The Role Of Prudential Regulation Of Banks In Promoting Financial Stability

The financial crises of the past have proven that prudent and effective systems of bank regulation are crucial in preserving and maintaining a resilient financial system. Banks play a significant role in the economic environment and their stability and soundness is imperative to prevent financial crises. Changes in the market and developments in banking practices have increased the risk exposures of banks. Through the contagion effect, the failure of one bank may have far-reaching consequences for other banks and the financial system as a whole. Essentially, enhanced and effective banking regulation is pertinent to safeguard the financial system. As a regulatory response to these financial crises, capital and liquidity requirements of banks have been developed and adopted internationally, over the years, with the purpose to preserve the integrity of the global financial system. These frameworks of international banking regulation have been adopted through the Basel Accords, which are premised on strengthening the resilience of banks to withstand financial pressures. The 2008 Global Financial Crisis prompted the need to revise the previous regulatory instruments, resulting in the introduction of the latest international regulatory framework known as Basel Ill. In South Africa, these international standards of banking regulation have been transposed into the relevant legislative instruments regulating banks in a proactive effort to enhance and preserve the stability of banks. This dissertation discusses the aspect of bank regulation and how prudential regulation, as a regulatory tool, contributes to the promotion of financial stability. The study critically discusses the capital and liquidity requirements of banks as set out in the Basel Accords and analyses their ability, as mechanisms of prudential regulation, to preserve a resilient financial system. The dissertation further considers how these international standards of banking regulation have been adopted into South African law. This is done by considering the legislative and regulatory instruments regulating banks and the role of the South African Reserve Bank in facilitating compliance by banks.