Banking System has changed significantly in last couple of decades to meet different requirements of the customers and different regulatory requirements imposed by the Government of different countries. It has been essential to regulate the banking system with different new regulatory reforms in order to reduce risk and make banks non-vulnerable to any financial crisis. Basel norms were implemented to protect the banking system as well as the consumer base of a country.
Financial crisis in 2008 has shown the requirement of stringent laws to stop banks from taking high risks in order to generate high profits. Lots of big banks were declared bankrupt during that time due to their huge exposure in high risky subprime market and Government had to rush to bail them out to protect common people’s money.
To regulate the banking system, Central banks were formed by the government of different countries which overlook the domestic banking system and regulate all the banks.
Based on this the banks can be classified into two main parts. They are
Central banks mainly take care of the regulation part and act as a bank to the Government while commercial banks act as bank to the common people and businesses.