The Financial Regulation

Introduction

The last 18 months, with high intensity being realized in the recent six months, the whole world’s financial system went into great financial crisis in the great history of financial capitalism. There are key specific national banking crises that have been recorded, such as the collapse of the UK banking system in the period between 1929 and 1933. The unique part of the issue is that not only the UK was experiencing these crises, but also many other countries. This phenomenon has seriously caused a great economic impact that is still being felt by the whole world since there is an interconnection between these countries as they enclose in terms of global market. To some extent, these countries are undergoing through this financial crisis due to the bad policies made in the early 1930’s. Although these policies have being avoided today, there are still larger estimations of financial crises to come. We are thus left to ask ourselves some profound questions like: what really went wrong? Were there mistakes that the past intellectuals made still being mistakenly performed today? And what do we need to do in order to reduce the probabilities of future financial crises?

Background Information

It is essentially right to establish the real facts on what really went wrong. This analysis is essential since it intends to help root out the required decisions that regulatory bodies might use to clear out the crisis. In this section, the cause of these crises is based on the four essential sections:

(i)  The global story: This theory is based on the macro trends linking with financial decisions.  These are the imbalances which had grown rapidly in the past ten years and are still being felt by the financial market development projects that have been underway in the past 30 years. Most of these macro-imbalances have been experienced in the last decade. The oil exporting states such as China and Japan have really accumulated the large amount of current surpluses. The driving force,  which is causing these imbalances are portrayed by the very high saving rates for which the country imposes on its citizens thus exceeding the requirements needed to foster domestic investments. China and other countries are committed to the fixed exchange rates, thus the raising in the claims, which then takes the forms of the central bank reserves. The financial market innovation is causing the demands for yield uplifts, which have been met by the waves of financial innovations, focused on origination, packaging and the distribution of securitized credit instruments.

(ii) The United Kingdom specific story: It is based on the story, which stipulates that the financial crisis has been experienced globally and that the understanding of this phenomenon requires a well-illustrated explanation to be provided for the overall global analysis. The UK is considered the leading centre for the trading activities, and hence the method of securitized credit model underpins the economy in general. The result of this aspect led to the shadowing of the banking activities, which developed further and eventually led to the collapsing of the economy in general. Some of these effects resulted in the emergence of wider sets of credit problems, in areas of mortgages, corporate lending, thus generating credit capacity constraints which as a result led to the economic slowdowns.

(iii)  Global finances which lacked the objectives governed by the need for global government: These developments lead to the various queries, which demanded to comprehend the approach which will have assisted the wise management and regulation of finances altogether. There was, therefore, the need to regulate the capital, liquidity, bank-like institutions, and the credit ratings that applied to all the banks across the globe with regards to the way for which they were entirely operating within the national market boundaries across the border basis. These crises have revealed fault lines in the global market regulation and supervision of some of the cross-border firms, which finally raise fundamental issues about the appropriate future plans.

(iv)  The fundamental theoretical issues:  in this case, the financial crisis was also expected to have been caused by the various concepts relating to the intellectual assumptions for which the regulatory approaches were believed to have been built on. These core assumptions have been the major facets, which helped in determining the theories of insufficient and rational markets.  In this case, the market prices are assumed to be the key indicators of the rationally- evaluated economic values. At the same time, the market disciplines are still being used as effective tools used in constraining the harmful risk taking initiatives.

The Failures of the UK Regulations

As discussed earlier, it is perceived that the government was still mandated to govern all the business activities of its country. A failure to the execution of the role of management and the adherence to its set objectives are considered to be the key causes for the economic failures. Most of these factors are listed and discussed in detail as follows:

(i) The poor financial committees: The government in the United Kingdom has been   mandated to form, develop and maintain the financial policy committee structures within the financial sector as a whole.  This committee is further mandated to monitor and address the macro-prudential regulations, which exist within the aforementioned financial sector. It is, therefore, wise to indicate that a poorly formed committee will definitely cause the state or rather adhere to the poor policies being used by another state and as a result lead to huge economic crises.

(ii)  Lack of close monitoring: The government has been mandated the role of undertaking the macro-prudential regulations at hand. Close monitoring is, therefore, essential for the purpose of finding out the necessary means which are required for achieving the financial stability as a whole. It is, thereby, advised that the government come up with action plans which are essentially useful in addressing the vulnerabilities and identification of imbalances caused by the financial crisis created. 

(iii) Lack of transparency and accountability:  It is wise to note that both the transparency and accountability mechanisms are necessary for the success and credibility of the business transactions, which are conducted on a daily basis within the financial sector as a whole. The government believes that it is important to retain and also strengthen the role of Court directors for banks to aid in the overseeing and evaluating of the bank activities.  Failure to adhere to this level of transparency will hence lead to the misappropriation of funds, thus this mishandled money saved and then would be injected back and used to operate the unregulated private activities. This, as a result, will delay the growth needed for the development of the United Kingdom economy. This feature is also perceived in other parts of the world altogether.

