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Financial Crisis - Gfc

Essay by   •  May 11, 2011  •  Research Paper  •  3,170 Words (13 Pages)  •  1,324 Views

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ABSTRACT

Throughout my study I examined what regulatory reforms have taken place since the global financial crisis and what application problems they faced. This essay will define major issues that were behind the GFC. I will describe factors like the lack of regulations and compliance with in the financial system that fuelled the financial crisis. It has been due to public retaliations that have triggered calls for reform within the financial sectors, to prevent future crisis. The G20 leader's summit did not implement any specific regulatory reforms, only enforcement of the regulations already in place. Dissatisfactions came for countries not included in the G7; many of the reforms introduced by the G7 were seen as aiding the benefits of the greater industrial countries only. However the G20 do agree that financial regulations must be tightened and empowered to prevent future crisis. "Without governance reform, the FSF and other narrowly constituted standard-setting bodies lack the legitimacy to direct a global regulatory response to the current crisis effectively" (Eric Helleiner & Stefano Pagliari 2009:281) or other future financial crisis. In conclusion I argue that select countries (such as G7) can no longer lead, control or flourish on their own; like in the past. As most chief financial complications are global and only worldwide regulatory solutions can fight them. The problems lie in countries acceptance and effective execution. To evade other financial crisis it is essential that the IMF hold a stronger position in financial markets must balanced, regulated and supervised better.

Is more global regulation the answer to global financial crises?

What are the problems of achieving such regulatory reform?

The GFC was born in the US and quickly spread internationally, becoming a global crisis. All countries have felt its effects rippling through various market segments, even causing some to crash. Although it was this crisis was created in the US, the crisis has had impacted many countries becoming a global financial crisis. Due to this extended global impact leaders along with the public have reacted by demanding that tighter regulations be enforced in the financial sectors. Through this essay I will discuss if "more global regulation is the answer to global financial crises?" and "What are the problems of achieving such regulatory reform?" I will also look at why financial regulations were unsuccessful and helpless in preventing the GFC. There is general demand to introduce preventative regulations and administer modifications to the current practices. These modifications produce a safer and a progressive turning point in the international financial regulatory system, aiming to escape the prospect of future crisis. Introducing only regulations is not the only solution, because regulations were introduced to correct and prevent past crisis yet it failed as more crisis followed. Therefore, implementing new regulations is not the only answer, it must go together with strengthening and empowering current governing bodies like IMF Additionally there must be greater awareness and ability to control the free market, as columnist Martin Wolf stated "the dream of global free-market capitalism died" (Eric Helleiner 2006:16).

In this essay I take the stand that implementing different regulations will only benefit the governance of new financial instruments and processes. Regulations will not be the only resolution to fixing the financial system. This has not worked in the past; as can be seen in the continued regulatory changes made to the Basel accord. The focus needs to be on changing and updating current regulations. For non-regulatory modifications to be effective firms and institutions that fail to abide should be heavily penalized; making failure more expensive than the profits made through avoidance. One value from the GFC is that it has 'stress tested' all existing regulations and underlining areas where rules are lacking. Now we ought to aim at solidifying the frail supports of the financial structure and "build" new regulations were obligatory. However, problems in achieving these changes will be lack of corporation from new and growing economies.

First I will review the begging of the financial crisis in order to highlight the points of regulatory failure. Prior to the crisis the US were in a "housing bubble". House prices were rising, yet wages remained the same and consumption began overtaking people's means. This bubble was "fuelled by low interest rates, increased global liquidity, aggressive and innovative marketing of credit facilities."(Martin Owiny, 2008) Other factors like the belief that house prices would increase plus wrong risk assessment were used by the financial sector to produce financial assets. Rising home prices along with low interest rates and slack financial rules created a boom in the financing of subprime mortgage.

In 2007 interest rates upsurged, house values fell while foreclosures and debt defaults were on the rise and mortgage loans began depreciating. This affected banks and financial institutions holding subprime loans. Institutions apart from banks held risky mortgage because of the introduction of ABS; that were packaged securitised as asset-backed securities and traded to international banks. International banks used bonds to purchase asset backed securities. As the housing market crashed underlying loans became uncollectible, and the bonds devalued leaving banks illiquid. "With the bond market collapsing, banks had to refinance the redemption of the matured bonds by other means than issuing new bonds. With many banks facing similar liquidity problems, it got, nearly impossible to obtain funds from other sources such as the interbank market." (Greg N. Gregoriou 2010:153) It is evident that through ABS creation and interconnection the American crisis turned into a global crisis, encompassing many economies.

Prior to the GFC the regulations governing financial activities and instruments were outdated. There was a lack of supervision and enforcement over the regulations already in place. An example is the closing of the Depository Institutions Deregulation and Monetary Control Act. This elimination allowed weak lending practices; there was also a failure of governing the activities of non-financial banks. Since the limits to the financial practices were largely unregulated it widened the lending prospective. This in turn created the problem of moral hazard among lenders, rating agencies and predatory lending. America has been the leader of financial market liberalization. "The financial market deregulated

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