Critically Evaluate The View That Banking Instability Is Caused By Regulatory Failure Rather Than Market Failure



Banking Instability

Introduction

The main purpose of this paper is to identify that banking instability is mainly the reason of regulatory failures instead of the market failures. The paper mainly discusses on the ways through which inflation targeting is operated in United Kingdom and also the evaluation of benefits of inflation targeting. The banking sector of United Kingdom is facing instability in its operations. There are various people claiming that the main reason behind such instability is the market failures. However, another group of analysts says that market failure has nothing to do with the banking instability; however, the main reason is the regulatory failures. Therefore, it is necessary that along with the market failures, the regulatory failures should be kept into consideration and the government of United Kingdom should pay huge attention on maintaining the regulatory aspects of banking industry. The duration of the banking instability is also considered to be the era of great financial depression i.e. from 2007-2009. There is a huge literature on the causes of great financial depression. Thus, it is very necessary to identify the main causes of banking instability occurring in United Kingdom.

Discussion

1a) How Inflation Targeting is Operating in UK

The term inflation is considered to be a complete increase in the price levels. Inflation increase is very dangerous for any society as it results in increasing the dangers of eroding savings and minimizing the investments. There is also a very negative impact of inflation on the economic development. Thus, it is fair enough to say that inflation plays a very dangerous role for any country and it is necessary that the financial regulators of the countries should take this matter into consideration and develop the necessary policies to deal with the increased rate of inflation (ABC News, 2007). Just like the other countries, inflation is also a problem for United Kingdom. This is the reason why different banks in United Kingdom are going for the option of inflation targeting. The inflation targeting approach is used in United Kingdom as a practical strategy taken against the monetary failures specially the monetary policies which are focused on money supply and currency valuation. In general, it can be said that monetary policy framework acts as the nominal anchor for UK economic development. This is the reason why the central bank of United Kingdom is adopting the inflation targeting approach so that the monetary policies of United Kingdom can remain stable. This approach can bring very positive results only in the cases when central bank succeeds to manage the money supply and maintain a stable relation between money supply and inflation (Yeates, 2009).

The approach of inflation targeting is considered to be a straightforward approach. The central banks act as the anticipator of the future of inflation trends and conduct its comparison with the target inflation rate. As per the inflation targeting approach, the UK central bank identifies the difference between ...