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Regulatory Response to the Financial Crisis which began in 2007 - Essay Example

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Instructor 11th November 2011 Regulatory Response to the Financial Crisis which began in 2007 Introduction The period 2007 to 2010 was a crucial period in the history of most if not all countries around the world. The crisis which rocked the financial system was described by many as the most severe downturn since the Great Depression of the 1930’s (Chang 2010, p…
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Regulatory Response to the Financial Crisis which began in 2007
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Download file to see previous pages 1). The debate still rages as to the real cause of the crisis. King (2011, p. 48) indicates that a major contributor to the global crisis was global imbalances which requires rebalancing of global demand in order to facilitate a sustainable recovery. This paper provides a brief synopsis of the events and the regulations which followed in the US, Germany, UK, Netherlands and Spain. According to Blundell-Wignall and Atkinson (2010, p. 2) every banking crisis has been associated with major disruptions as well as recessions and this is the reason for certain bank regulations. New regulatory responses are generated by every global financial crisis (Helleiner 2010). This was no different for the crisis which started in 2007 resulting in what has been described as ‘the Great Recession.’ Regulatory Response in the United States According to the U.S. Senate Republican Policy Committee (2010) a multitude of events led to the Great Recession of 2008-2009. They include the housing bubble which was caused by cheap credit made to persons who would not qualify for a loan under normal circumstances; low interest rates; failure of regulatory agencies; and inflated rating grades provided by credit rating agencies. In order to mitigate the crisis United States government introduced what they described as Targeted Asset Relief Program (TARP) and the Temporary Liquidity Guarantee Program (TLGP) – (Eubanks 2010b, p. 2). The TARP was later expanded to include automobile companies such as GM and Chrysler (U.S. Senate Republican Policy Committee 2010). A number of regulatory proposals were put forward in relation to consumer protection, modernisation of the regulatory system and restoring stability (Eubanks 2010a). These led to the Dodd-Frank Wall Street Reform and Consumer Protection Act of July 2010 and a consolidation of the regulatory bodies. The objective of the act is to “create a sound economic foundation to grow jobs, protect consumers, rein in Wall Street and big bonuses, end bailouts and too big to fail, prevent another financial crisis”. According to Lo (2009, p. 27) there has been a recent proposal to suspend Fair-Value – FASB Statement No. 157. Fair-value or mark-to-market accounting requires the valuations of firms’ asset at fair market prices and not on a historical cost basis. The practice which has forced a number of firms to write down their assets and thus triggering defaults and insolvencies has been blamed for the financial crisis. Regulatory Response in Germany In Germany the single regulator of financial services – the German Financial Supervisory Authority which was established in 2002 in order to improve stability and integrity in the German financial system had its regulatory authority greatly increased in 2009. This was done in order to improve its capacity to manage the financial crisis. The act for strengthening the financial market and insurance supervision became effective on August 1, 2009 (Eubanks 2010b). This act was a measure which had the objective of increasing the preventative, supervisory and intervening powers of this regulatory authority. The act also facilitated the strengthening of informational and reporting requirements for financial institutions, insurance companies ...Download file to see next pagesRead More
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