The role of regulation and crisis - Essay Example

The subprime crisis was also an outcome of negligence of financial regulatory body as well as the professionals engaged in accounting and auditing process. To have a better understanding of financial crisis the role of government, regulatory body, accounting system & standards, political environment and capitalism needs an analysis. From 2001, the Lamfalussy framework was introduced in EU system of supervision and regulation. The framework was arranged in four separate levels and published by European council (Great Britain: Parliament: House of Lords: European Union Committee, 2009, p.12). These regulations are responsible for making the accounting and auditing process more transparent.

After the great depression, International Monitory Fund and World Bank were established to avoid the causes which actually results into depression. But these regulatory bodies are almost 65 years old and are ill equipped to handle the complex banking environment of 21st century. Almost all the major economies have their own regulatory bodies, like Financial Services Authority (FSA) of UK and the Securities and Exchange Commission (SEC) in US, but they failed to check the financial crisis. Even the Basel II Accord agreement that was published in 2004 failed to detect and control credit crunch.

Many banks are blaming Mark to Market system for development of such a disastrous financial crisis (Rayner, 2008). The financial system is based on the trust and faith, but collapse of Lehman Brothers, Bank of America and PNC Bank Corp are few examples of how the policymakers and regulators failed to maintain people’s faith in them. Most surprisingly America’s financial system failed to manage risk and proper allocation of capital (Stiglitz, 2008). Fair Value Accounting or US Accounting Standard FAS 157 is basically used for determining fair value or market value of the assets and the liability.

Many critics argued that fair value accounting is highly