Strengthening the International Financial Regulatory System in Germany - Term Paper Example

Position Paper Strengthening the International Financial Regulatory System in Germany Executive Summary In Germany, strengthening the international financial regulatory system remains on the high agenda. It had been observed that failures in its financial regulation was the major cause of financial crisis. As a respond, Germany had established a single financial supervisor called BaFin, an authority that will oversee all the financial activities of different sectors. This reform will not compensate if the domestic regulatory structure will not coincide with the global financial system. The commitment it had made in different summit must be delivered accordingly and must be pleasing to all the members of Group of Twenty (G-20) countries. Also, the indispensable technology and environment as a solution to crisis must be fundamentally reformed. Introduction of the Issue Even though Germany had been successful in setting up a regulatory framework that proved its attainment in the global economy, it is still one of the G-20 countries that is affected by the global financial crisis.This financial crisis has been its serious issue when it become an economic crisis that created an impact on its real economy. Germany is suffering from a decline in Gross Domestic Product (GDP), increasing rate of unemployment and lost of jobs.The fundamental challenge on how to resolve this negative facts and on how to become sustainable in the future remains a mystery. Recently, the German financial system has a realization about its financial shortcomings that basically needs improvement. Its new sectors of industry need to have strong growth and the traditional sectors need to be modernized. This is to strengthen the sustainability of its financial system, that basically made this topic important. Rationale for Action and Inaction Following the outbreak of financial crisis throughout the world, the financial committees are very focused on developing strategies to prevent this financial crisis. Financial regulation structure in every countries is being re-examined for it is considered to be the major cause of the crisis (“Asian Development Bank,” n.d.). Gaps and inconsistencies are given focused to determine what elements need to be restructured. In terms of global crisis, Germany has proven to be susceptible; however, it needs to find balance between the global and domestic economy. This new era of financial and economic crisis inevitably needs new respond and new idea. For Germany, “inaction is much more costly than action in both crises” (Stienmeir & Gabriel, 2009, p.5). It believes that if nothing is done, the economy would face enormous burdens and risks. To gain back the trust and confidence being wasted, the financial regulatory structure should be repaired. The action had commenced when Germany is very disappointed with the conduct of European Union (EU) in tightening the financial regulation in which the steps are very dilatory and unilateral when 2010 had initiated (“eStandards Forum,” 2010). Germany had announced the statutorily ban, also known as the naked short selling on its stock trading that is listed in Germany particularly those short sales of stocks (Savic & Roudev, 2008). When this German approach on new taxes and restrictions had been formally announced it had surprised the other developed countries, particularly U.S. and Europe and delivered unpleasant expectations regarding cooperation (Schneider, 2010). These are the challenges that pushed Germany to act rather than remained to be idled. Exploring for ways to ensure advantage among other financial conglomerates are part of the country’s responds on financial regulation. The ways of assurance could either be “a single regulator for the entire financial sector or industry or by merging two of the main supervisory authorities” (Schuler, 2004). Germany had created BaFin, a single financial supervisor that will lead the growing integration of financial sectors like banks, insurance sectors and securities market. Banks. The regulatory system in Germany is not restricted compared to the U.S. system, and for this reason, the banking size of the country is large (Johnson, 2000, p.399). Although the regulatory structure of German banks are slowly having a definite and formal status as played by the German Banking Act, its capacity is still comparatively weak (Spindler, 1984, p.17). And for this reason, the regulatory system of banks are put into stricter quality and liquidity regulations so that its financial system will be strengthen (“Facts about Germany,” n.d.). Securities Market. According to Schmidt and Tyrell (2004, p.39), “...regulation of the stock market was neglected. Rules favoring transparency and restricting insider trading were virtually non-existent, and the disclosure of price-sensitive information was rather weak.” With this situation BaFin is created, to guarantee that the transparency and integrity of the financial market as provided in the Securities Trading Act will be duly implemented (“BaFin,” n.d.a). Insurance. In terms of regulation, the insurance industry is much more tightly regulated compared to other sectors, particularly the investment of funds, life insurance and property liability insurance (Schmidt & Tyrell, 2004, p.39). This is to exhibit confidence that all of the insurance undertakings will be assured of insolvency and liquidity at any period of time. Also, the remuneration system is delivered into closer scrutiny that instead of the short-term incentives, it will be considered to a long-term one to avoid high risks of employees (Krauel, 2010). All of the remuneration provisions, as long as it goes inside the jurisdiction of BaFin, will be decided either by the Federal government or the Federal states. The legal basis will be the Insurance Supervision Act and the function is to meet customer’s expectations that the insurers will be able to perform its duty as what is being stated in the agreed contract (“BaFin,” n.d.b). Background of the Situation Germany is compelled with high quality regulatory framework, which is why the trading and investing in the country is highly regarded by international stakeholders. It has been an open market because it had lessen its impediments to trade and investment all over the world. However, the tobin tax which was proposed by EU in the London Summit was supported by the German government (Godoy, 2010). This is contradictory as it had mentioned that “it will not introduce any tax on financial transactions without international accord...” (Peel & Wilson, 2010). This issue remained undivided between Germany and the U.S. wherein the latter wanted to levy the tax only to large firms; however, Germany is in favor to tax all areas of international financial transactions to raise revenue (Schneider, 2010). This had been rejected by most industrialized countries like Canada and India because of the presence of an argument that this tax will give a negative impact on the financial operations like the elevation of costs. With this, the unified reformation of the world financial regulatory system as one of the primary objectives of London Summit would not be viable (“The London Summit 2009,” n.d.). In view of the financial crisis, Germany is very determined to continue its reform to be future oriented at any level. In fact, the formation of Financial Stability Forum (FSF) in promoting international financial stability last 1999 was held in Germany. The purpose of FSF is to promote international financial stability and regulatory groups in the global financial system. Last 2009, the FSF is renamed as Financial Stability Board (FSB) by the G-20 countries in which the agenda is to strengthen the international