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Licences are necessary for a sound and stable banking system.
The main objective of the process is to limit the number of bank failures and minimise systemic risk.
They are an entry barrier for institutions that don't meet necessary conditions and could pose a threat to the banking system. Nothing guarantees that once a licence is granted, individuals running it will not turn rogue.
But a number of problems are avoided if the first filter blocks out undesirable elements.
Licensed institutions are subject to permanent supervision — to guarantee protection of public's savings.
Licences should not lead to a monopoly or be a deterrent to competition.
The Supervisory Authority should have discretion and power to reject banking licences to high-risk institutions.
(Source: From a 2009 study on ‘Authorisation of Bank Licenses', from The Association of Supervisors of Banks of the Americas (ASBA) .
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