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Prudential Regulation for Banks

In: Financial Stability in a Changing Environment

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  • Mark J. Flannery

    (University of Florida)

Abstract

Banking firms around the world operate under extensive government supervision and regulation. In part, these regulatory structures seek to reduce the likelihood that individual banks will fail, and these are the regulatory components which I define as ‘prudential’ in this chapter. Prudential regulations include minimum capital requirements, liquidity or loan portfolio diversification standards, limitations on a bank’s investment portfolio or lines of business, and other restrictions intended to limit the type of risks which a banking firm may undertake. This chapter’s main purpose is to evaluate the role of prudential government regulation of modern banking firms in developed financial markets. This evaluation cannot be undertaken without first establishing the appropriate purpose of government bank regulation. Indeed, an argument for prudential regulation implicitly asserts that the supervision and control exerted by private market forces is somehow inappropriate. Carefully specifying and addressing this contention constitutes a large part of my analysis here.

Suggested Citation

  • Mark J. Flannery, 1995. "Prudential Regulation for Banks," Palgrave Macmillan Books, in: Kuniho Sawamoto & Zenta Nakajima & Hiroo Taguchi (ed.), Financial Stability in a Changing Environment, chapter 7, pages 281-328, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-349-13352-9_8
    DOI: 10.1007/978-1-349-13352-9_8
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    Cited by:

    1. Angelos Kanas, 2005. "Pure contagion effects in international banking: The case of BCCIÂ’s failure," Journal of Applied Economics, Universidad del CEMA, vol. 8, pages 101-123, May.

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