Failure of Financial Regulation in the UK - Essay Example

? Failure of Financial Regulation in the UK Failure of Financial Regulation in the UK The financial crisis that hit the world came with a surprise to many since it led to loss of wealth, created inflexibility in the labor market and loss of income. The lessons that the society learns from the biting effect of financial crisis help in making policies which intend to cushion the country from similar problem. The financial crisis that rocked the world in 1970s had devastating effects to the society. Economists and policy makers developed policies, which they thought could help the world to remain stable amid the challenges that come with economic meltdown. This essay evaluates the failures of financial policies in United Kingdom and the move made by policy makers to cushion the country from falling into financial crisis. Financial crisis witnessed towards end of this decade had similar effects to crisis witnessed in 1970s. Many people grappled in unemployment, devaluation of wealth and other related issues that come when economic depression occurs1. G 20 meeting realized that policy tools made to cushion the world from economic slump had failed to discharge their role. It was also apparent from that meeting that the banking policies of United Kingdom and related market players had stains to the crisis. Growth in a country or in the world depends on sound policies, which balances the financial market and enhances economic stability. Economists and analysts in the economic sector believe that fiscal tools, which guide the economic growth of the country, must meet a certain threshold if the country is to remain stable. Deliberation of the meeting indicated that credit securitization is a factor that policy makers in the financial sector ignored2. Many banks offered credit loans to investors without collaterals that could support financial stability. The banks could not raise the minimum threshold required to make them remain in businesses after the investors had defaulted. The result was as worst as the financial depression of 1970s. Critics have contributed to this situation by making different argument about the country should do to avoid similar misfortune. The argument has rested on the effects of policy, which influence banking system. Some critics noted that policies instituted to correct the dangers of economic depression failed because of poor implementation strategy, which aimed at making the country more economically sound. Many economists believe that policy tools adopted in the banking sector created a window, which led to the economic meltdown. Evidently, a weakness of a policy can create instability as observed during the financial crisis. The major question that the society is trying to answer is not what caused the depression but how it can avoid the depression in future. Analysts have settled on the fact that failure of UK financial system is the contributor of the economic crisis. Economists have stated three reasons, which support the argument that policy failure led to financial meltdown. First, the role of financial market is to regulate market economy3. This regulation occurs through relationship that exists between the financial system and the market players. Economists believe that financial relationships influence market structures by creating stability and instability in the market. This means that financial system is the key driver to propel market structures towards making balance payment in the market. A failure of the system spells doom to the society since it creates imperfect operation in the market. Evidently, a slight mess bin the market would contribute to a collapse of other systems in the financial sector. Financial analysts have sited burst and boom factors as factors that directly influence market stability. Financial system usually look at credit supply and credit pricing as factors that control speculation in the burst and boom factors. Studies indicate that internet burst and boom witnessed in 1998-2001 increased the liquidity index in the country4. Such changes lead to gains in the financial sector, which must affect the financial trends. IMF report indicates that Banking crises have adverse effect to the economy more than any other factor that contributes to imbalance in the liquidity index in a country. The modern economic system gives power to the government to institute policies, which regulate banking policies5. When the banking sector fail to implement its policies, the country is likely to face economic slump. Economically, fiscal tools of economic stability regulate the system that the banks use to award loans to investors. Macro balances in the economy of UK did not regulate borrowing. Economic analysts have attributed the challenges that UK faced in the economic growth to its inability to control borrowing. This inability was due to poor banking policies, which did not demand for collaterals. In normal cases, banks demand collaterals as a symbol of security that it has towards money borrowed by an investor. Risks rates associated with government bonds in the UK were set low. Studies indicate that an investor could have easily invested in the UK with a risk free index6, which it had set at around three percent. The result of this low rate had two effects to the economy. First, it led to rapid economic growth which degraded standards set for credits and fueled property price boom. Property price boom leads to low standards of credits. Second, investors’ ferocious search for gain from the low rates led the banking system to engage in speculation thereby offering loans to investors without looking at the risk factors associated with low rate to the UK economy7. Studies show that financial innovation responded to the demands witnessed in the society. Largely, this is where the banking sector bore the greatest role in sending the UK economy into financial instability. Securitization of credits and credit prices fell thus creating upsurge in demand of credits from banks. Eventually, the banks could not sustain this upsurge in demand. Finally, the society fell into the depression. Banking policies usually offer fiscal tools of controlling spending in a country. Apparently, in the case of increase in demand for loans, application of fiscal tools could have led to increase in banking loan rates, which subsequently discourage lending to investors8. However, this was not the case, UK fiscal tools did not control upsurge demand for credit from loaning institutions. Many investors borrowed used the window created by the low rates. The effects of this move were evident when financial market witnessed over supply of liquidity. Increase in property prices was inevitable leading to financial depression witnessed. Leaders deliberating on the economic depression of UK realized that they did not have an institution that could regulate market structures. Studies indicate that banks and other financial institution operated without a clear regulatory board, which could influence macro balance. Perhaps it is important to highlight