1. The Impact of Government Policy & Regulation on Banking
Chapter:02
The Impact of Government Policy & Regulation on Banking

2. The Principal Reasons Banks Are Subject to Government Regulations.
To protect the safety of the public’s savings.
To control the supply of money & credit in order to achieve a nation’s broad economic goals.
To ensure equal opportunity & fairness in the public’s access to credit & other vital financial services.
To promote public confidence in the financial system, so that savings flow smoothly into productivity investment.
To avoid concentrations of financial power in the hands of a few individuals & institutions.
To provide the government with credit, tax revenues & other services.
To help sectors of the economy that have special credit needs

3. The Central Banking System: Its Impact on the Decisions & Policies of Individual Banks
Monetary Policy: Control over money, credit & interest rates to achieve a nation’s economic goals. The policy has two basic goals:
To promote “maximum” sustainable output & employment. &
To promote “stability” in price level.

4. What do maximum sustainable output and employment mean?
The Central Banking System: Its Impact on the Decisions & Policies if Individual Banks---Contd
What do maximum sustainable output and employment mean?
In the long run, the amount of goods and services the economy produces (output) and the number of jobs it generates (employment) both depend on factors other than monetary policy. These factors include technology and people's preferences for saving, risk, and work effort. So, maximum sustainable output and employment mean the levels consistent with these factors in the long run.

5. What's so bad about higher inflation?
The Central Banking System: Its Impact on the Decisions & Policies if Individual Banks---Contd
What's so bad about higher inflation?
High inflation is bad because it can hinder economic growth, and for a lot of reasons. For one thing, it makes it harder to tell what a change in the price of a particular product means. For example, a firm that is offered higher prices for its products can have trouble telling how much of the price change is due to stronger demand for its products and how much reflects the economy-wide rise in prices.

6. The Central Bank’s Principal Task: Making & Implementing Monetary Policy
The Open Market Operations Policy (OMO):
To reduce the money supply in the economy, Central bank sells securities in the open market.
To increase the money supply, Central bank repurchase the securities sold earlier from the market.
The Discount Rate Policy: Discount rate is the rate at which the central bank lends money to the scheduled banks or discounts the bills of the commercial banks.
To reduce the money supply in the economy, Central bank raises the discount rate.
To increase the money supply in the economy, Central bank reduces the discount rate.

7. Changing Reserve Requirements on Deposits & other Bank Liabilities:
The Central Bank’s Principal Task: Making & Implementing Monetary Policy----Contd
Changing Reserve Requirements on Deposits & other Bank Liabilities:
Raising reserve requirements, banks must set aside more of each incoming deposits into required reserves, & less money is available to support making new loans.
Lowering reserve requirement, releases reserves for additional bank lending.
{What are bank reserves?
Banks and other depository institutions (for convenience, we'll refer to all of these as "banks") keep a certain amount of funds in reserve to meet unexpected outflows. Banks can keep these reserves as cash in their vaults or as deposits with the Fed. In fact, banks are required to hold a certain amount in reserves. But, typically, they hold even more than they're required to in order to clear overnight checks, restock ATMs, and make other payments. }

8. The Central Bank’s Principal Task: Making & Implementing Monetary Policy----Contd
Other Policy Tools:
Moral Suasion: The Central bank tries to bring psychological pressure to bear on individuals & institutions to conform the bank’s policies, using telephone calls or letters to bankers, making speeches explaining the Central bank’s policies, & testifying before parliament to explain what the CB is doing & to clarify it.
Margin Requirements: An investor buying certain listed securities must use his or her own funds to cover a specified percentage of the securities’ purchase price, the rest of that price may be borrowed, using the purchased securities as collateral.

9. Impact of Fiscal Policy on Banks
Increases in government spending usually lead to increase in business & households incomes, which increases both bank deposit & loan demand, eventually accelerating the pacer of economic activity - & perhaps inflation as well.
Increases in government spending must be financed by added government borrowing, the tendency is to push interest rates higher as government credit demands are added to private credit demands, placing banks under increased pressure to meet all of their customers’ funding needs.
Decisions by parliament to raise taxes & reduce budget deficits normally lead to decreases in Treasury borrowings & eventually push interest rates lower. Private sector incomes, bank deposits, & loan demand are also likely to fall.

10. Prudential Regulations of Bangladesh Bank (updated 31-12-2006)
Policy On Capital Adequacy Of Banks
Policy On Loan Classification And Provisioning
Corporate Governance In Bank Management
Restriction On Lending To Directors Of Private Banks
Rules And Regulations For Appointment Of Chief Executive And Advisor In Banks
Constitution Of The Board Of Directors And Fit And Proper Test For Appointment Of Bank Directors
Constitution Of The Audit Committee Of Board Of Directors
Disclosure Requirements For Banks

11. Prudential Regulations of Bangladesh Bank (updated 31-12-2006)------Contd.
Policy On Single Borrower Exposure
Policy For Rescheduling Of Loans
Policy For Loan Write Off
Large Loan Restructuring Scheme (LLRS)
Requirement For Obtaining Information On Large Loan From Credit Information Bureau
Payment Of Dividend By Bank Companies
Loan Against Shares, Debentures Etc
Interest Rates On Deposit And Lending
Bank Charges
Bank Deposit Insurance Scheme
Guidelines On Managing Core Risks In Banking
Credit Rating