Financial Regulation
What is the role of financial regulation in mitigating the financial crisis?
Financial regulations are rules, laws, and regulations that govern financial institutions. A financial crisis is the disruption of the financial markets through the tremendous loss of market value to financial assets. Financial regulations on institutions focus on facilitating fair competition, protection of the consumer, and provision of stability to the financial systems. The rules seek to remove restrictions on financial institutions, control the movement of international capital, and remove restrictions on other lines of business.
Financial regulations also help in the prevention of market failure, protection of investors, promotion of macroeconomic stability, and mitigation of the impacts of financial failures on the economy. Successful financial regulations are a tool of improving market transparency and protecting investors, which serve to prevent market instability and failure.
Financial regulations help to create rules and regulations aimed at maintaining a self-regulating market system with the most appropriate level of risk for all participants. The laws intervene to enforce those rules if the market risk becomes unmanageable. Regulators of the financial regulations review incidences of uncontrollable risks and determine whether there is a need for the creation of new rules (Pilbeam, 2018, p 72). Regulators also determine whether the existing laws and regulations are being followed and adequately enforced.
Financial regulations also help in mitigating the financial crisis by consumer protection. The regulations ensure that firms treat consumers fairly by providing that firms act professionally, fairly, and in the best interests of the consumers. Regulations act as gate-keepers in the financial system by ensuring that only firms that have fulfilled several criteria are allowed to operate in the financial system.
The regulations also help to build confidence and trust in the financial system of a country. They also help in implementation of the government’s policies and economic goals by ensuring that financial institutions adhere to the financial laws enacted by the government. Regulations also ensure the safety of public investments in the financial system. Financial regulations also help to mitigate negative social externalities like environmental pollution. They do this through scaling taxes according to the level of social externalities incurred by firms, thus encouraging the firms to invest in pollution reduced practices.
Financial regulations can, however, create economic issues like conflicts of interest. In most countries, financial regulations are viewed as being unable to fully account for an effective financial system as expected (Claessens and Kodres, 2014, p 40). Most regulations tend to favor large market and business organizations and disadvantage the small-scale businesses in the financial system.
The use of financial regulations can also create financial instabilities and market equilibrium. If the rules seek to regulate the supply of a given commodity, for instance, the demand for the product may not match the supply. When the supply is reduced, excess demand is created, thus resulting in market insufficiencies, hence market failure results. Market failure means the achievement of the proposed financial stability in a country. The implementation of the financial regulations can be costly, especially where firms spend large amounts in the enforcement of the regulations.
In conclusion, financial regulation is crucial in mitigating the financial crisis by ensuring that consumers are protected, competition is fair, and that the financial system remains stable. Regulations help prevent market failure, protecting investors, and build trust and confidence in the financial system. Regulations can, however, create market insufficiencies and extra costs of their implementation.
Reference List
Claessens, S., and Kodres, M.L.E., 2014. The regulatory responses to the global financial crisis: Some uncomfortable questions (No. 14-46). International Monetary Fund.
Pilbeam, K., 2018. Finance & financial markets. Macmillan International Higher Education.