This chapter provides an overview of microprudential data collection in one of the most highly regulated portions of the US financial sector, the banking industry. The public policy objectives for banking supervision and regulation include a safe and sound banking system, stability in the financial markets, and fair and equitable treatment of consumers in their financial transactions. The relatively intrusive supervisory framework for depository institutions contrasts with the regulation of securities markets, where the focus is instead on transparency and investor protection.
Microprudential supervision in banking faces several fundamental challenges, including the inherent complexity of the largest institutions stemming from their scale, organizational structure, and their portfolio of financial services and products, the limitations of the standard accounting framework for measuring risk, the incentive to engage in arbitrage activities to lessen the regulatory impacts or supervisory scrutiny, and the possibility that some important hazards to the financial system may not be obvious at the firm level but become apparent at the system level upon viewing the financial firms collectively (Flood et al., 2012, section 2).
The significance of these issues is apparent in the financial crisis of 2007–2009, which erupted from securitization markets designed, ironically, to remove credit-risky loans from bank balance sheets. Banks, ofcourse, were nonetheless badly hurt by the crisis.