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Banking Regulation and Risks - Coursework Example

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Banking Regulation and Risks

The banks are now on a constant quest to out-wind the effects of the global financial crisis and encounter a new business era. The change in the regulatory framework of banks has been observed globally. The practices of the banks of increased regulatory requirement have are hindered the banks from progressing (Ernst & Young, 2011). Hence, this report aims to highlight the effect of the global financial crisis on the regulatory framework of the banks. It will signify the need for the banks to alter the global banking landscape. This has become mandatory so that the system can run smoothly and performance can be optimized while developing capability to sustain any such economic shocks in future. SECURITIZATION The financial engineering based process of pooling certain types of assets so that they can be converted into interest bearing securities is called securitization. The asset in turn derives interest and principal payment for the individual who has purchased the securities (Jobst, 2006). This concept began in 1970’s in the US. The agencies which were backed by the US government pooled the home mortgages. By the 1980’s other assets which were primarily important for pooling were gathered and since then the market of securitization grew dramatically (Jobst, 2006). There was incremental growth in the residential mortgage funding through residential based mortgage securities (RMBS) in UK moved to ?257 billion from ?13billion (Wainwright, 2010). Following trend was observed across the years: (Wainwright, 2010) With the global financial crisis the stability of this concept was also widely impacted. This impact originated from the credibility of securitization conducted for the sub-prime mortgage loans. The poor credit origination, lack of regulatory efficiencies and inadequate methods of valuation proved to hurt the securitization severely. UK suffered as nearly 70% of the RMBS were given to foreigners who reverted to local markets (Wainwright, 2010) The concept of Securitization is also known as financial innovation. The need for securitization was realized to supply the customers with securitized bonds which were backed by sufficient assets. The surety that such bonds will never be subject to bankruptcy was a major factor which attracted the individuals towards it (Davis, 2011). USEFULNESS OF SECURITIZATION AND THE FINANCIAL CRISIS Businesses adopted securitization as source of funding for business on the basis of assets held by them. Banks also allured to the usefulness of securitization as it reduced the pressure of minimum capital requirement imposed as regulation (Jobst, 2006). Securitization was widely used in the US before the financial crisis. At the time of the global financial crisis it was observed that the asset based securities were primarily in the limelight of the investors’ portfolio. The securitization tool was asset backed and so it was widely used as collateral of the sale and repurchase agreements. The asset based securities were also used for the issuance of the asset backed commercial paper. However, the benefits of securitization were enchased unduly that resulted in the crises. During the financial crisis banks were involved as financial intermediaries. When the banking system collapsed these instruments also collapsed as the banks couldn’t sustain the complex engineering introduced for excessive use of the process. This ...Show more

Summary

BANKING REGULATORY COMMISSION AFFILIATED TO THE CENTRAL BANK INTRODUCTION After the great depression the recent global financial crisis that erupted in 2007 was an event which had sabotaged the entire world’s financial system. The major effect of the global financial crisis was observed in the USA and Europe…
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