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How do international financial institutions manage the change needed after the 2008 financial crisis - Essay Example

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Financial crisis leads to a value erosion of the assets of the financial institutions as is the case with the current financial crisis that created a panic in the market and led to the worldwide recession. Although the crisis originated in US, it gradually spilled-over to the…
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How do international financial institutions manage the change needed after the 2008 financial crisis
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How do international financial institutions manage the change needed after the 2008 financial crisis

Download file to see previous pages... The main aim of regulation is making the reporting system transparent so that the market participants can have a better idea about the risk that they are undertaking. The above mentioned financial crisis was mainly attributed to insufficient regulation therefore a change in the regulatory framework is needed to avoid this in the future. An important official of the IMF has attributed regulatory failure to guard against excessive risk as the reason of the 2008 financial crisis. However excessive regulation is also one of the reasons that contribute to the financial crisis. As per the Basel II norms the banks have to increase their capital whenever there is an increase in the risk. This adds to the crisis, as the banks reduce their lending for meeting the capital requirements. When the Fed announced the hike in the interest rates the installments were re-set which resulted in widespread delinquencies. Faced by the rising foreclosures the banks had to sell off their assets for maintaining the capital requirements. This led to a steep fall in the housing prices. For preventing this crisis in the future various international bodies like IMF demanded strict disclosure and regulatory norms. This procedure requires changing the existing accounting standards and making the disclosure of off-balance sheet risk more effective. The international financial institutions have to play a major role in managing this change. Initially the changes of regulations and disclosures may not be acceptable. Here the international bodies have to play the key role in explaining the significance of the change. This will help in removing the restraining forces and will facilitate in reaching the equilibrium stage. When a change is implemented there are two contrary forces that act simultaneously- driving forces that support and restraining forces that oppose a change. To make the change successful it is important to explain its significance to the people in ...Download file to see next pagesRead More
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