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Financial service-Banking - Essay Example

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The government is responsible for issuing out fiscal and monetary policies, which help stabilize a country’s economy. Over the last three years, the world has been recovering from a global…
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Financial service-Banking
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Financial Service-Banking The government performs various roles when it comes to matters concerning the economy. The government is responsible for issuing out fiscal and monetary policies, which help stabilize a country’s economy. Over the last three years, the world has been recovering from a global recession. This recession has had a negative impact on the financial and banking sector. In 2010, large banks in Europe and the U.S were facing a financial crisis. In this essay, I will discuss the government’s role when it comes to regulating and stabilizing the economy in the banking and financial services industry.
The U.S and European market had enjoyed a lot of freedom thanks to deregulation and privatization in the financial industry. However, this trend was to be detrimental a decade later. According to Anne Khademian the government’s efforts to manage the financial crisis has been monumental (841). She continues to add that the congress made major reforms in the financial industry. First there was the Dodd-Frank Wall Street Reform and the Consumer Protection Act. These acts were aimed at regulating the unregulated financial industry, which had crippled the economy. This was an attempt by the government to reverse the actions of subprime lenders and investors, financial market intermediaries and credit rating agencies. Due to the unregulated nature of the financial and banking industry financial institutions were offering high interest rate mortgages. In sub-prime lending, banks were lending out higher interest rates to their customers without considering the risk of default rates of their customers. The banks were also fast to approve the loans because of the high interest rates charged on the loans. During the financial crisis, at least four million people faced foreclosure due to their inability to pay loans. Consequently the banks were late in receiving their payments and meeting their credit obligations. The government had to step in and bail out the banks in an attempt to end the financial crisis. The U.S treasury and E.U commission pumped in billions of dollars and Euros to the banks in order to save them from liquidity.
The government plays an important role when it comes to stabilizing the economy. This is achieved by either lowering or increasing the lending bank rates. In the journal article, the author says, “the response to the crisis caused by too much debt and interest rates manipulated interest rates too low” (Khademian, 842). During the financial crisis, the government lowered the interests lending rates to banks to zero. This was an attempt by the government to encourage borrowing and consumption which a fundamental to sustaining the economy.
The Investment banks act a link between the investors and the issuers (Sirri, 24). In other words, the fundamental role of investment banks is to reduce the friction involved when a new security is issued. The first conflict in the investment-banking sector comes in the pricing of securities. The clients usually opt for high priced securities while the investment banks seek lower prices for their clients. Investment banks usually bridge the gap between investors and financial institutions. Therefore, the investment banks wish to buy at low since their prospects of selling at a high price are better (Sirri, 24). Investment bankers usually find themselves in conflict of interest when an analyst might be working for two parties (Sirri, 26). A good example of such a case would be the work of a research analyst. Research analysts spend considerably long periods of time in conducting research. This research usually determines the success of the banks and analysts getting some bonus attached to it. In most cases, research analysts take short cuts so as to guarantee the bonuses.
References
Khademian, AM 2011, The Financial Crisis: A Retrospective, Public Administration Review, 71, 6, pp. 841-849, EconLit with Full Text, EBSCOhost, viewed 3 June 2012.
Sirri, E. (2004) Federal Reserve Bank of Atlanta. Economic Review: Investment Banks, Scope
and Unavoidable Conflicts of Interest. Available at:
http://www.frbatlanta.org/filelegacydocs/erq404_sirri.pdf (Accessed 3 June 2012). Read More
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