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The post-crisis reforms are being driven by the need to fix the loopholes in those advanced economies (Subbarao, 2011, p.1). There is a strong correlation between financial sector development and economic growth. Economic development gives birth to demand for financial services and urges financial sector progress. A developed financial sector is very useful in allocating resources and promoting economic development. The world before the crisis had “easy liquidity, stable growth, and low inflation”. Everyone expected that the things will remain like this forever and the financial sector will continue to pile up profits by sheer financial engineering (Subbarao, 2011, p.2). Now new regulation has been proposed and regulation comes with associated costs. A BIS study approximates that a one percentage point raise in the target ratio of tangible common equity (TCE) to risk-weighted assets (RWA) spread out over a nine year time span decreases output by almost 0.2% (Subbarao, 2011, p.2). Noted economist Paul Krugman has said that, the way to reform banking is to make it boring once again (Subbarao, 2011, p.6). In this paper we are going to look at the issue of financial regulations and banking sectors’ response to such regulations to maintain their return on equity. Causes of Global Financial Crisis of 2008 There is a host of ideas about the probable cause of the financial crisis. The classical explanation is very clear. Financial crisis are the result of monetary excesses. Monetary excesses first create boom and then there is a bust. In the crisis of 2008, we had a housing boom and bust, and these in turn led to financial turmoil in the United States and rest of the world (Taylor, 2009, pp. 1-2). The monetary policy was strategically loose. The interest rate setting based on macroeconomic variables had shifted significantly from the rates prescribed by the policy makers. The Federal Reserve said that the interest rates would be down for a significant time and then would increase at a deliberate rapidity. These actions were irregular government interventions to reduce the fear of deflation that Japan had faced in the 1990s (Taylor, 2009, pp. 3-4). There are a few competing explanations for the crisis. One of the arguments is called ‘Global Savings Glut.’ Proponents of this concept argue that the low interest rates in 2002-2004 were caused by global factors and thus monetary authorities have nothing to do. This substitute clarification concentrates on global saving. It points out that there was an overload of world saving or a ‘global saving glut’ as they assume and it pressed interest rates lower in the United States and other countries. But the numbers from the IMF says a different story. The numbers tells that the global savings rate as a percentage of world’s GDP in 2002-04 was very low compared to the 1970s and 1980s (Taylor, 2009, pp. 5-6). The crisis started as the fall of subprime lending market. Here the monetary interaction with the subprime mortgage problem needs to be understood. In the summer of 2007, the United States first went through an outstanding reduction in affluence. The risk spread increased, and the credit market deteriorated. The 2007 US sub-prime crisis finds its origin in declining housing prices and this caused superior default levels mainly among less credit-worthy borrowers. The effect of these defaults on the financial market has been largely overstated due to the complex package of compulsions that was thought to increase risk proficiently. ...Show more


Running Head: STRATEGIC BANKING ISSUES Strategic Banking Issues Regulations and Profitability Experts in the banking industry blame failure of regulation as one of the main causes of the 2008 global financial crisis…
Author : milleralysa
Strategic banking issues
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