The regulation of financial markets and its implications have been a topic of considerable interest among researchers and policy makers for a long time. On the one hand, it is argued that the regulation of financial markets has welfare benefits due to the existence of market…
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This essay is organized as follows. Section 2 discusses the origin of global financial crisis and its cases in general as well as in the case of UK in particular. Sections 3 and 4 discuss the different dimensions of financial regulation in UK and the reasons for their failure. Section 5 concludes the report.
The financial crisis had its origin in USA with the sudden boom in housing prices creating high optimism among investors and lenders between 1990 to 2006.This resulted in the creation of many mortgages and finally as the hosing price boom came to an end in 2006, subprime1 defaults started rising. Since the households became unable to repay their debts, the leading financial institutions worldwide had to write off their investments since August 2007. This deteriorated their balance sheet positions, which ultimately resulted in a tightening of supply of credit to households and firms to finance their consumption. Thus, the financial crisis led to economic crisis which spreaded all over the world (Agarwal et al, 2008; Vyuev, 2008; Gwimmer and Sanders, 2008).
Financial market regulation is mainly aimed at correcting market imperfection and ensuring allocative efficiency of resources (Giorgio et al, 2000). However, one major reason for financial crisis has been cited as the failure of regulatory system to cop up with the financial innovation that resulted in the crisis (Pan, 2009). The rising indebtedness of the US households and financial institutions during the years before the financial crisis increased their vulnerability to crisis. The complexity of highly sophisticated financial instruments like derivatives helped in spreading the financial crisis to countries all over the world. The inaccurate measurement of risk associated with the financial innovation also resulted in creating the financial crisis. The other main reasons for the financial crisis are identified in the literature as weakened lending practices,
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