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Implementation of Market Regulations to prevent Financial Crisis Introduction Financial markets are imperfect markets (Heremans, 1999). “A disruption to financial markets in which adverse selection and moral hazard problems become much worse, so that financial markets are unable to efficiently channel funds to those who have the most productive investment opportunities” is defined as a financial crisis (Mishkin, 1992)…
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Explained in details

Download file to see previous pages... Moreover, researchers have pointed out sever limitations in the policy instruments which are used to regulate the financial markets. The current paper attempts to answer “why and how the world financial markets must be regulated to minimize the adverse effects of crisis to the world economy.” The specific objectives of the current study are (1) to assess the need for regulating the financial markets and (2) to propose an effective framework for managing the financial systems. For this purpose four selected research publications which are focused on “financial market regulations” are thoroughly reviewed in terms of the rational, mechanisms, limitations and risks presented in each study. Next in relation to the essence of the above studies, the management framework of the EU zone banking and financial crisis, 2008 is evaluated. Beginning of the Financial and Banking systems failure National Bank Act and state banking laws which were imposed after 1933 restricted the activities of commercial banks to specific geographic locations and heavily used Federal deposit insurance and Federal Reserve funding to protect the banking system against risk and uncertainty. The above financial markets were largely stable and fairly profitable however, there was limited space for evolving the system. Towards the late 1960s depositors and investors found the above financial system inefficient in providing their dynamic and complex needs. Development of a “shadow banking system” which integrates the traditional lending activities and capital markets activities began during the early 1970s. Shadow baking system heavily adopted “securitization and derivative instruments” in place of real money. Traditional linkage between the depositors and commercial banks in lending activities largely deteriorated in shadow banking system. Recent financial crisis is viewed as an after math of exploding the above system (Tarullo, 2012). Organization of the Report Part 1 of this paper describes the characteristics of the financial markets, need for regulating and regulatory mechanisms used by the governments. This section of the paper is largely based on “Regulation of Banking and Financial Markets” by Dirk Heremans (1999) and “Regulatory Reform since the Financial Crisis” by Daniel Tarullo (2012). In the part 2, limitations and risks of regulating the world financial markets are described by using the “A crisis of Politics, Not Economics: Complexity, Ignorance, and Policy Failure” study by Jeffrey Friedman (2009) and “The Bailout through a Public Choice Lens: Government-Controlled Corporations as a Mechanism for Rent Transfer” study by J.W. Verret (2010). Part 3 contains implications of the above arguments in relation to the real world scenarios. Finally, the conclusions drawn from the literature review and examining the real world case scenarios are outlined in “Conclusions.” Part 1 Characteristics of Financial Markets and the Need for Regulating According to Dirk Heremans, 1999, financial markets are imperfect and contain “unique” characteristics (i.e. risk & uncertainty, information asymmetry, heard behavior and influence on money circulation) which demand systematic government intervening (pp 953). Risk and uncertainty in the financial mar ...Download file to see next pagesRead More
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