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International Economics - Research Paper Example

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Pros and Cons of Bank Regulation and Deregulation and their Effects on Global Economy Introduction Banks play an important role in economic growth, which is mainly through their contribution in payment and credit systems…
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International Economics

Download file to see previous pages... Capital regulation ensures that banks internalize losses. This helps guard deposit insurance fund reducing chances of losses by the deposit insurer. The recent economic crisis, which was associate with credit crunch started with the melt down of subprime mortgage, which is directly dependent on how banks are regulated. In the United States, the move by Clinton and Republican congress to deregulate the banking sector is liable for igniting the 2008 crisis. This paper focuses on the pros and cons of bank regulation and how it relates with global economics. The paper will also address the pros and cons of deregulation in the banking sector as well as how it relates with global economics. Additionally, the paper will analyze the effects of bank regulation and deregulation on and the financial crisis of 2008. Pros and Cons of Regulation in the Banking Sector The regulation process in US is such that a bank is supposed to take immediate moves to reinstate its capital ratio in case Losses occur. In case of losses, banks restore their capital by raising fresh capital or shrinking their asset base. The regulators force the banks to take either of the steps, which prevents instances of failure (Roubini 1-3; Delaney Web). Since United States resulted from confederation of states, there exist dual regulatory systems where banks are regulated by both the state as well as the federal government (Barthy, Liy and Lu 1-5). The 2008 economic crisis triggered numerous changes in bank regulation within United States. The bank regulators increased their inspection on banks particularly on capital and reserves. Additionally, the congress is expected to implement reforms aimed at increasing regulation and make changes on the regulatory systems (Pellerin, Walter and Wescott 1-4). Bank regulation entails chartering and authorizing banks to start business and examination of the activities of the banks through frequent auditing. The banks regulators in United States include Comptroller of the currency, State Banking Authority, Federal Reserve, and Federal Deposit Insurance Corporation (FDIC) (Pellerin, Walter and Wescott 6-7; Roubini 6-8). Pros of Bank Regulation Like mentioned above, banks regulate their capital by asset shrinkage or raising fresh capital. Each of these moves has its pros and cons. In case of asset shrinkage, the effect could be either credit crunch or fire sale. Shrinking of assets through reducing lending, the interest rate increases, which make it hard for firms to borrow money for investments. This results in eventual decrease in employment, which is detriment to the economy (Pellerin, Walter and Wescott 10). Bank regulation helps in protection customers and the taxpayer. The government agencies concerned with regulation of banks supervise the operations of financial institutions preventing them from abusing taxpayers. They ensure that taxpayers are not denied access to deposit insurance as well as loans (Roubini 7). The Federal Reserve ensures that the central bank provides loans to banks. In case of financial crisis, the Federal Reserve inflates the safety net or increases the ease with which banks can access loans from the central bank. Therefore, safety net help to safeguard banks from bank runs reduces systemic risk in addition to reducing the cost of evaluating the health of financial institutions (Pellerin, Walter and Wescott 11-13). Another importance of bank regulation is to ensure safety and soundness regulation. The regulation agencies ensure ...Download file to see next pagesRead More
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