The Process of Banking Regulation Essay Example | Topics and Well Written Essays - 2000 words

The Process of Banking Regulation - Essay Example The financial crisis exposed failures of banks to control financial meltdown. The case pointed out that banks directed their interest at the expense of the common good of the financial markets. Regulation in the sector is an issue that is quite complex because the UK has banks which handle domestic and international banking. This paper analyses banking regulation and its effects on the financial market. The argument for and against regulation The argument about the need for bank regulation has divided economists into two groups. The first group feels that the banking sector should institute policies, which regulate the operation of banks while the second group feels that banks are volatile to instability, hence less need for regulation. Economists have observed that unregulated actions lead to greater social marginal costs and less private marginal costs (Slaughter and May. 2011). The effects of social marginal costs influence the overall economy because banks form important units of making public payment. This contrasts to private marginal costs because it belongs to a clique of shareholders of the firm. Turner Review on banking regulation proposed interest policy that should be able to tone down macro stability as well as bubbles in the financial sector. However, during the financial spill, it was evident that central banks were unable to control the macro stability of the banks. Elaborate regulation influence practices, which influence lending, and borrowing. Complexity in the sector crops whenever banks failed to comply with the regulation because they tend to manipulate the markets to gain profit (Hoose, 2010:136). The challenge is to balance the financial market as well as doing business. Serving these interests have often thrown the market into crossroads where financial spiff off is inevitable. However, the mandate of the regulation is to promote common good among the market players in the financial sector (Hardy, 2006:6). Economists for regulation have argued that uninsured depositors would create a financial spill when they acquire information about the poor performance of the banks. For instance, Northern Rock bank was a victim of depositors run during the financial crisis in 2007. Many of its depositors were not certain that bank suffered liquidity problem. It means that a bank run would create an adverse effect on the economy because of loses that banks would incur in its attempt to meet the demands of its depositors. The idea is to equip the banks to handle unstable markets (Independent Commission on Banking. 2011: 23). During the 2008 crisis UK, government shielded the banks from falling because they did not have the capacity to absorb the risks. Early banks had demonstrated their ability to lend without evaluating their capacity to handle the risk. Erosion of bank equity destabilized the financial market because the banks lost the ability to bear loses. Proposal on banking regulation is an issue that committees such as the Basel committee have discussed reviewing macro-prudential methods of regulating operation in the banking sector. The report charged with reviewing stability in the banking sector identified three areas first, the minimum requirement of capital, second, supervisory on internal bank assessment and third, cushioning public from risks. Basel committee recommended that each loan should command its own capital requirement as opposed to portfolio the loan added.