The Financial Services Authority and the Bank of England - Essay Example

COMMERCIAL LAW No ID COMMERCIAL LAW This paper will examine the regulatory policies that were put in place by the Financial Services Authority and the Bank of England since the start of the Credit Crunch in September 2007. The credit crunch is thought to have had its roots in a mortgage market that was located in the United States. The credit crunch began as a withdrawal of liquidity from some financial markets in august the year 2007. This had an impact on some banks causing the banks to suffer large losses. The credit crunch affected the economy of most countries resulting to the falling of asset markets and recession.1 It is evident that in august the year 2007, the Financial Services Authority aired its concerns about the Bank of England. It is evident that in October, the same year, it was announced that the Financial Services Authority would set proposals to review the liquidity regime of the United Kingdom. It is at this time that the Financial Services Authority reviewed the liquidity requirements for banks.2 One of the effects of the credit crunch being the liquidity risk, the Financial Services Authority, implemented a policy, focusing on the role of liquidity in ensuring the effective functioning of the banking sector and other markets. The liquidity policy was instituted to address the reduction in liquidity that was experienced by shorter money markets, and the drying-up of liquidity in covered bond markets. The start of the credit crunch in September the year 2007 led to the amendment of the Financial Services Act, whose objective was to protect and enhance the stability of financial systems in the United Kingdom. Some of the regulatory policies of the Financial Services Authority were to ensure the efficiency of the economy, proportionality in terms of the restrictions imposed on companies, and management of companies by guarding against unnecessary intrusion. The regulatory policies were also meant to facilitate innovation in connection with the activities the Financial Services Authority regulates, accountancy for international aspects of businesses, and the minimization of the effects of competition arising from the activities of the Financial Services Authority.3 The bank of England being the central bank is normally involved in the preservation of price stability and the sustenance of the government’s economic policies. In order to, effectively carry out these functions, the bank has implemented a policy to ensure monetary stability. In enhancing this, the bank of England, ensures stable prices and also maintains the confidence of the currency. In maintaining stable prices, the bank normally ensures the government’s inflation target meets the price increase of commodities. These are normally monitored by the monetary policy committee.4 The other policy that is implemented by the bank of England is maintaining financial stability. This normally involves protecting the various financial systems against threats. The detection of threats is normally carried out by the banks surveillance. These threats are then normally dealt with by the bank through financial operations. In ensuring monetary and financial stability, the bank of England normally works with other institutions such as the Financial Services Authority. The Financial Services Authority is an independent body that is normally involved in the regulation of the services of the financial industry.5 The Financial Services Authority is normally a quasi-judicial body that normally has the obligation of regulating the goings-on in the financial services industry located in the United Kingdom. The body normally operates independently of the government. With the passing of the Financial Services Act in the year 2010, the Financial Services Authority was involved in protecting and enhancing stability of the financial systems in the United Kingdom. Some of the regulatory policies that were put in place by the financial services authority include; the policy on efficiency and economy. In this policy, the financial services authority describes how it will use its resources in an efficient and economical way when discharging its functions.6 The other policy is the management policy. This policy was designed by the Financial Services Authority, in order to; guard against intrusion of firms by the Financial Services Authority. 7The other policy put in place by the financial services authority is the policy concerning proportionality. In this policy, the Financial Services Authority normally ensures that the policies that the financial services authority imposes on the industry are proportional to the benefits that should arise from the restrictions. When imposing the restrictions, the Financial Services Authority normally ensures the judgments account for costs of consumers and the firm. One of the regulatory requirements put in place by the Financial Services Authority is the cost benefit analysis.8 The other regulatory policy that has been set up by the Financial Services Authority is the policy on innovation. This policy defines the desirability of the Financial Services Authority in facilitating innovation in conjunction with other regulated activities. The Financial Services Authority normally ensures the scope is allowed for different means of compliance, ensuring the market participants are not restricted from launching new products and services.9 The other regulatory policy is the policy regarding the international characters. This policy dictates the role of the Financial Services Authority in maintaining a competitive position in the United Kingdom. In this policy, the Financial Services Authority accounts for the international aspects of financial businesses and competitive positions in the United Kingdom. This normally involves cooperation with overseas regulators, to ensure the international standards are maintained, and they also monitor global firms.10 The other regulatory policy of the Financial Services Authority is that it attempts to minimize the effects of competition that may arise from its activities. In this policy, the Financial Services Authority examines the unnecessary barriers that may hinder business expansion. The considerations of competition and innovation have proved to play a key role in the cost benefit analysis of the Financial Services Authority.11 One of the regulatory policies of the financial services authority and the bank of England since the start of the credit crunch in September the year 2007 is the liquidity policy. The liquidity policy was put in place by the financial services authority to ensure the statutory objectives concerning consumer protection and market confidence are achieved. This was done to ensure the financial services authority averts bank failures that were caused by liquidity. It is evident that the bank of England being the central bank ensures liquidity to money markets, and also maintains its role of being the source of the local currency settlement asset. This normally dictates the framework within which individual banks manage their own liquidity and funding. Hence it illustrates the role of the bank in implementing the liquidity policy. 12 In implementing the regulatory policy, the Financial Services Authority put in place some regulatory principles for banks such as the bank of England. They include; the prevention of liquidity stresses to the firm. In this instance, the Financial Regulatory Authority ensures they regulate and manage the primary risks that may be faced by a firm. Such risks include; the credit crunch, operational risks and market risks. The other principle was to withstand firm liquidity stress, to ensure they are able to meet liabilities. This included the ability to access emergency lending by the central bank, which can disrupt the market confidence.13 The regulatory policies that were put in place by the Financial Services Authority are preventative measures, which help in the reduction of the probability default. The regulatory policies put in place boost the confidence of consumers in holding their cash savings with the bank. The regulatory policies also ensure the risk of; losing savings and the interruption of banking facilities are minimized. The other policy by the Financial Services Authority is the policy regarding the loss of a given default. This normally addresses situations when the bank is almost failing and the policy leads the banks in managing liquidity. 