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Bank Regulations
Restrictions on the Number of New Financial Services Institutions entering the Industry Annually
The decision by the regulators to restrict the number of banks and financial institutions that can enter the market every year is justified. Regulation of banks cannot achieve all the desired goals within the realm of soundness and safety of the financial system (Rose & Hudgins, 2013). However, when left unregulated, banks can engage in unethical behavior and expose the industry. The banking industry, just like any other should be regulated, but even with more strictness because of the kind of services that they offer. Small banks, for instance, have high chances of failure because they do not have the national recognition, and as such, they simply rely on the local economies that do not give them chances to succeed as much as nationally-recognized banks.
Because of the reliance on the local economy, banks that are admitted to the industry annually must demonstrate that they have the financial capability to operate and expect losses without compromising the finances of their customers. It is, therefore, possible that with such regulations, foreign banks with huge capital might take advantage and invest in this market when the local banks and financial institutions fail to reach the regulator’s threshold (Callaway & Jagani, 2015). Consequently, the limitation of the number of banks, especially the foreign ones that can be allowed in the industry per year is reasonable in the sense that it aims to protect domestic investment and the American companies. Allowing foreign financial institutions into the industry without such policies would be injurious to the domestic investors, especially when such institutions come from jurisdictions without similar banking policies and regulations like the host nation.
Restrictions on the Depository Institutions Eligible for Government-Sponsored Depository Insurance
The restrictions on the banks that qualify for government-sponsored depository insurance does not encourage local banks that struggle in the local markets today. Bengston (2015) suggests that the number of banks with assets below $100 million that fail increase annually, which makes it even urgent for the regulator to relook into such policies and law and see the best way of helping these struggling banks. On the other hand, however, there is also a logical argument in this sense because most of the failures of these banks are occasioned by risky behavior such as aggressive growth strategies through non-traditional and chancy sources of funding as well as credit losses on commercial real estate loans. Consequently, the banks that are eligible for the government-sponsored depository insurance must not exhibit such practices. Unlike in the small banks within different states, this regulation befits that foreign banks because they are multinationals that have to demonstrate high levels of financial prudence. This is why it is important for the federally licensed foreign branches and agencies to deposit cash or alternatively, eligible securities at ratified depository banks so that they satisfy the capital equivalency requirement as stipulated by the IBA (Diamond, Kashyap, & Rajan, 2017). In this way, their operations within the country are regulated and they cannot take advantage (supposing the government-sponsored depositor
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