Bank regulators throughout the world face the challenge of regulating banks in a changing environment. The environmental changes include, but are not limited to, globalization of financial intermediation, deregulation (price, product, and geographic), financial technology (derivatives, securitization, unbundling of credit risk, etc.), and computer communications technology (Internet, electronic money and banking). In addition, there have been a large number of banking crises in recent years, especially in developing nations such as Thailand.
This chapter presents an overview of bank regulation, and questions whether prudential bank regulation is effective in its current form. Prudential regulation deals with the safety and soundness of financial institutions. In other words, it attempts to prevent bank failures. It also provides bank depositors protection against fraud and malpractice. Other topics covered in this chapter include the purposes of regulation, theories of regulation, problems with regulatory structure, regulatory failures, the cost of regulation, and the evolution of bank regulation.