HOW REGULATION HAS BEEN A FACTOR FOR THE CRISIS

How regulation has been a factor for the crisis and regulation aided correction of finance markets or hindered them?

Abstract

This essay considers the purpose of regulation and supervision in the financial industries. By analysing historical events with the current crisis, regulation can be discussed throughout those periods. It shows in some periods that regulation may not even be necessary, because bank runs were rare even when there was a lack of guidelines. There were other certain periods, which showed excessive regulation may be necessary. The conclusion demonstrates, since January 2010 there is current policies in the pipeline to ensure the growth and control of the financial industry. But will they be effective for the stability in the long run? When making these decisions it is essential not to base regulation on perfect markets, as traditionally used. To create regulations that are more effective they should form these guidelines around imperfect markets as this is more realistically related to the real world.

Table of contents

Abstract2

Introduction4

What is Regulation?5

The Banking Industry6

A Review of the Regulation in the Finance Industry8

The Practice of Regulation in the Financial Markets13

Diamond and Dybvig model19

Is supervision the answer to help regulation?21

The Problems of supervision23

The link between regulation in the Financial sector and Housing Market25

Conclusion28

Regulatory Reform28

Bibliography31

How regulation has been a factor for the crisis and regulation aided correction of finance markets or hindered them?

Introduction

Regulation is an instrumental factor of an economy. There are guidelines implemented that theoretically allow the markets to run efficiently. In recent years various markets have adopted such regulatory bodies. As an example, the financial markets in the UK are regulated by the Financial Service Authority (FSA), an independent body from the government, who were given statutory powers by the Finance Services and Markets act 2000 UK. Regulation can be deemed to create barriers towards new firms in the market, which in the long-term can reduce competition. It is not necessarily in the public's favour with regards to costs, because the lack of competition may create monopolies and subsequently drive up prices of goods. Benston, G (1998) as an example stated that in the USA the only industry that was regulated more than the financial industry was Medicine. Compared with Britain's nationalised medicine industry, no comparison can be made. The only heavily regulated industry in the UK is therefore the financial markets. Can the lack of regulation in one market have been proven to be more successful than a market, which was more regulated or vice versa? This leads to the question has regulation been a factor for the crisis?

The structure of this report will attempt to challenge these questions. The initial discuss of the report will give an analysis of what is regulation. Secondly, the next discussion will be how regulation has affected the financial markets. It will lead onto the reconsideration of these regulations and supervision put into practice of these markets. Thirdly, has the housing market's lack of regulation been the downward spiral of the ...