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p. 725. Regulation and supervision of the banking industrylocked

  • John Goddard
  •  and John O. S. Wilson

Abstract

As financial intermediaries, commercial banks use liquid liabilities to finance illiquid assets. Banks hold only a small proportion of their assets in the form of reserves, and cannot cope if all depositors demand the return of their funds simultaneously. Together with leverage, this makes banks inherently fragile, and creates the potential for one distressed bank to cause a loss of confidence in others. ‘Regulation and supervision of the banking industry’ describes the causes of bank runs, the different regulatory authorities, banking licenses, and capital adequacy regulation, and the government safety net. Regulation and supervision of the banking industry aims to protect individual banks, and the financial system as a whole, from the possibility of collapse.

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