What is a Financial Regulation?
The reason behind the financial crisis was due to the lack of having an effective regulation. Some parts of the financial system were hit hard by the crisis and the government-sponsored enterprises and large commercial banks failed in preventing the systemic risk or the substantial loss for those on particular financial products.
Under the regulatory system, the amount of such injections have been increased significantly by some weaknesses. Such failures does not only cost taxpayers with big sums of money, but they likewise damaged the financial system’s ability in matching savers and borrowers and also on providing risk-sharing and information services.
The improvements on regulation for protecting society should focus on revisions on capital requirements, development of rigorous process on bankruptcy to resolve insolvency of complex financial institutions as well as on the reduction of interconnectedness issues of credit default swap contracts through using clearing-houses and exchanges.
The regulations likewise play a vital role to protect individuals. Any economic theory of regulation could potentially stress the need in providing adequate information and transparency. Behavioral economic arguments likewise suggest the importance of simplicity on the consumer investor option. On the recent financial crisis, regulation plays an essential role to greater transparency on the securitization as well as on information on mortgage contracts.
There in fact are some overarching themes that links on the regulatory needs for society as well as for individuals. The first one would be on the need of regulatory reform in focusing on the “too big to fail”. It’s obvious that failures on the policy of dealing with exacerbated systemic risk on the time of the financial crisis. The problems with too big to fail led to mispricing on the risks which gave people less safe return than what they really bargained for and the disruptions on the liquidity harmed the borrowers as well.
The other one would be on the economic concern to which over-regulation on financial instruments and institutions that lead to cause harm through the case of raising cost of funds to household and business borrowers. The secret to this is to design regulation in order to ensure proper pricing of risks and information with regards to risks and this approach offers the appropriate balance of protection for both the society and individual.
When it comes to the consumer protection agency, it is very important for the prudential supervisor to give to the consumer protection body its input about the impact of the regulatory actions with regards to the safety and soundness of financial system and that conflicts on the supervisory and consumer protection body needs to be resolved by the treasury.