee on Banking Supervision

Question 7

Which regulatory category primarily addresses fair treatment, disclosure and complaints handling?

A. Conduct regulation

B. Structural regulation

C. Monetary regulation

D. Fiscal regulation

Correct Answer: A. Conduct regulation

Question 8

What is regulatory capture?

A. A bank’s capture of a new market

B. A regulator’s temporary seizure of deposits

C. Regulation being distorted to favour regulated interests

D. A central bank’s purchase of foreign currency

Correct Answer: C. Regulation being distorted to favour regulated interests

Question 9

Which feature most directly increases the possibility that one bank’s failure will affect others?

A. Interconnectedness through payment and funding relationships

B. A large number of customer service desks

C. A low advertising budget

D. A short annual report

Correct Answer: A. Interconnectedness through payment and funding relationships

Question 10

What is the principal purpose of bank resolution?

A. To guarantee profits for shareholders

B. To manage failure orderly while preserving critical functions

C. To eliminate all competition between banks

D. To replace all private contracts with public funding

Correct Answer: B. To manage failure orderly while preserving critical functions