the concept of macro prudence. Market forces usually depend on forces, which create stability. Economically, a financial market without regulation cannot remain stable because of unfair practices that some players are likely to engage. This means that regulatory board must set mitigation measures, which balances forces influencing stability of the market. UK treasury had the overall responsibility of maintaining institution and legal frame9. However, the weakness realized in the financial policy system was the fact that UK did not place responsibility upon a specific institution to legal macro balances in the financial market. Committees deliberating on financial crisis debate called for reforms in the financial sector. These reforms intend to influence macro produce balances. The government indicated that its focus must address macro-prudential actions and analysis10. This system will require the government to institute policies through the Bank of England, which are responsible for maintaining economic stability. It is evident that the previous system bestowed responsibility on the banks. The banks did not control the systematic risks because they are in business and speculation made by banks usually throws the market out of balance. First reform that the government intended to implement in the financial sector was to create a Financial Policy Committee, which would deliberate on issues affecting financial balance in the market. Notably, the committee comprises of Bank executives, which have various abilities that Central Bank cannot be able to provide. The composition of the committee members also includes regulatory bodies and other stakeholders who have interest in the financial sector. Evidently, this approach intends to enhance accountability in UK. Involving of parliament is one way of creating an avenue of accountability to the public. Macro prudential policy tools intended for economic crises intervention include raising capital requirement in an event of credit boom. The argument here is that an increase in credit requirement would dampen demand thereby restoring the market into balance. This reason is behind the composition of the committee on banking or financial policies. Economists have observed that monetary policies influence systematic risks11. For instance, monetary policies influence risk taking. In essence, vulnerability of the financial sector occurs whenever the monetary tools are not able to cushion the financial sector from systematic forces. To this extent, it is apparent that public policies and macro prudential policies influence stability in the financial market. Research indicates that the committee has been able to create reforms in the financial sector with many changes intended by the committee being among the relevant policies, which influence market players. To date, the UK government boasts of a number of achievements, which include controlling risks, which banks assumed in the past financial system12. The risks created an off balance, which is responsible for financial hiccup witnessed during the depression. Weaknesses, which occurred in the accounting system, are currently under control. Transparency in the banking system was to blame for speculation by banks, which had characterized bank involvement in the financial depression. The policy instituted by the financial committee subject banks to implement risk management tools, which many banks had ignored. Bank governance had laxity in implementing policies that influenced liquidity flow in the financial market. Internationally acceptable principles have taken course in the financial market. Abusive selling which was rampant during the past decade has reduced. It is apparent that abusive selling had created market imbalance, which was dangerous to the economy of the UK. Financial critics believe that abusive selling usually create an imbalance in the market because it GDP reflected in the balance sheet is not the actual amount the flows in the market. The effect translates into excessive flow of liquidity in the financial market. The supervisory role played by the committee has been able to coordinate financial issues at the international market1314. Largely, cross border relationship require sound policies, which do not set the market into off sheet balance. Protection of depositors is among the gains that the committee has been able to address. In conclusion, financial regulation failure in UK contributed to economic depression. Studies conducted that financial institutions directly influenced the financial balance in the financial market. This eventually threw the market out of balance. Banking institution took the advantage of windows created by the then policies to speculate. The result speculation was a financial meltdown. Policy tools responsible for financial control had no implementing body, which influenced its implementation. Findings implicated banks as the major player, which had direct influence to the financial system. UK government has moved to create policies in the banking sector, which intended to protect financial flow in the financial market. To date, the financial committee has been able to realize a number of impacts following the implementation of macro prudential policy. The banking sector is currently expensing sanity because of the policies constituted to influence banking practices. The international trade and players in the international market have been able to adapt to new changes constituted by the financial committee. References The Economist's Inaugural City Lecture. (2009). The financial crisis and the future of financial regulation. Retrieved on 31 Mar 2012 from http://www.fsa.gov.uk/pages/Library/Communication/Speeches/2009/0121_at.shtml Speech to European Association of Banking and History. Retrieved 31 Mar 2012 from http://www.fsa.gov.uk/pages/Library/Communication/Speeches/2010/0521_at.shtml International Organization of Securities Commissions (2010).IOSCO Objectives and principles of Securities regulation: Retrieved 31 Mar 2012 from http://www.iosco.org/library/pubdocs/pdf/IOSCOPD323.pdf James Perry et al, “The new UK regulatory landscape”, C.O.B. 2011, 84 (Mar), 1-33. Command of Her Majesty. (2010). A New Approach to Financial Regulation, HM Treasury, Cm 7874– Introductory Chapter 1. Retrieved 31 Mar 2012 from http://www.hm-treasury.gov.uk/d/consult_financial_regulation_condoc.pdf Snowdon P. and Lovegrove S., The new European Supervisory Structure, C.O.B. 2011, 83 (Feb), 1-39 access on Westlaw. The Turner Review: A regulatory response to the global banking crisis, 2009, FSA, Chapters 1.1 (pages 11-28) and 4 (pages 115-117). Retrieved 31 Mar 2012 from http://www.fsa.gov.uk/pubs/other/turner_review.pdf Financial Stability Board Report: Improving Financial Regulation, 25 September 2009. Retrieved 31 Mar 2012 from http://www.financialstabilityboard.org/publications/r_090925b.pdf Financial Stability Board Progress Report: Macroprudential Policy tools and frameworks, 27 October 2011. Retrieved 31 Mar 2012 from http://www.financialstabilityboard.org/publications/r_111027b.pdf Read More