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Arguments For and Against Financial Regulations
Financial regulations mainly exist due to the existence of economic effects or social effects on various phenomena related to the economy. These incidents include instability in finances, desire to maintain efficient markets, maintaining fair competition, and attempting to protect consumers against bad market practices. Without financial regulations, there would be problems associated with consumer exploitation, market inefficiencies, and financial instability in various businesses, industries, and financial markets (Skerratt, 2010).
Regulations are important in all financial systems. Without the financial regulations, most banks would try to make short-term profits. These short-term profits are made against the set policies that are regulated by the respective authorities. The regulations help avoid cases of adverse selection as well as moral hazards. As far as adverse selection is concerned, if no financial regulations, some good firms may be kicked out of the industry by those firms with bad practices. If unfair competition exists, it means that no regulations (Skerratt, 2010). Therefore, regulations would give all firms equal opportunities.
On another note, financial regulations are critical in getting rid of the problem of banks following each other if safety nets are in place. In this case, no management would be in the position of attempting to adopt risky policies used by bad banks. If a bad practice happens; for instance, paying off and delivering high profits, they would be held responsible. This would only happen through financial regulations in the banking system (Skerratt, 2010).
Regulations in financial practices are therefore great in ensuring efficiency in the operations of all business organizations. In a system of regulation with principle-based regulators, the influence on the finances can be better than the use of formal powers. In a proposal to solve market problems in the United Kingdom, financial regulations are the most advocated tools or methods of ensuring this. This involves the use of financial regulation influence in attempting to bring the industry to a desired stable position. The financial industry is the bearer of the situation and regulations need to play their part (Skerratt, 2010).
However, in trying to regulate the financial related issues, there is the likelihood of developing problems like in conflicts of interests and great costs associated with research because of trade execution and contract certainty especially in the insurance where uncertainty is the aspect of trade. Regulation in the proposed solution to market problems would however ensure a better treatment of customers in the retail sector of the market (Skerratt, 2010). As far as financial services are concerned, regulations in this UK proposal are viewed as not being able to achieve a single and effective financial market as expected. The reason for this is that regulations are sympathetic or favor some financial markets while it is destructive in others (Surveyer, 2009). This is a further creation of inequality in various financial markets that are aimed to be interlinked (Surveyer, 2009). Certain characteristics of some markets are favored by the financial regulations. Smaller markets may be in a threat since most regulations are created and implemented to favor large markets and business organizations. Therefore, those who operate in small-scale businesses and markets are much disadvantaged.
The best regulations should be considerate on both the local markets in individual states and the European market in unison. In this case, the use of other methods of ensuring efficiency in financial markets and equality could be used (Tiner, 2005). The use of taxation policies and social security systems can work effectively in creating market efficiencies rather than the use of financial regulations. Taxes can be used to reduce excess demand of some products in which their consumption is not advocated for by the government. At the same time, social security and pension schemes would attempt to maintain the common consumer within his or her normal consumption level. This level of consumption keeps the demand at the correct level; thus, avoiding creation of excess supply in the market. This is an example of market efficiency.
The use of financial regulations may create instabilities and market equilibriums. For instance, if the supply of a certain commodity is regulated, the demand may not be in a position to equal the supply. If the supply is made lower, excess demand is created (Young, 1997). This alternatively creates market inefficiencies, and hence, market failure. This means that unless otherwise, the achievement of an effective market is not easy with the use of financial regulations as a tool for achieving this goal. Regulations alone cannot possibly facilitate the achievement of the proposed single market for retail consumers in the UK.
A major issue on financial regulations is the supervision of individual firms within an industry. This is usually costly with the high financial spending in the program by regulators. They can choose a different way of monitoring firms’ financial patterns without facing the great costs. They can do this by constraining the available resources and coming up with a sample research before getting into the major analysis activities (Skerratt, 2010). There is much risk in either way. This is a clear implication that the regulators should be in a position to assume any risks. The risks are in terms of the use of their scarce resources, which should be focused on the greatest risk areas of the project.
The project in this case is analyzing the possibility of coming up with a single market for the retail consumers. Since in such projects, tests are carried out, the possibility of trying some financial regulations to create the market that is desired may fail (Skerratt, 2010). This is a case for the retail markets, but not for the larger markets or markets in higher levels such as the money markets and security markets.
Financial regulations are great if specified and used for the correct kind of market. Large markets would be the best. Such markets include the financial markets, stock markets, and financial markets. The same thing can be seen from the ICB report.
The Strengths and Weaknesses of the ICB Report
ICB stands for Independent Commission on Banking. The commission released a report on certain banking sector regulations. The report’s recommends that banks need to ensure enough protection in their retail activities especially from the investment banking units that are considered risky. After implementing this protection, the banks would be able to boost their levels of capital such that they can protect taxpayers from some unpredictable future crises (Wilson, 2011).
The report raised various issues that have caused different types of reactions. The government has considered it as great and exceptional. It is considered as an essential step in the efforts of coming up with a better banking system in which both lending to families and businesses is supported. At the same time, the commission ensures that the banking systems support the economy in its diversity and goes hand in hand with the job market. The system is expected to cause little or no problems in the tax structure by imposing higher taxes on the taxpayers especially when things go wrong.
Still on the banking sector, most banks are expected to be in the process of implementing certain reforms. This would bring them closer or straight to the safer side of the sector. A safer side would mean safer systems with lower risks of banks failing in the projected future. A steady income flow would be ensured, and savers and taxpayers would be highly protected. This argument highlights the strength of the ICB report (Joseph, 2011).
Some arguments have been raised against the ICB report. A major one is that the report came out being worse than it was expected. There were greater expectations, but what came out was to accomplish the goal of a new banking system at a lower level. Ring fencing is what was brought in rather than the expected and better full separation. This come with at least some realized achievements despite the prediction in the increase in costs (Wilson, 2011).
The Bank of England has raised many questions concerning the contingent convertible bonds. The bank had been championing for these bonds and the ICB report is alarming because many risks may be pushed or rather shifted into the banking sector. It also gives a warning that greater conversion to equity would further lead to increased risks and deterioration of the banking systems. This would be a way of creating a death spiral, which is undermining to the financial stability of the sector (Joseph, 2011).
The financial market is a tool for enhancing the effectiveness of the banking sector, but it has not been well mentioned in the ICB report. Most opinions on how the market forces of demand and supply can affect the banking sector have been avoided in creating the report. Some of the achievements cannot be realized without incorporating the financial market. This market is core in determining the value of any currency, its supply, demand, and the money creation process. It had to be incorporated to bring in some additional sense of realism in the report (Joseph, 2011).
A critical study of the report shows that there would be no significant changes in the business life of England. The business likelihood of going on as it was before the report is very high. The same ratios on capital in relation to the relative international businesses would be the same. A laissez fair representation of the report to investment in the banking sector is clearer than any other form of investment structure.
The ICB report and the financial regulations are comparable in that they are both targeting the same economic achievements. While the financial regulations are done with a view of achieving a single retail consumer market, the ICB report is based on coming up with a better banking system or structure (Joseph, 2011). Both these goals mean to change the UK economy for the better. For best results, the ill bits of the two projects need to be readjusted. At the same time, the strong points should be strengthened and fully implemented. The weaknesses are good to a certain extent since they are alarming to the possible economic failures or mistakes.