Prudential regulation is a type of
financial regulation
Financial regulation is a form of regulation or supervision, which subjects financial institutions to certain requirements, restrictions and guidelines, aiming to maintain the stability and integrity of the financial system. This may be handled ...
that requires financial firms to control risks and hold adequate capital as defined by
capital requirements
A capital requirement (also known as regulatory capital, capital adequacy or capital base) is the amount of capital a bank or other financial institution has to have as required by its financial regulator. This is usually expressed as a capital ...
, liquidity requirements, by the imposition of concentration risk (or large exposures) limits, and by related reporting and public disclosure requirements and supervisory controls and processes.
Prudential regulation can be split into
microprudential regulation that focuses on the individual firms and making sure that they can withstand shocks and
macroprudential regulation
Macroprudential regulation is the approach to financial regulation that aims to mitigate risk to the financial system as a whole (or "systemic risk"). In the aftermath of the late-2000s financial crisis, there is a growing consensus among policymak ...
that looks at the whole financial system and
systemic risk
In finance, systemic risk is the risk of collapse of an entire financial system or entire market, as opposed to the risk associated with any one individual entity, group or component of a system, that can be contained therein without harming the ...
.
Some countries have separated their financial regulators along the lines of prudential/consumer protection such as the UK with the
Prudential Regulation Authority or in Australia with the
Australian Prudential Regulation Authority
The Australian Prudential Regulation Authority (APRA) is a statutory authority of the Australian Government and the prudential regulator of the Australian financial services industry. APRA was established on 1 July 1998 in response to the recomm ...
.
References
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