THE GLOBAL FINANCIAL CRISIS FOR THE REGULATORY SYSTEM

The Implications of the Global Financial Crisis for the Regulatory System



The Implications of the Global Financial Crisis for the Regulatory System

Introduction

The global financial crisis is unprecedented in the era of modern finance. Its origination in the Global housing and mortgage finance markets and subsequent transmission into other asset markets has exposed significant structural problems. The crisis has, in particular, exposed the existence of serious information asymmetries in several markets, especially with respect to securitization. It has also illustrated how poorly developed contracts create difficulties for markets. Many commentators have also noted egregious unethical behaviour on the part of lenders, brokers, and borrowers (Downs, 2008). One of the major themes currently in the public consciousness is the notion that the subprime debacle and the subsequent contagion to the rest of the economy were the result of free markets run amok. Paraphrasing the old adage, the idea seems to be that “for want of a regulation the economy was lost.” Indeed, a New York Times editorial explicitly blamed the mortgage market collapse on a lack of federal regulation (New York Times, 2008).

This paper examines the role that regulation and regulatory agencies played in the creation of the subprime mortgage market, and its subsequent crash. It also examines the difficulty that regulatory efforts face when dealing with so-called “black swan” events: events that happen so rarely planning for them is virtually impossible, but which have an extreme effect when they do occur. In particular, this paper argues that the liquidity crisis portion of the meltdown is such an event and that “more” regulation would not have been very likely to have prevented it.

Discussion and Analysis

It is a fact that the financial crises has actually shook the system badly, dropping the world in disastrous recession. Ever since the crises bailout and stimulus packages have comprised with a great depression of 19130's type. However, this current crisis describes the requirement for a more detailed and comprehensive global finance regulatory regime. Thus, in G20 (the Group of twenty) and the IMF has agrees on the initial step towards the liquidity and international regulatory reforms for supporting the G20 has not failed to live up towards the expectations (Turner, 2009, Pp12-78).

Basically, many of the weakness of international financial regime were underlined. Firstly, there are various numbers of mechanism and institutions, which are overlapping mandates and limiting the power. Secondly, in spite of this machinery of cooperation, the critical agreement was impossible. Thus, when the states perceived a conflict with their national interest, they actually disagree on the fundamental issues, moreover, hiding the prospects for the cooperative regulation for reforming the international system.

Regulatory System

Regulation may be considered a necessary evil, a positive influence or a positive hindrance to the effectiveness of the financial services industry. However, in the past 20 years the 'compliance function' in financial services has become increasingly prominent.

It would be unlikely that any market could work without some basic framework of rules concerning ...