How should the banking sector be regulated
• How should the banking system be regulated?
The very nature of any free market system possesses elements of uncertainty and risk. For the economic process to function effectively in this environment, suitable financial regulation must be implemented by the state in order to assure stability and to aid decision-making.
Financial regulation is the use of laws and rules to govern the behavior and activity of the banking sector. The establishment of statutes, contracts and independent supervision helps to protect shareholders, prevent illegal activity and direct the appropriate allocation of wealth.
The global financial crisis in 2008 saw the debate into the degree of financial regulation rise to prominence. The world financial system was on the brink of collapse after a period of irresponsible banking, this placed pressure on governments to implement widespread changes in the regulatory system. Irresponsible lending, high-risk speculation and complex derivative securities all contributed to the crises in 2008 that left global financial markets in need of reform. The regulatory debate following this crisis shared a broad consensus upon the requirement to change the existing system by increasing the level of regulation and supervision, but conflict occurred as to the timescale and extent to which these changes were to be implemented.
Proposals to overhaul any banking sector must not be taken prematurely as any change in regulation or change in the market adds further uncertainty to the economic environment.
One of the key problems to be addressed and further regulated is the relationship between bank’s liabilities and their assets. Bank’s liabilities are essentially used as money as their redeposit ratios mean that they are able to hold long term assets without fear of illiquidity. The control of this ratio was loosened during an age of neo liberal economics in the 80s under Thatcher and Reagan in an attempt to open up global markets and encourage growth.
The very nature of any free market system possesses elements of uncertainty and risk. For the economic process to function effectively in this environment, suitable financial regulation must be implemented by the state in order to assure stability and to aid decision-making.
Financial regulation is the use of laws and rules to govern the behavior and activity of the banking sector. The establishment of statutes, contracts and independent supervision helps to protect shareholders, prevent illegal activity and direct the appropriate allocation of wealth.
The global financial crisis in 2008 saw the debate into the degree of financial regulation rise to prominence. The world financial system was on the brink of collapse after a period of irresponsible banking, this placed pressure on governments to implement widespread changes in the regulatory system. Irresponsible lending, high-risk speculation and complex derivative securities all contributed to the crises in 2008 that left global financial markets in need of reform. The regulatory debate following this crisis shared a broad consensus upon the requirement to change the existing system by increasing the level of regulation and supervision, but conflict occurred as to the timescale and extent to which these changes were to be implemented.
Proposals to overhaul any banking sector must not be taken prematurely as any change in regulation or change in the market adds further uncertainty to the economic environment.
One of the key problems to be addressed and further regulated is the relationship between bank’s liabilities and their assets. Bank’s liabilities are essentially used as money as their redeposit ratios mean that they are able to hold long term assets without fear of illiquidity. The control of this ratio was loosened during an age of neo liberal economics in the 80s under Thatcher and Reagan in an attempt to open up global markets and encourage growth.