The financial system plays an important role in our lives. Banks are a big part of the system and bank regulations aim to ensure that banks do not put the system in jeopardy. There is a lot of bank regulation and it's very difficult to know about all the regulations. However, if we can understand the overriding principles and what they mean, we will be able to more quickly understand the individual initiatives. The key objectives of banking regulation are as follows. Prudential oversight aims to reduce the level of risk to which creditors of banks are exposed. Prudential regulation imposes standards that require firms to control risks and hold adequate capital with the goal of protecting the markets.

Systemic risk control aims to reduce the risk caused through interrelationships between banks and other financial institutions, such as lending and depositing money with each other, reducing the risk of contagion. That is one bank's bankruptcy causing other banks to fail as well, avoiding misuse. The aim of this objective is to reduce the risk of a bank being used for criminal purposes, such as money laundering or insider trading. Confidentiality is simply to ensure confidentiality of client information. Other objectives will vary depending on the national regulator, but might include treating customers fairly and appropriate levels of corporate and social responsibility amongst others. Efficient credit allocation is really the overriding principle to all these regulatory objectives, getting money to the people who are going to use it most efficiently within the economy within these objectives, Prudential oversight and systemic risk control are the most important ones, and they have by far the most important regulation from national and international regulatory bodies.

Regulators have three main tools at their disposal. Firstly, regulators typically require that all banks under their supervision hold the appropriate banking license to operate in their jurisdiction. As part of the license application process, the bank is initially vetted by the regulator before it can carry out any regulated activities and then agrees to follow the rules set by the relevant authorities.

Secondly, regulators impose minimum requirements to do with capital, liquidity and leverage in order for banks to survive times of stress. These minimum requirements aim to ensure the bank has sufficient buffers against losses. They might suffer so that if there is an economic downturn and the bank does suffer losses, they are well placed to continue in operation. The bigger the risks that banks take on, the bigger these buffers imposed by regulators tend to be. Thirdly, market discipline refers to the process by which stakeholders such as regulators and shareholders monitor the risks that a bank is exposed to and take action to limit excessive risk. Taking this market discipline more often takes the form of high levels of public disclosure by banks of the risks that they are exposed to.