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
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)…
Deposit insurance is fixed and pays claim from a pool of funds to which every depository institution frequently contributes (Freixas & Rochet, 2008). However, this covers only a fixed maximum amount per account holder. Thus depository insurance is the measure taken by various banks to protect their client’s savings, either fully or partly to avoid the bank from returning.
It is a fact that a number of the leading global banks have reverted back to profitability and have paid or do intend to repay the so infamous government bailouts. Banking industry, though far from being in the pink of health, is in a much better shape then what it was just a year ago.
Banking Regulation and Risk. The 2008 financial crisis that started in the United States and immediately spilled over to many economies across the globe highlighted several problems that need to be addressed in the current financial system in order to prevent the same catastrophe from happening again.
Over the recent past decades, immense changes and growth in the financial sector across the globe have emerged. It is worth noting that, within the same period, a high number of countries across the world have suffered banking crises, which in some situations have resulted into costly bank failures and by extension severe economic disruption.
With the dynamism in the current business environment such as increased costs of doing business and competition, business organizations and financial institutions seek for ways of reducing costs and increasing their productivity levels. Through consolidating by mergers and acquisitions, banks hope to curb these challenges.
Regardless of the product or service that is being studied; it is noticeable that all of a sudden the information flow has become more rapid, regulatory structures have been oriented more towards free market structures and the movement of capital and permission to access local markets has become freer.
The study of Sathye (2002) investigated the productive efficiency of banks India. Her results were that the mean efficiency score of Indian banks was comparable with the world mean efficiency score, as well as the efficiency of private sector commercial banks as a group were, ironically, lower than that of public sector banks and foreign banks in India.
On the other hand, it is argued that financial market regulation imposes significant costs to an economy that outweighs the benefits (Benston, 1998).The debate remains unsettled. In this essay, the failure of financial regulation in UK in the light
avity of the problem is underscored by the length and the damage wrought by the slump, which some economists called as a recession and financial shock. In the effort of prevention, it is crucial to identify the causes of the financial crisis.
Technically, it was the collapse of
The ICB (Independent Commission on Banking) released its report highlighting the reforms in 2011 to the United Kingdom banking sector. The discussion for banking reforms is not easy to avoid. United Kingdom has a stable financial service sector with assets dwarf GDP that has a factor of 4.5.
6 pages (1500 words)Essay
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