The global financial crisis hit banks’ regulation at its core. As significant portion of this crisis’ responsibility has been attributed to the lack of effective banking oversight, there has been immense pressure on the next Basel agreement to tackle such issues in order to avoid future crises, or at least decrease their severity. In essence, the Basel accords mainly intend to gauge the level of capital required to protect banks against risks related to their assets. As a result, the latest accord, Basel III, has substantially increased the capital requirements of banks and introduced other features as an effort to increase the soundness of the banking system. The banking industry, however, has proclaimed that it would promote mainly negative outcomes throughout the global economy due to higher required capital ‘set aside’. In light of this contentious dynamic, this essay strives to give a balanced overview of the issues at stake, and to critically analyse the arguments advanced in the article attached to this document. As a result, it highlights Basel III’s potential positive and negative effects when fully implemented, as well as several credit rating agencies’ shortcomings, which were mainly exposed due to the financial crisis. Finally, it concludes by arguing that the article lacks essential information, and the banking industry’s reactions signal an attempt by a powerful industry to maintain its exorbitant privileges.
Although the article claims that Basel III will likely promote negative effects, such as an increase on the cost of credit to borrowers, it fails to acknowledge the potential benefits of that agreement. In fact, many substantial benefits are associated with Basel III, particularly those relating to increased b...
... middle of paper ...
...el III potential benefits and shortcomings, the article overemphasized the latter. This allows readers to have an incomplete understanding of the complexities relating to global banking regulation. Moreover, the article does not provide sufficient space to regulators elaborate the benefits. Instead, these are succinctly mentioned as a weak statement. A realistic evaluation of Basel III’s positive and negative effects shows that the former outweighs the latter when the safety and soundness of the global economy considered. It is plausible to argue, therefore, that the banking industry’s overreaction illustrates how a powerful industry, which has grown immensely due to deregulation, financial liberalization and lack of adequate oversight advanced, or at least allowed to, by national governments of the major global economies, has strived to keep its privileges intact.
The presence of systemic risk in the current United States financial system is undeniable. Systemic risks exist when the failure of one firm may topple others and destabilize the entire financial system. The firm is then "too big to fail," or perhaps more precisely, "too interconnected to fail.” The Federal Stability Oversight Council is charged with identifying systemic risks and gaps in regulation, making recommendations to regulators to address threats to financial stability, and promoting market discipline by eliminating the expectation that the US federal government will come to the assistance of firms in financial distress. Systemic risks can come through multiple forms, including counterparty risk on other financial ...
Banks exist to provide people with financial security. Banks accounts allow for people to store money for saving and investing purposes. People give their money to banks in hopes that the bank will take care of their money. However, history has shown as that banks cannot be completely trusted. For example, in the days of the Great Depression. During the years of President Roosevelt’s tenure, he attempted to make it easier for people to trust banks. Still, many years later, banks cannot be completely trusted. In 2008, the financial crisis was the worst since the Great Depression, and it stemmed primarily from banks’ abuse of people. Once again, there has been legislation to keep banks from abusing
Market crashes are nearly as old as the invention of money itself. But, as Gillian Tett underlines in Fool’s Gold, “the latest financial crisis stands out due to its sheer size”. Economists estimate total losses could sum up to $2000 to $4000 billion, a number surprisingly not dissimilar to the British Gross Domestic Product. In its post-mortem, the self-inflicted disaster has commonly brought to light the question: “Did bankers, regulators and rating agencies fail to see the flaws, or did they fail to care?” Importantly, it has also created a hunt for scapegoats and quick fixes.
Major banks are cutting back on some of their legally permitted operations, such as- market making, and that has led to liquidity issues in the bond markets. Proprietary trading could become unregulated if more banking activities continue moving towards the shadow banking system. This would essentially defeat one of the main purposes of Volcker Rule. [d] The third major unintended consequence has been the degree by which the Federal Reserve has become the main regulator of the finance industry. In order to discourage future bailouts similar to the ones during the financial crisis, the Dodd-Frank Act limited the Fed’s emergency powers. However the liquidity and capital standards now imposed by Fed has purportedly become one of the most important regulatory developments of the Dodd-Frank Act.
Investment banks, Rating agencies and Insurance companies are key components of the financial market. In this presentation, I’m going to explain how these three key roles worked together to create the 2008 financial crisis.
