Impact of Bank Regulations on Growth
The key justification for introducing financial regulations is based on the idea that financial markets are imperfect and that regulations can effectively correct these shortcomings. The various areas of regulations considered in this chapter have all sprung into existence due to these considerations. Since customers often have asymmetric information regarding the operations of the banks, licensing and disclosure requirements are put forward to restrict the possibility of improper activities while providing the investors with adequate information. Capital requirements are an attempt to contain the risk-taking incentives of the owners of banks. The powers granted to the supervisors ensure that they have access to adequate information on the financial intermediaries and can act in a timely and efficient manner when troubles arise. Deposit insurance schemes are put forward to mitigate the likelihood that imperfectly informed depositors lead to a bank run. Credit information availability is crucial to overcome credit rationing, which arises when the financial intermediaries have limited information on borrowers.
KeywordsMonetary Policy Financial Development Capital Requirement Financial Regulation Bank Regulation
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