Bank Regulation Essay

The fact that banks control 97% of the world's money supply makes them a vital institution. Banks are the engine of our modern financial system and a source for economic growth. The bank's ability to create credit can have destructive effects; the Great Depression of 1929 and the Great Recession of 2008. In both cases, banks spurred on an asset bubble through overextending credit to aid the purchase of assets. The result was an economic collapse that wiped out wealth and reduced credit creation which stalled productive investments. The lessons of the two great economic collapse support the notion proposed by the author, that bank credit for transactions that do not contribute to the economy should be restricted.

There are various categories of banking; these include retail banking, directly dealing with small businesses and persons. Commercial and Corporate banking which offers services to medium and large businesses (Koch & MacDonald 2010). Private banking, deals with individuals, offering them one on one service. The last category is investment banking. These help clients to raise capital and often invest in financial markets. Most global banking institutions provide all these services combined. With all these institutions in existence within the same localities and offering similar services, there is a need to regulate the industry so as to protect the consumer and provide fair working environment for all banks (Du & Girma, 2011).

Within the First New Deal, Roosevelt kept the banks and industry from failing, but instead allowed them to be taken under the wing of the government. These institutions had become the backbone of the American economy and without them America would have remained an indefinite amount of time in this depression. One of Roosevelt’s first goals was to reestablish America’s confidence in the banking system. The Emergency Banking Relief Bill put poorly managed banks under the control of the Treasury Department and granted licences to those who had already failed. By doing so Roosevelt could reassure the security of the banks to the public so

Overall, the 19th century United States banking system took on this structure and regulations due to politics and wartime decisions. These decisions may have been beneficial in the short term, but they ultimately created a system so exceptionally interconnected that it bred instability and panic throughout the externalities. The regulations placed on Clearinghouses created unintentional incentives for trusts to get around the rules to maximize profitability and play the game with a different set of rules. However, by avoiding the federal regulations, there was no safety net for these trusts to fall back on,

(7) The repeal of Glass-Steagall Act contributed to the crisis, so is only normal to restore it. The banking system should be divided in two halves; speculative and underwriting, and commercial taxpayer-backed depository banks (Ritholtz, xxvi). (8) As Nixon Treasury Secretary George Shultz famously quoted, “If they are too big to fail, make them smaller” (Ritholtz, xxvi). By reducing the limit size of the behemoths of total U.S deposits, competition would increase leading the banking sector with more institutions decreasing bailouts. (9) In corporate structure, public firms along partnerships should be held responsible and liable for the losses. This will prevent partnerships, just like public firms to not act recklessly with their investor’s money.

In the 1930s, there were major troubles in financial markets in the US and the 1929 crash led to the closure of 900 banks and contributed to economic depression. Depositors lost confidence in the banking system and in 1934, deposit insurance coverage was established (Fdic.gov, 1998). There was increase lending during the 1933-1983 periods and due to increased nontraditional risks in banks in the 1960s, another bank crisis emerged. Due to high-interest rates and inflation, there were post-World War II bank failures and the FDIC had to meet depositors’ claims due to bank failures. In 1988, there were 200 insured banks that failed hence the FDIC lost money too but in the early 1990s, insurance premiums were raised from 12 cents to 23 cents per $100 deposits. Further reforms in the early 2000s include raising deposit insurance to $250,000 per depositor while banks would be required to meet premium payments in advance (Fdic.gov, 2014). Large and riskier banks would also pay higher premiums. The 2008 financial crisis battered the system as bank failures increased

Financial crises have plagued the international financial system for many decades. Indeed, they are becoming quite common lately. This quasi-permanent and problematic aspect of the global financial system can be highlighted by the problems regarding the sovereign debts of Asia, Africa, Central Europe, Latin America and the Middle East in the 80s, the 1987 stock market crash, the European foreign exchange crisis in 92-93, the bond market shock in 94, the financial problems that affected Asia, Brazil, Mexico and Russia in the mid-1990s , and more recently with the 2008 global financial collapse. This paper addresses the need for a globalized approach aimed at establishing a well-crafted legal framework capable of dealing with crises within the banking system, hence being able to protect the entire economy of the detrimental cascading effect that those instabilities can create. It compares the approach taken by the UK against the efforts being directed by the G-20 nations. It sheds light on the perspective that several important areas, such as systemic risk, consumer protection, market integrity, macro-prudential and micro-regulatory policies, as well as international competitive equality and shadow banking need to be scrutinized if we are to establish an effective international legal structure.

