RISK REGULATION AND COMPLIANCE

Risk Regulation and Compliance

Risk Regulation and Compliance

Introduction

The purpose of this study is to expand the boundaries of our knowledge by exploring some relevant and factual information relating to the analysis of risk regulation and compliance in the banking sector. The Principles, which represent the best practices in banking supervision and regulation, were established in 1997 by the Basel Committee on Bank Supervision. The Basel Committee initially comprised representatives from bank supervisory authorities from thirteen advanced countries, although since then, most countries in the world have progressively adopted these regulatory standards and protocols in order to prevent disruptions in their financial systems and their economies as a whole (Mikdashi, 2011, pp. 51-59). Because the US banking system depends on consumer trust in banking institutions, the commercial banking industry is highly regulated. New legislation passed since the 2008 financial crisis places limits on banking fees, introduces new regulatory oversight and forces banks to hold higher capital reserves.

The subprime mortgage crisis caused a number of banks to reduce their level of participation in foreign markets, concentrating instead on their domestic operations and on regaining the capital strength needed to recover from the debilitating recession. According to the International Monetary Fund, cross-border assets, which are held on banks' balance sheets as a proportion of total assets, fell in 2008, as cross-border lending declined at a faster rate than overall credit. This situation will likely reverse as the Commercial Banking industry recovers and banks continue expanding into foreign markets (Machiraju, 2012, pp. 75-78). In this essay, Bank of America Corporation is selected to study whether its activities are fully compliant with the international Basel capital standards and the Basel Core Principles for Effective Bank Supervision. Moreover, Citigroup Inc. is chosen as representative bank to be compared with Bank of America.

Measures of Bank Performance

The Bank of America Corporation's revenue mix is diversified. For instance, BoA derives significant amount of its revenues from business line such as global banking and markets (25% of the total revenues in FY2011), card services (19.2%), global wealth and investment management (18.4%), all other (16.1%), deposits (13.4%), global commercial banking (11.2%), and consumer real estate services (-3.3%). Favorable business mix is helping the company to serve a large customer base, as well as helping it to offset volatility in its revenue streams (Kunt, 2012, pp. 3-6). The company's balance sheet has a good distribution of assets and liabilities. In FY2011, BoA strengthened its capital through a series of actions that increased tier 1 common capital by $1.6 billion. The company ended FY2011 with a tier 1 ratio of 9.9% as against 8.6% inFY2010. Total capital ratio increased from 15.7% in FY2010 to 16.7% in FY2011.The Company also brought down its long-term debt by $76 billion to reach $372.2 billion in FY2011 as compared to $448.4 billion in FY2010, and global excess liquidity sources were up $42 billion to $378 billion in FY2011 as compared to $336 billion in FY2010. The company's strong capital base helps it avoid liquidity and ...