Bank Reforms Emerging from the Unites States and the United Kingdom - Essay Example

? Bank Reforms Emerging from the US and UK of the of the Concerned 3 May Introduction The recent housing bubble bust took the banking system within the US and the UK by surprise. Yet, the reality is that this banking crisis was not the result of some offbeat or asymmetrical shock inflicting the Western banking system from the blue, but was in fact the result of sustained and methodical lacunas and anomalies existing within the banking system since decades (Muolo & Padilla 2008). A failure on the part of the banking community to check the existing loopholes in time and the inability on the part of the monitoring mechanisms to correct the things when they could be, led to this debilitating fiasco in the US and the UK banking system (Muolo & Padilla 2008). Now, when the crisis is within control and the economies of the US and the UK are showing signs of nascent recovery, the cries for reforms in the banking system are emerging from the affiliated concerns and institutions. Some of the proposed reforms are a step in the right direction. Still, all that is being said and done does not portend to achieve the expected results. Causes of the Banking Crisis The occurrence of crisis like situations within the US and the UK banking system owing to the embedded systemic weaknesses has been typically shocking in the current decade. Not to mention, the cost of such scenarios have been significantly high for the affected economies. Though, the causes and reasons impacting the banking system during the 2008-2009 recession have been to some extent, region specific. Still, some salient trends can be identified, that have been common to the UK and US banking system. First and foremost, the risky banking practices and the accompanying structural weaknesses in the financial system were bound to give way to a crisis like situation at some time or other (Turner 2008). When these disabilities are added to the unrealistic incentive practices and the ethical hazard marring the banking personnel who were in charge of the things, everything begins to fall in place. Ineffective regulations and a complacent attitude on the part of the regulatory bodies, made the things even worse (Turner 2008). One cannot simply ignore the insufficient monitoring and control by the concerned statutory agencies. It was an attitude of negligence on the part of the regulatory bodies that allowed the irresponsible bankers to manipulate an environment marred by ineffective market discipline (Turner 2008). This gave way to unsound corporate governance practices on the part of the banks and the customers who approached them for seeking loans. How Banking Crisis Contributed to Recession Actually experts have been predicting the collapse of the banking system much before the things went wrong. The unrealistic and unethical credit expansion by the American and the English financial institutions was a phenomenon that had been taking place since the last couple of years (Turner 2008). The irony was that even the Central Banks in the influenced countries failed to check this artificial credit expansion. All the instruments and mechanisms that facilitated this credit expansion were predominantly pegged on the real estate market in the US (Roberts 2008). As expected, as the real estate boom in the US came to a halt, the financial instruments backing it got worthless; giving was to caustic assets and the accompanying credit crunch that hit the world economy (Roberts 2008). The following oil price volatility made the things even worse (Turner 2008). Banking Reforms in the US The US government incorporated the lessons learnt from the subprime mortgage crisis into the envisaged banking reforms. These reforms not only intended to create new regulatory bodies with more teeth, but also planned to protect the interests of the customers. These reforms provided more power to the Federal Reserve thereby enabling it to better monitor the functioning of the financial institutions, and if required to takeover over a financial institution if it went awry (BBC 2009 a). Also it was made necessary for the Central Bank to take the Treasury Department into confidence, before extending credit to the firms in unusual and exigent circumstances (BBC 2009 a). These measures were to a great extent pragmatic in the sense that they amounted to a realization on the part of the regulatory bodies that all the muck did not exist only in the private sector, but to a great extent they also had a big share in it. The Federal Reserve was also made to divest some of its powers regarding the regulation of mortgages to a new institution called Consumer Financial Power Agency (BBC 2009 a). However, these reforms were not accompanied by a clear cut confession on the part of the government regarding the faulty policies that gave way to the subprime crisis. Instead, these reforms came more as a message from the government that it needed better regulatory bodies and more powers. So, the regulatory reforms intended by the US were to a great extent partial in the sense that they failed to address the disruptive government policies, but rather tried to carry on with them by vouching for additional powers and new institutions. The reforms also failed to delineate as to what extent the new regulatory bodies were to act autonomous and as to how much they were to be free of external political influences. One more regulatory body called the Financial Services Oversight Council was created in the US to have a supervisory role over the banking system (BBC 2009 a). Yet again, the reforms failed to mention as to how and when the given regulatory body was to identify a situation as being a precursor of a systemic risk. Everybody knows that it is utterly difficult to spot a systemic risk. The reforms also failed to delineate as to how a systemic risk regulator was to pre-emptively label a financial product as being capable of giving way to a systemic risk in the time to come. And even if the proposed systemic risk regulator succeeded in identifying a hazardous product, to what extent were the banks and financial institutions were to abide by the judgement of this regulator. Besides one other major problem with the US reforms was that they further bureaucratized the financial system. The US reforms also led to the creation of a Consumer Financial Protection Agency (BBC 2009 a). This was certainly a step in the right direction as it extended a stake to the small investors in the overall financial system. The small investors and individual consumers definitely lacked a say into the functioning of the financial system. Banking Reforms in the UK To a great extent, the banking reforms mulled by the UK not only intended to give more power to the regulatory bodies, but also proposed to curb the risk taking tendency on the part of the banks (BBC 2009 b). In the regulatory arrangement prevalent in the UK, the regulatory duties were hitherto shared by the Treasury, the Bank of England and the Financial Services Authority. The proposed reforms failed to mention as to who was to be the primary regulator in the new scheme (BBC 2009 b). It also failed to enhance the regulatory powers of the Bank of England, thereby leaving it more of an advisory body than a powerful regulator (BBC 2009 b). The reforms only extended powers to the Treasury and the Bank of England to control the money that the banks could lend (BBC 2009 b). In fact this was not something new in the sense that the mentioned institutions had already been serving this duty albeit with lesser powers before the credit crisis. So the reform initiative on the part of UK government was not that robust and zealous. Somehow, the government hesitated to interfere whole heartedly in the functioning of the financial institutions in the name of upholding the competitiveness of the markets and by pretending not to make things worse in a recessionary environment. The good thing that happened was that the banks were told hold greater funds to act as a shield against possible losses (BBC 2009 b). This step practically put a constraint on the ability of the banks to engage in hazardous investments. This also assured that the tax payers did not lose much in case the government was to takeover a bank. The other effective reform was regarding the restrictions imposed on the banks with regards to pay packages and bonuses (BBC 2009 b). This reform certainly required a more responsible and rational behaviour on the part of personnel managing the financial institutions. The other reform that was noteworthy was regarding the risk alerts to accompany the financial products like mortgages and pensions. This reform will positively protect the interests of the individual consumers and will curtail the ability of the banks to engage in financial malpractices. Conclusion The fact is that the subprime mortgage crisis was too complex a phenomenon to be dealt with one time reforms. Besides, over the years banks have specialized in bypassing the regulatory mechanisms to engage in hazardous and risk intensive practices. So the situation demands a more concerted and ongoing effort on the part of governments and consumers to work for reforms that make the system more transparent and above board. Reference List BBC 2009 a, ‘US Unveils Banking Reform Plans’, BBC News, 17 June, viewed 3 May 2011, . BBC 2009 b, ‘UK Set to Reform Bank Regulations’, BBC News, 8 July, viewed 3 May 2011, . Muolo, Paul & Padilla, Matthew 2008, Chain of Blame: How Wall Street Caused the Mortgage and Credit Crisis, Wiley, New York. Roberts, Lawrence 2008, The Great Housing Bubble, Montery Cypress, London. Turner, Graham 2008, The Credit Crunch, Plato Press, New York. Read More