Regulatory Efforts in Preventing Banking Crisis The Role of the Depositor

Abstract

Bank failures occur when a bank is unable to meet its obligation to its depositors or other creditors because it has become insolvent or too illiquid to meet its liabilities. An Industry?s regulatory framework can have a major impact on the efficiency and direction in which the Industry evolves. Regulation is all encompassing in that all key players must be taken into consideration, and most play their roles effectively for regulation to succeed. Unfortunately, depositors? roles in preventing banking failures have been neglected, such that depositors play little or no role to complement the Central Bank in this regards. The purpose of the study is to find out why depositors could play insignificant roles in preventing bank failures. Questionnaires were administered in Kelaniya, Kiribathgoda and Kadawatha on bank depositors and the result showed that 87 percent of depositors who are graduates never care to know the activities of their banks, and thus, could not in any way influence the activities of their banks. The mere fact of depositor?s knowledge of banks activities is itself a check on how banks undertake their activities. Therefore, the information disclosure and customer awareness campaign must be undertaken by the Central Bank of Sri Lanka and the other banks to aggressively encourage depositors to develop interest in the activities of their banks, and will in turn, supervise the banks. Keywords: Bank, Central bank Depositors, Failures; Insolvent, Regulation