Banks play a key role in the financial system and wider economy. Therefore governments have been concerned about regulating banks to avoid banks defaulting on promises. If one bank gets into difficulties through reckless borrowing or illegal activities it can harm the whole banking system.
The credit crunch of 2007-08 caused the Government to consider stricter banking regulations.
FSA and Banking Regulations
Banks are regulated by the Financial Services Authority. FSA. The FSA regulate the way banks treat money and the criteria they use for lending and dealing with complaints. The FSA regulate areas such as:
- market abuse (abusing monopoly power, preventing competitors and charging high prices to consumers
- insider trading – when companies or individuals use inside knowledge about company profits to make personal gains through buying and selling shares on the stock market
- Customer data security
- Liquidity risk. Are banks lending inappropriately. The credit crisis showed that Northern Rock’s balance sheet was poor and didn’t take account of risk. This led to its nationalisation
OFT and Bank Regulation
The Office of Fair Trading OFT has also investigated aspects of the UK banking sector. An important decision came in March 2007, when the OFT said that many bank charges were excessive. This led to the OFT gaining written undertakings from the 8 biggest banks to reconsider charges. It has also led to customers complaining and asking for bank charges retrospectively. OFT and Banks