Financial Regulation – A Level Economics OCR Revision

Overview of Financial Regulation

Financial regulation is the supervision and oversight of financial institutions.
It aims to maintain the integrity of the financial system, prevent fraud, ensure market confidence, and protect consumers.
Financial regulation is maintained by various regulatory bodies, both at the national and international level.

Capital adequacy: Financial institutions should hold sufficient capital to cover their risks. This principle reduces the risk of banks becoming insolvent and helps maintain stability.
Liquidity: Banks must have enough liquid assets (those that can be easily converted into cash) to meet their current obligations.
Risk management: Financial institutions are expected to manage risk effectively, identifying potential risks and implementing measures to mitigate them.
Transparency: Financial institutions should disclose relevant information to the public. Increased transparency allows the market to function more efficiently and helps to protect investors and general public.

The Financial Conduct Authority (FCA) focuses on consumer protection and market integrity within the UK financial services industry.
The Prudential Regulation Authority (PRA) is responsible for overseeing banks, insurers and large investment firms. It aims to promote the safety and soundness of these firms.

On a global level, the Basel Committee on Banking Supervision provides a forum for regular cooperation among its member countries on banking supervisory matters.
The International Monetary Fund (IMF) monitors financial and economic developments worldwide and provides advice to prevent crises.

Financial regulation attempts to prevent issues such as financial fraud, market manipulation, and excessive risk-taking, which can lead to financial instability.
It also aims to maintain customer confidence in the financial system by ensuring the stability of financial institutions and protecting consumers from fraudulent activities.

Some critics argue that excessive financial regulation can stifle innovation and create unnecessary burdens for financial institutions.
There may also be limitations in the effectiveness of regulation, as seen in the inability of regulatory bodies to prevent financial crises, such as the 2008 global financial crisis.