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Banking Regulations And The Current Financial Crisis - Essay Example
Author : tomasa71
Finance & Accounting
Pages 7 (1757 words)
Banking Regulations and the current financial crisis Introduction Banking sector is termed as a heavily regulated industry and it has a huge impact on both the local and global economy. So every country feels the need for a stable banking system. Instability prevailing within the banking system can lower down the growth of a country by causing higher uncertainty (Jokipii and Monnin)…
Thus we can say that even a stable banking system with all proper regulations in place failed to stop such a financial crisis from occurring. The paper intends to trace out the reasons behind such a failure with the help of findings and analysis and the relevant steps undertaken for this. Reasons behind failure of banking regulations Economists and policy makers of various countries have tried to find the conditions which led to the crisis. They tried to find out those faulty policies and the incorrect measures taken by the bank that led to its failure of crisis prevention. It was found that at the time of the crisis the interest rate was really low. Financial investors in such a scenario became optimistic regarding the prices of assets along with the underlying risks. The banking regulations directed towards changes in financial landscape led to extension of leverage and this made accurate risk prediction more difficult. Investors transformed into risk lovers and excessive risk taking began in the markets (Caruana). Neither banking regulations nor effective supervision could stop such a phenomenon. The fragmented banking regulation again proved to be wrong. ...