financial regulation and enforcement (Zagaris, 2010, p.450). Implications of the Action and Inaction The process of strengthening the regulatory financial system in Germany is still in its early development and the work is still in progress; thus it is too early to evaluate on what impact would it bring. What is important is the position wherein it stand on financial stability that consequently gives hope to a positive beginning. Germany had been persistent in identifying for inconsistencies and any lapses in its financial regulatory system. In fact it had created BaFin, its single financial supervisor that will regulate all of its financial activities. It heavily implied that this action had led to a point that the financial crisis is due to a major failures in financial regulation (Mayes & Wood, 2007). This reason had also been true not just to Germany but to other countries of the world (United Nations, 2008, p.34). As what had been observed, although there is the presence of national financial system, the concern is directed to the different goals, structures and operations. Thus, the actions of Germany implied that it needs a variation of its domestic financial regulation to be in line with the global regulation to find balance. This would be done without neglecting the best practices, and see whether it would be suitable to all of its sectors. The large size of banking industry implied that the financial system of the country is largely dependent on “bank-led finance” (Alexander, et al., 2006, p.19). Justification of Policy and Pros and Cons of Alternative Policies The policy of green technologies in Germany “is part of the global green recovery: part of long-term, low carbon, resource-efficient economic growth (Steinmeir & Gabriel, 2009, p.6). This policy is not a unilateral action rather it is an economic opportunity that is justifiable because it had helped the country in creating jobs, increasing revenue and at the same time it preserves the natural resources (McGrane, 2010). On the other hand, this policy needs technological advances which are relatively expensive, and success is still uncertain if there would be no alliance between the work, environment and innovation (Steinmeir & Gabriel, 2009, p.9). The political will might become uncertain in purchasing this technology because this policy had delivered a financial crisis last 2009. The environmental policy in Germany had been successful in the environment particularly in recycling of wastes, reduction of water pollution and the driving force of innovation. This policy being the forefront of innovation had strengthen the technology sectors which consequently transcribed by other countries. However, the policy had been leading the way to make the national and international environmental law have a conflict. Germany is very determined to change the traditional political and economic strategies of the country, and it is one of the agendas of its ecological industrial policy. To have this successful, it requires all parties to act together such as the government, society, industry associations and companies (Franz, et al., 2006, p.23). The Position A German financial regulatory system is in need of fundamental reform in order to meet the new era of financial and economic crisis. This can be viewed by achieving a much more strict regulation in its different financial sectors that will allow a greater individual responsibility. The banking system will be ensured of efficiency and stability from any insolvency; the securities supervision will allow transparency and protection of investors, and the insurance industry will increase the confidence of the customers to the insurers. In the future, the financial regulation of these different sectors will become sustainable. A balance on domestic and global regulatory system will be ensured by means of this tight regulation. As far as the financial regulatory system is concerned, the weak and neglected system needs to be dismantled and systematically restructured in order to have future financial stability. The use of the tobin tax that will be levied to all financial transactions would be a mean to generate revenues for development, lessen the degree of speculation in financial market, and provide buffers against future economic recession. Additionally, the innovation brought by the different policy in Germany must not deteriorate. Instead it should continue to seek for possible provisions that will outweigh the disadvantages. The participation of other countries to this innovation must be continued as the assets of the German system. Recommendations Germany is one of the participants of the London Summit which aim is to unify the world’s major economies and stabilize the economy of the world. It also commits to strengthen its financial regulatory system with the use of a unified approach. Thus, it needs to listen and reflect to the positions of other G-20 members with regard to the strategies that will be used in attaining objectives. The different national approaches among G-20 members should be organized in a common set of standards that are agreeable and mutually recognized. The financial institution has also been transfigured by technology that is why Germany had launched the so called green technologies. The goal of this strategy is to modernize the economy by means of enhancing new branches of industry to be used in labour distribution and at the same time undertake global challenges. As a proposal, it would be more pleasant if the contribution would focus on aiding the financial regulatory system by creating a new financial regulatory branch. This branch would be tasked to promote and heightened the supervision and regulation in all financial sectors so that any ambiguity will be closed, and oversight will be enhanced. When this new branch will be realized, there should be a reformation of consumer protection in terms of transparency and fairness, new proactive access to disclosure, and intensified investors connection. Hooping into green technology will help in the preservation of economic system brought by mankind and international policies aftermath. With this kind of modernized strategy, the increasing scarcity and environmental destruction of natural resources will be saved (Steinmer & Gabriel, 2009, p.7). Conclusions First, the financial regulatory structure is an important issue not just in Germany but in all countries of the world. The fact that the presence of inconsistencies and gaps in the financial system are the fundamental causes of crises, it should be restructured. The development of the single financial supervisor that will oversee all the financial activities will create a system of clear objectives, individual responsibility and accountability. Second, being the biggest supporter of the tobin tax should coincide with the opposition’s ideas. Germany sees the benefits it can get through this tax, thus it should generate a means to make its position be agreeable to all the G-20 countries. The underlying innovation must be further improved in the sense that all of the areas in policies will be an advantage. Third, the restructuring process to strengthen the financial regulatory system is a complicated task that carries risks. Also, cooperation to all of the acting parties is needed in this procedure. This must be properly considered to avoid possible outcomes: to worsen the situation or history will repeat itself. Reference Lists Alexander, K., Dhumale, R. & Eatwell, J., 2006. Global governance of financial system: the international regulation of systematic risk. New York, NY: Oxford. Asian Development Bank, n.d. Financial sector legal and regulatory toolkit: Part three: financial regulation and supervision. 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