(iv)  Lack of enough accountability on the part of the treasury: Apart from both the internal and the external accountability which is required by the regulations stipulated by the parliament, the United Kingdom government is expected to be delivering half year budget to the treasury. The government is expected to develop meetings, which it will use to inform the financial Chancellors of the financial stability issues within the Bank’s wider remit. Lack of these accountabilities is expected to hinder possible growth strategies of ideas from being exchanged between the involved financial parties within the sector as a whole.

(v) Funding problem: As discussed earlier, critical financial issues, which have affected the economy at large, arise from the funding challenges experienced within the financial sector. These problems arise when a substantial amount of money is injected back to the economy without the laid-down specifications which will enhance regulation of the aforementioned funds as a whole thus directing the funds to their respective rightful usefulness. It should be noted that when more money is circulating within the economy, it definitely leads to an unwanted level of inflation. An inflation state refers to the situation whereby there is a consistent increase in the commodity of prices and in turn the money within the economy lacks the monetary value as a whole.

(vi)  Poor definition of business scopes:  The major objective of all businesses within the economy is to make profits while minimizing costs at the same time. The aforementioned scope should, therefore, be operated under a particular state, which should be well defined and the legal terms of operation have to be set well as prescribed. Lack of clear definition of business activities by the governments might lead to the existence of illegal operations. In most cases, the illegal operations will cause the unfriendly environment for businesses hence leading to potential investors withdrawing their investments in a particular state altogether. This, as a result, causes the failures in the economy.

(vii) Rule making: The government is responsible for the formation of the core prudent rules, which are used for the purpose of covering the underlying issues, which are affecting the safety and the soundness of the individual firms. Rule making should thus be a mandate given to the PRA board which cannot be left open for the sub-committee or the members of the executive. This is part of the key reason which might be affecting the economy of the United Kingdom, since there are chances of premature judgments being made.

(viii) Lack of adequate supervision and enforcement: Both supervision and enforcement are essentially important towards the credibility of any regulatory regime. It is clear that the rules of conducting business activities within any stipulated regulated industry are always framed in such a way that it ensures the appropriateness of the regulatory outcomes, thus the lack of the effective supervision which will in turn term the postulated rules as incredible. Once the country lacks the credibility needed for conducting business, it then leads to the drastic decrease in terms of great business transactions. This, in turn, might be the contributing factor, which causes the challenges being faced by the United Kingdom economy.

Analysis on the Lessons Learnt

The financial crises discussed in the previous section require a number of regular changes in the banking system, which the governments should introduce in the respective countries. The banks are the key sections in the control of the economy, which really require the aspect of well- monitoring and regulation in order to avoid the financial constraints. The following are some of the analysis for what should be done and how the United Kingdom and other nations can benefit from it:

(i) The need for synthetic approach: The future approaches to the banking regulations require that the governments have to be responsible for controlling most of the activities concerning financial aspects as well as the life insurances. The purpose for this phenomenon lies with the mere fact that banks are the providers of maturity transformation, which is, holding tenor assets more than the liabilities and thus leading the non bank sectors to holding the aforementioned longer liabilities. According to the recent International Monetary Fund analysis, it stated that bank failures are extremely severe for the growth of the state economy. A synthetic approach thus is essential for coming up with the short and long term financial stress.

(ii) The fundamental changes in capital, accounting and liquidity: The presence of inadequate capital against the trading book positions leads to extreme excessive leverage. The changes imposed on the maturity patterns create the transformation in the system-wide liquidity range. These changes can be achieved through the stages like increasing the quantity and quality of the bank capital, avoiding the practicality in the Base 2 implementation, creation of counter-cylindrical as capital buffers as well as the control of the liquidity risks in the individual banks at the synthetic levels.

(iii) Increasing the quality and quantity of the bank capital: This is a specific call for the United Kingdom to protect the fundamental rights of the senior creditors and the depositors in the events of individual bank failures within the stable overall system. There should also be the application of the concern approach, in which the regulators and the macroeconomic policy makers are expected to consider when coming up with bank structures. All these measures will eventually lead to the substantial amount of credibility within the economy hence increasing the quality and quantity of the respective bank capital.

(iv) Insurance Deposit and Bank Resolutions: This approach concerns itself with the accounting, capital, liquidity and the coverage as being significant in the reduction of the probability of the bank failures. It also reduces the extent to which strains on the bank capital and the liquidity results in the impaired abilities to extend credits to the real economies. It should, however, be noted that the probability of bank failures cannot be reduced completely to zero.

(v) The use of Macro-prudential analysis and the intellectual challenge: It is essential for the system to have the macro-prudential perspectives in order to offset the systematic risks. The Macro-prudential analysis looks at the roots of the problem through defining and providing for the possible perspectives to use in the analysis.

(vi)The Use of Risk Management and Governance: The analyses on the causes of the crisis are not expected to stipulate the limits for which the risks can be identified and thus not offsetting the identification of the risk itself. This is essential in predetermining the rough estimates of how much risky the situations are before making the resultant investment decisions.