In today’s society banks are an essential part to the continuation of a growing economy and regulations ensure that they are run in such a manner that they should be functioning for years to come. According to the Business Dictionary a regulation is a principle or rule (with or without the coercive power of law) employed in controlling, directing, or managing an activity, organization, or system. Banks are regulated to give guidelines as to how the bank should be run to ensure their services are available for years to come.
One main reason why banks are regulated is to protect and prevent the bank from fraudulent activities. The regulators protect the consumers from possible fraudulent activities as small as misleading advertisements on the banks part to major acts as money laundering. The possible effects of poor regulations in the banking sector was clearly depicted in the case of Stanford where, since the bank was poorly regulated Mr Stanford had the opportunity to steal millions of dollars from the customers and as a result when he was brought to justice the ripple effect it had was devastating since many individuals lost their money in his ponzi scheme. The regulators also ensure that the banks do their part in giving their consumers a return on their savings and aren't depriving the consumers of their basic benefits.
Another reason of why banks are regulated is to reduce the systematic risk, where this is the risk of the bank completely failing. It is important that a bank thrive because if one bank fails it does not affect that particular bank alone, it has a ripple effect throughout the entire banking industry and the economy on a whole.
In our progressive society where we are growing at an alarming rate, the Principle-Based Approach of regulation is the preferred method of regulation. This approach has basic principles that are flexible, easier and