After the Great Depression, the financial industry was strictly controled and the United States didn’t have any financial crisis for 40 years of economic development. Most banks of U.S. were worked locally and all were baned to use the depositors’ saving for speculating. In addition, the investment banks which held bond and stock, were strictly regulated in small or private partnerships. The change was started in 1982 when the U.S. President Ronald Reagan allowed the banks take the depositors’ money to provide for risky investments. Therefore, in late of 1980s, a lot of savings and loan companies had gone to bankrupt and this crisis expensed taxpayers 124 billion dollars, and many people lost their savings as a result. After that, under Clinton

According to B.E. Gup (2004), the same was true of the United States during the Great Depression; in response to varying competitive environments, federal authorities approved notably larger authority to banks during the start of the 20th century, for example in the securities market. “The U.S. conceit that its financial and regulatory system could withstand massive capital inflows on a sustained basis without any problems arguably laid the foundations for the global financial crisis of the late 2000s” (Reinhart and Rogoff 2011). The rational of ‘this time is different’ in the U.S. due to its superior structure was proved false.

In the past two decades, economic analysts and policy makers have recognized that the financial system can significantly contribute to economic growth. Observing the changes that have taken place, a result has arisen that a liberalized financial sector operating in a competitive, open environment with market-based supervision based on international norms, is the best contribution to economic development. The new market-based paradigm for the design of financial systems contrasts with earlier thinking about the appropriate role for official intervention in the financial system. In the past, financial institutions, especially banks, were considered "special" entities in which it was appropriate for governments to intervene regularly in detecting a wide range of economic and social objectives . While, in earlier times, the financial sector differentiated strongly among countries and influenced by national rules .

“ Concentration has made the financial sector more fragile by creating a few large institutions that dominate more than half of the sector. The top 18 banks currently hold about 60 percent of total assets with the top 4 holding about 40 percent (this is even higher than pre-crisis levels)—compared with only 23 percent of total bank assets in 1992. Further, as compared with 1992, these are now “universal banks,” permitted to engage in a wide range of financial activities, from commercial banking to investment banking and to insurance.

Economists, bankers, congressmen, and part of the industry have been thinking that it is the time to make some adjustments. Despite that fact, some of those people believe that big banks, without any break up or reform, are more stable and safer than smaller and less complex banks. Moreover, those defenders have stated that the regulatory reforms

There are various reasons that are regarded as the importance of the bank regulation in the United States. Some of these

Over the past few decades, particularly during the 2000s, financial markets around the globe have become increasingly interconnected (Shmukler, 2004). This mounting integration of the world economies is a direct result of globalization. Particularly, the globalization of financial markets is characterized by substantial cross-national flows of capital and the development of a large foreign exchange market. Every day around the world, banks and stockbrokers transfer vast amounts of money across country borders in the form of retirement funds, hedge funds, insurance, and similar investments. For instance, a German national is able to purchase Facebook stock which is an American-based company that went public to venture capitalists around the

Over the past two decades, the health of the global economy has been periodically threatened by financial instability. What could be described as a ‘boom and bust’ cycle since the end of the Bretton Woods monetary system in 1971 has led to several significant economic downturns, the most recent being a financial crisis in the late 2000s. Much of the last several decades’ financial instability originates from expansionist monetary policies that promote financial risk. Several major sources of systemic international financial instability stand out: global trade imbalances, lax monetary policies, and a lack of capital controls. However, while instability is commonplace, mitigating much of the risk in today’s unstable and globalized system is not unattainable. While tighter regulation alone cannot prevent all types of risk, it is necessary in constructing a more stable financial system. Banning risky financial practices, reinforcing capital controls, and limiting the sizes of banks are all needed components to enhancing global financial stability. Acknowledging the inherent risks of globalized finance, an improved financial system should also artificially limit risk by encouraging states to implement a tax on cross-border financial transactions.