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Banking Regulation - Essay Example

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Banking Regulation

The financial crisis exposed failures of banks to control financial meltdown. The case pointed out that banks directed their interest at the expense of the common good of the financial markets. Regulation in the sector is an issue that is quite complex because UK has banks which handle domestic and international banking. This paper analyses banking regulation and its effects on the financial market. Argument for and against regulation The argument about the need for bank regulation has divided economists into two groups. The first group feel that banking sector should institute policies, which regulate operation of banks while second group feel that banks are volatile to instability, hence less need for regulation. Economists have observed that unregulated actions lead to greater social marginal costs and less private marginal costs (Slaughter and May. 2011). The effects of social marginal costs influence the overall economy because banks form important units of making public payment. This contrasts to private marginal costs because it belongs to a clique of shareholders of the firm. Turner Review on banking regulation proposed interest policy that should be able to tone down macro stability as well as bubbles in the financial sector. However, during the financial spill it was evident that central banks were unable to control macro stability of the banks. Elaborate regulation influence practices, which influence lending, and borrowing. Complexity in the sector crops whenever banks failed to comply with the regulation because they tend to manipulate the markets to gain profit (Hoose, 2010:136). The challenge is to balance financial market as well as doing business. Serving these interests have often thrown the market into cross roads where financial spiff off is inevitable. However, the mandate of the regulation is to promote common good among the market players in the financial sector (Hardy, 2006:6). Economists for regulation have argued that uninsured depositors would create a financial spill when they acquire information about poor performance of the banks. For instance, Northern Rock bank was a victim of depositors run during the financial crisis in 2007. Many of its depositors were not certain that bank suffered liquidity problem. It means that bank run would create adverse effect to the economy because of loses that banks would incur in its attempt to meet the demands of its depositors. The idea is to equip the banks to handle unstable markets (Independent Commission on Banking. 2011: 23). During the 2008 crisis UK, government shielded the banks from falling because they did not have the capacity to absorb the risks. Early banks had demonstrated their ability to lend without evaluating their capacity to handle the risk. Erosion of bank equity destabilised the financial market because the banks lost the ability to bear loses. Proposal on banking regulation is an issue that committees such as Basel committee have discussed reviewing macro prudential methods of regulating operation in the banking sector. The report charged with reviewing stability in the banking sector identified three areas first, the minimum requirement of capital, second, supervisory on internal bank assessment and third, cushioning public from risks. Basel committee recommended that each loan should command its own capital requirement as opposed to portfolio the loan added. The significance of Basel model was to cushion the banks from running into ...Show more

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Name Institution Course Instructor Date Banking Regulation Introduction The idea of banking regulation stems from systemic effects of banking operation in the market. Economic stability depends on principles that influence financial market players (Beck, 2011:50)…
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Banking Regulation Essay essay example
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