Contemporary Issues in Finance - Case Study Example

Contemporary Issues in Finance Table of Contents Table of Contents 2 Introduction 3 Regulatory Framework of US 3 Regulatory Framework of UK 6 Regulatory Framework of EUs 7 Similarities or Differences Present In the Regulatory Reforms of US, UK and EU’s after Crisis 8 Conclusion 10 Introduction For hundreds of years, economic crisis has been described on the financial landscape. They often appear without any warnings. A financial crisis has often been deciphered as an era of sufferings that is critical enough to cause an immense change in most or all areas of this sector. The impact of financial crisis has been witnessed to affect the world economies to a large extent threatening their growth prospects (Allen & Gale, 2007). This paper is a brief article about the financial crisis which was being identified by the end of 2007 till the beginning of 2008. It was due to the ill-effects of the crisis that regulatory reforms were taken by US, UK and EU regions. This paper will thereby focus on the regulatory reforms adopted by these nations in the milieu of the 2008 financial crisis. Regulatory Framework of US Financial crisis is often termed as an unknown disturbance which leads to erosion of the total financial market of a country or a nation. By the end of 2007, with the identification of the financial crisis, US and other globalised economies become highly concerned about their survival as a global power. Most businesses ruined and were forecasted to lose approximately $ 2.7 trillion in this crisis (Rude, 2008). As a result, unemployment was at its highest stage. With this concern, the US government concentrated on keeping the banks and most significant businesses alive to overcome the unwanted danger. The crisis acted promptly drafting many important pieces of legislation or necessary changes and charting the post-crisis financial regulatory framework. But it was not an easy task; it comprised of numerous hurdles within it. The fundamental role in reforming the financial policies in the US was played by Basel Committee on Banking Supervision (BCBS) and Financial Stability Board (FSB). They developed a DFA (Dodd-Frank Act), which is a framework of reforms to prevent the consequences arising due to such turmoil (Rude, 2008). The vital elements in reformation of US economy relates to the steps taken to develop a financially stable future as well as resizing of the international financial system, so that the need of the economy can be better served (Rude, 2008). It is worth mentioning that the decline of capital regulation in US was not only due to the ad hoc financial events but was also due to a direct consequence of ineffective design and substance of regulatory capital initiates. The detailed structure could not prevent the large financial institutions from failing. Apart from this, the unskilled leverage ratio turned out to be the most important constraint which ultimately proved beneficial (Rude, 2008). Requirement of capital was the most prevailing area of concern against bank failures after the crisis. Furthermore, the resolution procedures, another regulatory reform which was considered as a better process other than bankruptcy to deal with the problems of insolvency of financial institutions. This states that the framework of banks needed to be extended to other financial institutions in order to safeguard the large institutions in the financial services market. After the crisis, there was bail-out of many institutions due their inability to bear the failure of cross-border banks (Rude, 2008). This led to other regulatory reforms in the aftermath of the crisis, which resulted in dramatically increase of capital and liquidity buffers of the bank. The reforms enforced after the crisis mainly focuses on two perspectives, i.e. market-restricting approach and market-harnessing approach. The market-restricting approach mainly concentrates on deflating the commercial institutions along with the intention to limit the size of these institutions and reduce the investments in the market. On the other hand, market-harnessing approach deals with imposing careful factors on the trade of proprietor at depository institutions and its holding companies (Rude, 2008). Furthermore, huge loans were given by banks for housing purposes. But the tumbling down of the housing market resulted in non-repayment of a large proportion of these sanctioned loans which negatively affected the stability of the financial market. Moreover, the efficiency of the Credit Rating Agencies (CRA) by bringing down the dependence on external ratings was also advised to be a reform after the crisis. The existing federal agencies responsible for policing financial institutions and markets were also strengthened and renovated in order to protect the investors and consumers with the purpose of minimising the effects of crisis (Rude, 2008). Regulatory Framework of UK The financial crisis was an unpredicted disorder that occurred in the financial and housing sector of US affecting almost all the economies of the world including the UK. The financial crisis faced by UK economy led to a drastic change in almost every sector of the nation influencing its reforms in the financial and trading segments (Shell, 2010). The financial crisis of UK was the result of the over dependency of its economy on US nations. As the US banks and the financial institutions cannot recover the housing loans, suddenly they stopped the process of providing loans to the multinationals. This resulted in the financial crisis.. So, in order to protect the corruption within the banks, improved rules were implemented at all levels of economic structure, to fight with the crisis as well as to regain the trust of the consumers (Shell, 2010). In order to withhold the strong impact of the financial crisis, UK went through certain other reforms also. There is requirement of improvement at all levels of efficiency and liquidity of the financial market for preventing the users from