Principle of banking law can be referred to as the principle which guides the governance of the banking law and the applications. The banking law may vary from place to place.
The Principle governing the federal banking law and the state banking law are almost same.
The Principle of Banking law can be as follows:
- Reserve requirements
- Capital requirements
- Activity and affiliation restriction
- Payments system requirements.
Reserve requirements:
The reserve requirements demands that the bank the minimum reserve which a bank must possess including the client deposits.
The year 2004 marked the year when the deposits in the United States Of America was approximately $8 trillion whereas the reserves of depository institutions were around $50 billion.
The principle of banking law states that the reserves requirements of a bank is directly proportional to the reserves a bank holds at any point of time.
The higher the reserves requirement of a bank, the more cash the bank should possess at any given time.
The Principle of Banking law also states that the reserve requirement can act as a buffer in the event if there is a financial crunch.
Capital requirements:
The capital requirement principle of banking law states or guides as to how a bank and depository bodies should handle the capital and the assets of the bank.
Every country's capital requisite is guided by the Bank for international settlements.
Every country's capital requirement is estimated by a Basel Capital Accords.
This is a standard tool for measuring the capital need of a country. The recently used capital network is called Basel 2.
Board of Governors by the Federal Reserve System (FRB) provide the capital guidelines for capital requirement which are vulnerable to risks in case of the depository institutions.
The depository institutions may include the following:
- banks
- credit unions
- stock broking institutions
- building society.