Prudential regulation of banks a critical review

Abstract

Introduction: The global financial system faces escalating risks due to political and strategic uncertainties, with developing economies experiencing significant pressures. This study critically reviews prudential regulations, particularly the Basel frameworks, and their impact on financial stability, risk management, and regulatory practices.Discussion: In response to the 2007-08 financial crisis, Basel III introduced several regulatory frameworks including the Capital Conservation Buffer (CCB), Counter Cyclical Buffer (CCCB), and requirements for Global Systemically Important Banks (G-SIBs). These measures aim to enhance the resilience of financial institutions by improving capital quality and liquidity standards. However, challenges such as regulatory capital arbitrage, risk-weighted asset management, and the effectiveness of macro prudential regulations remain.Conclusion: Basel III's emphasis on higher quality capital and liquidity standards is crucial for financial stability. Nonetheless, ongoing reforms and adaptations, such as Basel IV, are necessary to address emerging risks and ensure comprehensive regulatory frameworks that can adapt to dynamic financial environments.