How can strong banking regulations help protect a country from future financial crises?
Answer (1)
Strong banking regulations are like safety rules for banks. They make sure that banks handle money responsibly, protect customers, and avoid risky behavior that could hurt the economy. These regulations are essential to prevent financial crises from happening—or at least to reduce their damage if one occurs.One important regulation is requiring banks to keep a certain amount of capital reserves. This means they must have enough money set aside to cover losses. If borrowers cannot repay their loans, the bank won’t collapse because it has backup funds. This makes the banking system more stable.Another regulation is credit risk evaluation. This ensures that banks check if borrowers have the ability to pay before giving loans. If banks give too many loans to risky borrowers, and those loans go bad, the bank could fail. Strict loan approval processes help avoid this problem.Transparency is also key. Banks must submit regular and honest reports about their finances. This allows the central bank—like the Bangko Sentral ng Pilipinas (BSP)—to monitor their health and take action early if something is wrong.In the Philippines, after the 1997 and 2008 crises, the BSP improved its regulations. Banks were required to reduce non-performing loans, increase reserves, and follow international standards. As a result, during the COVID-19 pandemic, the Philippine banking system stayed strong, and most banks continued to operate safely.Regulations also prevent banks from doing things that are too risky, like investing depositors' money in unsafe markets. This protects the public and maintains trust in the financial system.In conclusion, banking regulations are like guardrails on a mountain road. They may seem strict, but they prevent disaster. A well-regulated banking system is key to a healthy economy because it protects savings, supports businesses, and builds confidence among investors and the public.
