How should the banking sector be regulated

How should the banking system be regulated? The very nature of any free market system possesses elements of uncertainty and risk.

For the economic process to function effectively in this environment, suitable financial regulation must be implemented by the state In order to assure stability and to aid decision-making. Financial regulation Is the use of laws and rules to govern the behavior and activity of the banking sector. The establishment of statutes, contracts and independent supervision helps to protect shareholders, prevent Illegal activity and direct the appropriate allocation of wealth.The global financial crawls In 2008 saw the debate Into the degree of financial regulation rise to prominence. The world financial system was on the brink of collapse after a period of Irresponsible banking, this placed pressure on governments to Implement widespread changes In the regulatory system. Irresponsible lending, high-risk speculation and complex derivative securities all contributed to the crises in 2008 that left global financial markets in need of reform.

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The regulatory debate following this crisis shared a broad consensus upon the requirement to change the existing system by increasing the level of regulation and supervision, but conflict occurred as to the timescale and extent to which these changes were to be implemented. Proposals to overhaul any banking sector must not be taken prematurely as any change in regulation or change in the market adds further uncertainty to the economic environment. One of the key problems to be addressed and further regulated is the relationship between banks liabilities and their assets.Bank’s liabilities are essentially used as money as their redeposit ratios mean that they are able to hold long term assets without fear of liquidity.

The control of this ratio was loosened during an age of neo liberal economics in the ass under Thatcher and Reagan in an attempt to open up global markets and encourage growth. However without stringent measures controlling this ratio and keeping it at a sustainable and sensible level, high levels of risk soon become associated with banks as their liabilities become far greater than the value of their assets.Regulation should take place in controlling this ratio and keeping it as low as possible whilst still encouraging growth.

Regulation needs re assess how banks’ assets held are valued. The rigorous tier 1&2 capital risk criteria created at Basel II go some way to achieving this. However controls need to further remove volatility from the valuation of bank assets.

The practice of using mark to market valuation methodologies caused banks to make misguided lending decisions based on the temporary upsurge of asset value.Banks need to be encouraged to be more noncreative in the way In which they value their asset Changes should be Implemented at an International level as Thatcher and Reagan permitted the free flow of capital across International boundaries. Unless regulation Is universal, capital Is likely to move across Into nations where there Is a less rigorous regime which potential exposes share holders and customers to greater risk. Changes have to take out volatility so that capital markets are used to sustain long-term growth and needs more aware of the risk that they are taking.