14 The Financial Services Authority normally works with the bank of England in ensuring that severe shocks are managed by the firm and the necessary authority, they also ensure that spill overs that may affect the financial system are contained. The start of the credit crunch in the year 2007 resulted to the definition of the role of the central bank in implementing the liquidity policy. This resulted to the description of the prudential liquidity requirements for the operation of the banks, which was also the basis used by the central bank in supplying domestic currency to individual banks that were not in a position to satisfy urgent liquidity needs of the market. The other policy that was implemented by the central bank as regards the liquidity policy that was put in place by the Financial Services Authority was ensuring that the framework for liquidity management was safe, flexible and efficient. This would help the banks in managing liquidity under stressing conditions.15 The credit crunch experienced in the year 2007 was caused by the failures in the policies and practices that were put in place. Some of the failures contributing to the credit crunch include; supervisory failures by the Financial Services Authority. Severe deficiencies in the United Kingdom and regulation, in the global banking, may have also led to the credit crunch. The credit crunch might have also been caused by the lack of proper prudential supervision. It is believed that there was insufficient focus on the quality of assets, liquidity and capital. Some of the factors that led to the credit crunch were as a result of the regulatory rules that were put in place concerning bank capital and liquidity. It is believed that the regulatory policies were deficient, in that the banking system was allowed to run with liquidity buffers and equity capital resources, reducing the fraction of the safe levels. It is the policy error that caused the banking systems to move to inadequate liquidity and excessive leverage.16 The other factor believed to have led to the credit crunch was the poor pre-crisis structure that was put in place by the Financial Services Authority. This poor structure led to a gap between the bank of England, which was responsible for implementing the monetary policy. It is evident that the Financial Service Authority and the central bank of England did not focus on the risks that would accompany increased leverage, booming credit supplies and asset prices hence causing the credit crunch. 17 The other regulatory policies that were put in place by the Financial Services Authority after the credit crunch include; the prudential regulation policy and the monetary policy. The prudential policy addressed the changes that were to be made regarding prudential supervision. This policy was put in place to ensure asset quality; liquidity and capital are effectively controlled. The creation of the prudential regulation authority by the bank of England would also help in the execution of the policy.18 The other regulatory policy that was put in place by the Financial Services Authority is the supervision policy, which was to enhance the development of an effective approach towards the credit crunch. The creation of the financial policy committee by the Financial Services Authority also helped in the identification of the risks across the banking and financial systems. The Financial Services Authority was also equipped with macro-prudential tools, which include tools such as countercyclical capital requirements that would help in guarding against the growth of leverage and credits.19 The implementation of the regulatory policies, by the Financial Services Authority and the bank of England, led to the transformation of the global and European rules that had been put in place regarding bank capital liquidity. This led to the Basel Regime, which was meant to ensure sound operation of the banking system. It is evident that the credit crunch was caused by a boom in leverage and debt. These debts were from the private sector, and they grew rapidly compared to the GDP of countries such as the United Kingdom, the United States and Spain. The period of the credit crunch was characterized by the complexity in the intra-financial systems, which included a combination of a complex web of links in the financial systems increasing the vulnerability of the financial system to shock. It is the dangers caused by the credit crunch that resulted to the implementation of regulatory policies. Following the credit crunch, the Financial Services Authority put in place a regulatory plan that was meant to help the Financial Services Authority deal with the risks that were posed by the credit crunch.20 The financial services authority put in place a risk operation policy. This policy was implemented to ensure the appropriate response to risks by ensuring the essential resources are allocated when dealing with the risk. According to the risk operation policy put in place by the Financial Services Authority, risks are supposed to be categorized based on the priority of the risk, against the impact and probability factors. This policy was put in place by the Financial Services Authority to ensure the proper allocation of resources in assessing the impact and probability of a risk. Under this policy, the Financial Services Authority normally ensures the performance of a firm is improved through the creation of incentives for the firm to maintain its standards. The policy also ensures proactive and flexible regulation by putting more focus on areas that are at enormous risk.21  In conclusion, the credit crunch might have been caused by the failure in the policies that were put in place before its occurrence. It is evident that, after the crisis, the Financial Services Authority was faced by a difficult situation because the crisis was followed by excessive leverage booms. It is through the establishment of the regulatory policies by the Financial Services Authority that it would deleverage the booms to ensure a restoration of the private sector, the payment of mortgages and the avoidance of new debt commitments. It is this environment that led to the establishment of the monetary policy.22 The liquidity policy was also put in place by the Financial Services Authority to ensure the statutory objectives concerning consumer protection and market confidence are achieved. This was done to ensure the Financial Services Authority averts bank failures that were caused by liquidity.23 The other regulatory policy that was put in place was the proportionality policy. In this policy, the Financial Services Authority normally ensures that the policies it imposes on the industry are proportional to the benefits that are expected to rise from the restrictions.24 The other regulatory policy is the supervision policy, which was to enhance the progress of an effective and robust approach towards the credit crunch.25 The other regulatory policy that was put in place after the credit crunch is the prudential regulation policy. The prudential policy addressed the changes that needed to be made regarding prudential supervision. This policy was to ensure asset quality; liquidity and capital are effectively controlled. The creation of the prudential regulation policy by the bank of England would also help in the implementation of the policy.26 References Avgouleas, E., 2005. “The Mechanics and Regulation of Market Abuse; A legal and Economic Analysis”. Oxford University Press. 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