Commercial banks in a country are regulated and supervised by the country’s central bank. The central bank is the highest monetary authority, responsible for maintaining financial stability, controlling the banking system, and protecting depositors’ interests. It formulates banking laws, issues guidelines, and monitors the activities of commercial banks to ensure that they operate safely, transparently, and in accordance with national economic policies.
The central bank regulates commercial banks by granting licenses, setting capital and reserve requirements, controlling interest rate policies, and supervising lending and investment activities. It also conducts regular inspections and audits to ensure that banks adhere to prudential rules and refrain from excessive risk-taking. For example, if a commercial bank fails to maintain the required cash reserve or violates banking regulations, the central bank has the authority to impose penalties or corrective measures.
In many countries, commercial banks are also guided by government banking laws and financial regulatory authorities, but the central bank remains the primary regulator. For example, in Bangladesh, commercial banks are regulated by the Bangladesh Bank, while in India they are regulated by the Reserve Bank of India (RBI), and in the United States by the Federal Reserve System, along with other regulatory bodies.