Since the financial crisis the banking industry has gone through unprecedented structural and regulatory reform aimed at reshaping and stabilising the banking systems. Although some of these changes were both necessary and beneficial to we have reached a point of overregulation is damaging the sector.
Banks have been forced to respond to the substantial increase in capital and liquidity requirements by scaling down their businesses and strategically evaluating their choice of customers, products and geographies. To a certain extent simplification of banking business is positive since leading up to the crisis, bank balance sheets were undoubtedly too big, business models were too complex, leverage was too high and risk models were inadequate and to handle the extreme events that occurred. However the required changes will inevitably lead to lower returns.
Although it can be argued that the longer term benefits of stability are more important than the short term costs of reform we have reached a point where the cumulative impact of regulatory changes is becoming a hindrance to banks being able to effectively do business. The increasing cost of compliance required by ever-expanding regulation is strangling the sector and impeding economic growth without resulting in a real reduction of systemic risk.
There are a number of significant concerns around the current and proposed regulatory measures. Firstly is complexity. As regulations become more complex there is a risk that that the impact of individual initiatives is diluted or that regulation become contradictory. It also becomes more likely that supervisors don’t fully anticipate potential exploitation of complex regulation or have the technical expertise to prevent it.
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...rice bubbles. For example an artificial increase in the prices of sovereign bonds regulators require banks to hold.
The sheer volume of new regulation means that banks have to focus enormous resources on regulatory implementation. There is a danger that with intrusive regulation the focus on regulatory compliance is actually acting as a distraction from proactively managing other business risks. There is also a danger that over regulation leads to decreased accountability if banks can point to following regulations.
To operate banks need to be able to reasonably price and manage risk and generate adequate shareholder returns. A reform of banking regulation was required however we have reached point of over regulation where compression of profit margins and ever increasing regulatory cost may mean that it becomes impossible to find investors in bank capital.
In addition, the Federal Reserve did badly on supervision of the financial market. Many banks did not have enough ability to value their risk. The Federal Reserve and other supervision institution should require these banks to enhance their ability of risk valuing.
The Dodd-Frank Wall Street Reform and Consumer Protection Act’s policies haven’t really been implemented to the extent that regulators would have liked. Although the legislation takes many steps in addressing systematic risks in the United States financial system and improving coordination among regulators, some critics believe that alternative options might have been more effective. The coming years will give us a better understanding of how well the Dodd-Frank Act addressed these concerns.
Globally, banks have been facing big challenges in the last few years and continue to do so. As a result of the financial crisis, the regulators have tightened the minimum capital requirements with the aims to create a more solid and shock-resistant banking system especially for the so called Global Systemically Important Banks (G-SIBs). The Financial Stability Board is expecting to raise the total loss-absorbing capacity
In today’s America, bankers are often seen as heartless, money hungry pigs, and media outlets portraying bankers putting hardworking people on the streets. Regulation like FDIC and Dodd- Frank increases financial security and helps restore our repetition. Cases like ERON and Long-Term Capital Management, where people lost their entire savings, would not happened. Regulation is not the enemy. Instead of having lobbying groups to deregulate, accountable banks should embrace such regulation designed not only to improve consumer confidence, but also to preserve the integrity of our overall financial
One of the major unintended impacts of the Dodd-Frank Act has been on credit unions and community banks. These banks weathered the credit crisis and lost only 6% of their share of banking assets between 2006 and mid-2010. A recent Harvard study indicates that this decline accelerated to 12% since the passage of the Dodd-Frank in July 2010. [a] While the community banks’ earnings increased by 12% to $5.3 billion by mid 2015 the number of these banks had declined according to Federal Deposit Insurance Corporation. The number of banks with assets under $1 billion has declined from around 7500 in 2010 to less than 6000 since Dodd-Frank came into effect. [b] Increased compliance costs due hiring of new personnel to interpret the new regulations compelled these banks to cut down on customer service amongst other things. The law hurt them disproportionately and forced them to consolidate. Regulatory economies of scale drive the process of consolidation. A larger bank is often more equipped at handling increased regulatory burdens
No, abandon capital (safety) in return of profitability is not what regulators desire. Regulators care more about the well-being of banks owner and banking system. As I mentioned before, there is a trade-off between safety and profitability. Holding too less capital will largely increase risk of bank’s debt insolvency. A certain amount of capital is required to serve the bank as a buffer against the potential defaults and crisis. 【c】
The limited ability of regulators to asses bank risk due to asymmetric information and reliance of internal bank models that may be inaccurate.
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).
Before a bank can be described as too big to fail, the criticality of the roles played by such bank, its complexity, leverage, interconnectedness and size are some of the factors to be considered. On the size of these banks, Berger et al. (1997) discovered that some individual banks and overall banking systems in Europe reached enormous size relative to their countries’ GDP. In Iceland the liabilities of the overall banking system reached around 9 times GDP at the end of 2007, while it is 6.3 and 5.5 in Switzerland and United Kingdom respectively.
Banking scenario since 1991 has been a process of transformation and consolidation. With financial sector reforms implementation, the microenvironment of banking sector has undergone a radical change. Almost all insulations to commercial banking have been peeled off and it has been susceptible to all types of exposures now. There has been paradigm shift in operational, functional, environmental, technological spheres. The reforms emphasised the “commercial character” of the banking system and helped the banks to stand on a firm footing. The first phase of reforms directed mainly towards the operational efficiency has brought concepts like prudential accounting norms, Deregulation of Interest Rates, Credit Delivery, Transparency, Capital Adequacy Norms, Autonomy in Management etc. Banks started cleansing their balance sheets, competition led to improvement in their efficiencies and profit concept being recognised as a test of commercial viability. The transparency made them to realise their own strengths.
...eting strategies all contribute to this growing. However, the critical problems of it, such as restrictions over the capital flow set by bank, lack of inspection of information security and risk control, as well as the unsustainability of high returns, have asked for more regulation
Keeping up with the banking industry’s progression in this century includes offering a variety of services to international markets. Some of the largest banks in the word have become complex financial organizations and the banking sector is expected to become even more complex in the future. It is important for banks to keep up with the latest technology and develop customized services for their clients. Banks not only need to service individual customers, but must think about corporate customers, as well. Commercial banking covers deposit services, credit services, cash management, and foreign exchange. Investment banking covers anything from asset securitization to corporate restructuring. Due to the deregulation
However, once interest rates began to rise and housing prices started to rapid drop.the borrowers were unable to refinance.” （Justin Lahart, 2007）Hence，commercial banks will face to many risks as chased profits. Those risks will cause an adverse impact on the financial system. In the financial system, Because producers can create more wealth. At the same time, they also need abundance fund to manage and develop their enterprise. Therefore, producers always be a mainstay. Howells. Bain said that “producers often dominate the regulatory process since the activities of regulators are much more important to each of the relatively small number of producers than to each of the much large number of the relatively small number of producers than to each of the much large number of consumers.”(Howells.Bain, p365, 2007) Agency would rather to pay attention to the profit from the producers. For customer, that lacks fairness. In especial for non-professional customer who has not experience in investment, so they deposit their money into the
Do capitalized bank is contribute more on bank performance compare to other variables? Did relationships between determinants of banks’ profitability change during the financial crisis? This study therefore, intends to examine the bank specific and macro determinants on banks’ profitability, the impact capital and financial crisis on banks profit. To answer the research questions, the dissertation selected 27 commercial banks in Malaysia including local and foreign banks to fill this gap.