The regulatory framework includes regulations imposed both for monetary policy as well as prudential purposes. An adequate framework can help ensure financial stability by reducing the probability of bank failures and the costs of those that do occur. Regulation is about changing the behavior of regulated institutions because unconstrained market behavior tends to produce socially sub-optimum outcomes.
The regulator therefore has the responsibility to move the system towards a socially optimum outcome. The strategy followed by the State Bank of Pakistan aims at improving the market structure and competition on one hand and optimizing the overall regulatory regime on the other.