Companies whose success and continuous operation prove vital to the economy and financial systems should receive auditor scrutiny and regulation oversight. It is clear that Lehman Brothers required oversight and possible prohibition of its liabilities financing practices using repo borrowing. Likewise, AIG deserved more review of its credit swap business practices. The negligence of these institutions cost the United States and foreign economies billions of dollars. The federal government chose not to intervene on Lehman Brothers’ behalf, for reasons that some say are inconsistent with other bailout decisions (Smith, 2011). However, the government did find that an AIG failure would constitute systemic risk and chose to rescue the insurance company. The government created incentives to increase depositor confidence by guaranteeing market-based fund-raising. The financial crisis of 2008 offered lessons learned to both government and banking
Following the financial crisis of 2008 – 2009, the Basel Committee of Banking Supervision (BCBS) extensively revised the existing capital adequacy guidelines. The resultant capital adequacy framework is called Basel III. In a paper published by KPMG entitled Basel III: Issues and Implications Basel III proposal had two main objectives:
New shaping strategies must be enforced to remedy the crisis. Many financial experts have suggested that major regulatory reform must be authorized on the federal level (Bruce, 2008). We have not witnessed this type of reform advocated by US lawmakers. Congress passed a 325 base points of federal fund package, with $160 billion fiscal bill which should ease the financial impact of the default sub-prime crisis (Ruder, 2008). Further, central banks in the US and the eurozone authorized liquidity injections into the economy to further off-set to keep insolvency low and decrease further liquidity issues from becoming immobile (Ruder, 2008). Also, financial experts believe that regulatory forbearance should be enacted to ensure reduction of capital requirements, especially for Freddie and Fannie. All of these measures were undertaken maintain and foster financial security in the US and global markets (Ruder, 2008). Another important consideration has been the reducing the federal interest rates; many experts feel that further reductions could cause an apparent increase in inflation, escalating oil and gas prices, higher food costs, and lower standard of living and quality of life for Americans, which they deem unfathomable (Bruce, 2008). The government and global must be very careful in the measures which have been drafted
The "subprime crises" was one of the most significant financial events since the Great Depression and definitely left a mark upon the country as we remain upon a steady path towards recovering fully. The financial crisis of 2008, became a defining moment within the infrastructure of the US financial system and its need for restructuring. One of the main moments that alerted the global economy of our declining state was the bankruptcy of Lehman Brothers on Sunday, September 14, 2008 and after this the economy began spreading as companies and individuals were struggling to find a way around this crisis. (Murphy, 2008) The US banking sector was first hit with a crisis amongst liquidity and declining world stock markets as well. The subprime mortgage crisis was characterized by a decrease within the housing market due to excessive individuals and corporate debt along with risky lending and borrowing practices. Over time, the market apparently began displaying more weaknesses as the global financial system was being affected. With this being said, this brings into question about who is actually to assume blame for this financial fiasco. It is extremely hard to just assign blame to one individual party as there were many different factors at work here. This paper will analyze how the stakeholders created a financial disaster and did nothing to prevent it as the credit rating agencies created an amount of turmoil due to their unethical decisions and costly mistakes.
There has been much debate over the advantages and disadvantages of the regulation of financial reporting. The central argument put forward by proponents of regulation of financial reporting is that a lack of regulation of the market results in severe market failure and regulation mitigates the chance of such failure. On the other hand, proponents of the free-market approach argue that the private incentives for self-regulation and production of credible financial reports are such that regulation is unnecessary and often worsens market collapses- the opposite of its intended purpose. This paper will argue that whilst regulation is necessary to mitigate market failure and serve the public interest, it is important to consider that regulation has in some cases caused financial crises. The global economic crisis has “ignited worldwide debate on the issues of systemic risk and the role played by financial regulation in creating and exacerbating the crisis” (Bushman and Landsman 2010: 259).
What is the net contribution of the Basel Process to the governance of global finance? The goal of this paper is to describe, analyze, and evaluate the costs and benefits of the Basel Capital Adequacy Accords through the comparison of intended consequences, namely the stability of the global banking system, and unintended consequences, namely financial risks.
In conclusion, we feel that the recommendation we have suggested in this report is a suitable foundation to build a sustainable and prudent financial system in this country. This will facilitate the financial industry both, withdraw out of this crisis and in the future avoid as much as possible inducing the scale of matters at present. As the report suggest, everyone contributed in their own miniscule way to this crisis, we feel that it’s up to every one of us to contribute to the overall recovery of this financial crises and recovery of the nation in general.
International financial institutions are fraught with controversy despite their seemingly altruistic objective of providing economic support for ailing member nations. From evolving charters and Western bias to corruption and anti-globalization protests, there is little hope for consensus when dozens of member nations are driven by self-interest. But perhaps, in fact, it is this “invisible hand” of national self-interest makes these institutions work so well.
...e structure of the market and limiting the amount of competition. That could be troublesome and have undesirable side effects. The challenge is to keep up competition for the benefits it will provide for the entire economy, while in the meantime making an administrative structure that minimizes the negative ramifications that it can have for stability. Thorsten Beck writes that “Together [the banking regulatory rules] would constitute the so-called “safety net”…The safety net consists of: Banking supervision, Deposit insurance (explicit or implicit), Capital requirements, Lender of last resort, Bank crisis resolution (private solutions, bailouts and bank closure policies)” (Beck, 2010). Administrative change can give the powers better tools to manage failing banks later on, and accordingly diminish the negative repercussions on the rest of the financial framework.
Many researchers have pointed out that the global imbalances are the root of the recent financial crisis. Portes claims that “the underlying problem in international finance over the past decade has been global imbalances, not greed, poor incentive structures, or weak financial regulation, however egregious and important these may be.” (2). According to him, the global imbalances lead to “the increasing in dispersion of current account”, which “puts a burden on financial systems to intermediate.”