Banking Law
Core concepts
Banking law governs the banker-customer relationship, which is fundamentally a contract of debt (the bank owes the customer the balance). Candidates must understand mandate, authority, set-off, combination of accounts, banker's lien, confidentiality and its exceptions, wrongful dishonour, and the duties of care on both sides. Know negotiable instruments basics, security documentation, guarantees vs indemnities, and limitation periods. Understand anti-money-laundering reporting obligations as a legal overlay.
Traps in questions
- Guarantee vs indemnity: a guarantee is secondary liability (surety benefits from the debtor's defences); an indemnity is primary liability. Stems often blur this.
- Mandate: the bank must act within the customer's mandate; acting outside it can make the bank liable even if the customer benefited.
- Set-off: requires mutuality and, often, maturity; it is not automatic in all jurisdictions.
- Confidentiality exceptions: legal compulsion, public duty, bank's interest, customer consent, and disclosure to credit reference agencies.
- Wrongful dishonour: dishonouring a cheque within funds can be a breach sounding in damages.
Worked example / rule of thumb
Rule of thumb: "Check the mandate, then the authority, then the funds." Example: A company director instructs a transfer beyond the board resolution's limit. The bank executes it. Even if the payment benefited the company, the bank acted outside the mandate and may bear liability. The examiner wants the mandate analysis, not the outcome analysis.
Exam discipline
Identify the legal relationship first (debtor-creditor, principal-agent, bailment for safekeeping), then apply the duty that flows from it.
Banking Law, Regulation and Compliance
Core concepts
This domain covers the regulatory architecture: prudential regulation (capital, liquidity, leverage), conduct regulation, and compliance as the operating discipline that connects them. Candidates must understand Basel capital adequacy concepts (risk-weighted assets, capital ratios), liquidity coverage, stress testing, AML/CFT obligations (CDD, beneficial ownership, suspicious activity reporting), sanctions screening, market conduct, and governance (three lines of defence). Know supervisory tools (reporting, inspection, enforcement) and regulatory capital vs economic capital.
Traps in questions
- Capital vs liquidity: capital absorbs loss; liquidity meets cash outflow. A bank can fail on liquidity while well capitalised.
- Risk-weighted assets: a ratio can improve by shifting to lower-risk assets without raising capital.
- Three lines of defence: the first line owns risk, the second oversees, the third audits independently. Do not assign ownership to the second line.
- Suspicious activity reporting: report suspicion, not proven crime; tipping off is prohibited.
- Beneficial ownership: identify the natural persons who ultimately own or control.
Worked example / rule of thumb
Rule of thumb: "Capital is a cushion against loss; liquidity is fuel for outflow." Example: A bank reports a strong capital ratio but a liquidity coverage ratio below the minimum. The correct conclusion is a liquidity vulnerability, not a capital deficiency. If the stem asks which ratio breaches, answer the liquidity ratio; if it asks what absorbs unexpected credit losses, answer capital.
Exam discipline
Classify each requirement as prudential (safety of the institution) or conduct (fair treatment of customers), then apply the matching supervisory response.