How Prudential Regulation Shapes Financial Resilience
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Abstract
This paper examines the evolving relationship between banking regulation, financial stability, and risk management in modern financial systems. The literature shows that post-crisis regulatory reforms have significantly transformed banks’ capital structures, liquidity management, credit allocation, supervisory relationships, and responses to systemic vulnerabilities. Basel III capital and liquidity requirements have strengthened loss-absorption capacity and funding resilience, although their effects on lending depend on institutional characteristics, economic conditions, and regulatory calibration. At the system level, financial stability increasingly requires attention to interconnectedness, contagion, credit and housing cycles, monetary-policy transmission, and cross-border financial spillovers. At the institutional level, traditional credit, liquidity, and interest-rate risks are now complemented by climate, cyber, technological, and strategic risks associated with the transformation of financial intermediation. The literature therefore suggests that effective banking regulation cannot rely on isolated prudential ratios or uniform regulatory interventions. It requires an integrated framework combining capital adequacy, liquidity resilience, supervision, macroprudential instruments, systemic-risk monitoring, governance, and forward-looking risk management. The paper concludes that financial resilience depends on the capacity of regulatory authorities and financial institutions to adapt prudential frameworks to changing sources of vulnerability while preserving sustainable credit intermediation.
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