When a bank fails the bank’s customers, the depositors, suffer as much or more than the bank’s owners. Failure of one large bank in todays globalized world can trigger losses across the boundaries of nations as the international commerce today is so closely interwoven. This makes the banking industry an excellent candidate for government regulation. Bank lending policy can also aggravate the business cycle. During an economic downswing banks can become overly cautious, restricting the availability of loans and sending the economy into a steeper downward spiral. On the upswing, however, if banks are willing to take more risks and generously granting loans they can propel the economy into an inflationary boom.
Protecting banks and bank customers from bank failures of this sort is the aim of much government banking regulations. Government regulation strives to protect bank depositors from bank failures and to encourage banks to become a stabilizing force in the economy. Commercial banks are institutions dealing in money. These are governed by various regulations prescribed in each country to regulate banking industry. In India banks are governed under the Indian Banking Regulation Act, 1949.
In this section we will discuss some historical regulations that had an major impact on banking industry, as well as, some modern banking regulations that are shaping the present and future of the banking industry.