Finace Essay Example | Topics and Well Written Essays - 1750 words

Finace - Essay Example It is typical of regulatory environments to offer incentives to managers as way of spurring increased risk taking by the banks for the benefit of the larger population. Typical provisions found in different regulatory frameworks include branching and new entry restrictions, pricing restrictions (interest rate regulation and other prices/fees controls, restrictions to the line of business, ownership linkages regulation between financial institutions bank portfolio asset’s restriction, compulsory insurance deposits, and capital-adequacy requirements, reserve requirements, and requirements to direct credit to favored sectors or enterprises, among others (Claessens & Laeven, 2005). Different regulatory environments may from time to time ease on the regulations as a form of incentive to bank managers and hence spur increased risk taking by banks. One way through which incentives may put forth is with regard to branching regulations. In order to increase the rate at which the larger population embraces banking, regulatory environment may be eased to allow banks to open more branches and hence reach out to the population more closely (Baltensperger, 2007). Such a move allows bank managers an incentive that will motivate them to expand their operations. This is definitely an increased risk to the bank. While some banking regulations dictate the number of customers to warrant opening a new branch, in such instances, the regulation can be eased to allow a bank to open a new branch without attaining the mandatory number of clients. Mergers are often regulated. However in special circumstances, the rules guiding mergers can be eased as an incentive to secure banking customers. Banking system specialty from stability perspective is widely recognized and studied. However, not much literature has looked at the implications is special statuses which may be accorded in special