There has been lots of financial crisis in the world history and each crisis prompted for stricter and more effective compliance rules. The financial crisis of 2008 was the most severe one which had led to bankruptcy of big global banks and recession in most of the developed economies. The crisis underlined the importance of sound financial system and risk management.
Over the time due to increased competition in the financial market, different banks and financial institutions increase their financial leverage in order to make big profits. They have used borrowed capital to invest in complex derivative instruments which increases their risk exposure as well and makes them more vulnerable to any negative sentiment in the market.
Financial sector is the back bone for any economy and it has to be well established in order to support economic growth. If the banking system fails, the entire economy will collapse and people will lose their savings. Therefore, it’s very important to control and regulate the entire banking system.
Following are the different regulatory requirements imposed on the banks in order to improve their risk management and reduce their overall leverage.