the preferences of risks (Shell, 2010). After the crisis, UK started delivering maximum supervision of the financial firms to provide effective and immediate improvement of the institutions. Lastly reforms of UK intended to improve the strategies of the Credit Rating Agencies (CRA) by bringing down their dependence on external ratings. The regulatory reforms are the measures taken by different nations to overcome the financial crisis (Shell, 2010). Regulatory Framework of EUs The financial crisis had a permeating impact on the economy of the EUs, which had an immense effect on the assets valuation, loan books and credit supply. The crisis not only affected the economic activity but also influenced the potential output of the nations. The crisis mainly affected the banks which had a tremendous impact on the economic activity (European Central Bank, 2011). Hence, new rules were implemented in order to serve the consumers with better service and also to prevent them from the risk of crisis. Similar to the case of US, BCBS and FSB played a vital role in the reforms enforced in EU as well. Another similarity between the reforms of these two nations, i.e. the US and the EU can be witnessed as the implementation of the DFA as a measure of recovery from the financial crisis of 2007 (European Central Bank, 2011). Other than this, numerous other initiatives were framed to bear the shock of crisis. As the crisis clearly showed the reduction in absorption capacity of many regulatory capital ingredients, there was an immediate need for a better and improved quality of capital to enhance the profitability of the financial system. Moreover, as the financial system was very much unprotected to market, a prompt framework of regulation was imposed on liquid ratios. The banks were mainly affected by the crisis due to which resizing of the banks were taken as a regulatory framework to prevent the economy from crisis (European Central Bank, 2011). A significant amount of loans were sanctioned by banks or other financial institutions for housing purpose, which resulted in non-repayment due to the inflation of the market. This resulted in tumbling down of the housing market which had a reverse effect of severely shaking consumer confidence (European Central Bank, 2011). Last but not the least was the introduction of new principles for governance to improve the incentive structures and help the consumers from the prevailing risks. Also, there were changes of strategies at every level of corporate governance, in order to withstand the risk of financial crisis (European Central Bank, 2011). Thus, it can be stated that the regulatory framework is a very complicated task where the policy makers have to face numerous challenges. Similarities or Differences Present In the Regulatory Reforms of US, UK and EU’s after Crisis The financial crisis is an unexpected hazard to some extent which has an immense impact on whole of the world and currently is at the stage of recovery. The financial crisis was faced not only by US, UK and EU’s but by the whole world and by every economy (Shell, 2010). The financial regulatory framework developed by the three nations had both similarities as well as differences among them. The regulatory reforms of US and EU are quite similar to one another; however the reforms enforced by the UK reveal certain differences. In both the nations (i.e. US and EU), BCBS and FSB played a critical role in reframing the regulatory reforms (Shell, 2010). Due to the fact that the crisis was started in US and it had an immense impact of UK but still it did not particularly enforce the reforms of US. This is because UK wanted to reduce its dependency on foreign economies that would in turn minimise the risk of financial turmoil being transmitted from those economies. Thus, restructuring in these sectors became a mandatory reform (Shell, 2010). These economies reframed certain measures with the intention to enhance the efficiency and liquidity of the financial market. For instance, after the crisis, the Credit Rating Agencies were intensified by reducing their maximum addiction on external ratings. Therefore, the designs were modified after the shock (Shell, 2010). Almost every economy adopted the common policies to freeze the driving forces of the crisis. Thus, it can be stated that after the heavy blow of the 2008 financial crisis, different remedies by different countries were reformed to prevent the economy from the future occurrences of such disruptions (Shell, 2010). Conclusion It has been observed that the regulatory reforms of US and EU were almost similar. It can be stated in this context that after recognising the consequences of the financial policies adopted by the US in the pre-crisis period, EU also became concerned regarding their restructuring of financial reforms. But the reforms of UK were slightly different from that of the US. The major intention of the UK in reforming its financial policies was to minimise its dependency on foreign trade. Conclusively, it can be recommended that financial policies should be developed from a long-run perspective rather than focusing on the sort-term which in turn is likely to minimise the risk of such financial turmoil. For instance, this was one of the major reasons for the 2007 financial crisis in the housing and in the financial sector of US (Das, 2007). References Allen, F. & Gale. D., 2007. An Introduction to Financial Crisis. Essay. [Online] Available at: http://fic.wharton.upenn.edu/fic/papers/07/0720.pdf [Accessed November 07, 2011]. Blundell-Wignall, A. & Et. Al., 2008. The Current Financial Crisis. Financial Market Trends. [Online] Available at: http://www.oecd.org/dataoecd/47/26/41942872.pdf [Accessed November 07, 2011]. Cook, C. R., 2011. The Impact of Financial Crisis. Global Research.Ca. [Online] Available at: http://www.globalresearch.ca/index.php?context=va&aid=10271 [Accessed November 07, 2011]. Das, S., 2007. Reasons for US financial Crisis. Overview. 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