StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

Why Banks should be Regulated - Research Paper Example

Summary
From this research 'Why Banks should be Regulated', it is clear that regulations are established to avert abuses such as monopoly, corruption, and fraud among others. With regards to banks, some people advocate for their regulation while others are opposed to the idea. I am a strong believer of a free-market economy…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER97.7% of users find it useful
Why Banks should be Regulated
Read Text Preview

Extract of sample "Why Banks should be Regulated"

Why Banks should be Regulated Introduction Regulations are established to avert abuses such as monopoly, corruption, and fraud among others. With regards to banks, some people advocate for their regulation while others are opposed to the idea. I am a strong believer of a free-market economy, who does not support the red tape of the government choking the life out of businesses. However, I believe banks should be regulated for the good of various nations as well as for their own good. According to Dow (1996), the regulation of the banking sector is vital because of its role within the economy, as well as, the insecurity associated bank failures. Banks fuel economy of various nations via provision of credits and money circulation. People trust that banks will keep their monies safe, and it is from the deposits that banks find capital to operate; therefore it can be said that banks symbolize trust of the people. What happens when that trust is broken, and bank runs occur? The failure of a leading bank causes a public panic, which spread all through the entire banking industry and the economy. In addition, the panic contagion may also spread overseas, consequently engulfing the entire globe. The fall of Lehman Brothers and Bear Stearns in 2008 is evidence to the panic contagion (Stockfessor, 2012). For instance, the United States suffered a key bank run in 1929, after which the Great Depression took place. Another example is the 2008 economic meltdown that nearly toppled the key players in the banking industry, and as a result, a significant recession occurred, whose impacts are still being felt to date. This paper discusses the reasons why the banking system should be regulated. Before looking at regulation of the banking system, let us examine the kinds of banks existing in the banking sector. According to Stockfessor (2012), there are two types of banks i.e. commercial and investment banks. Examples of commercial banks include JPMorgan Chase, Citibank, and Bank of America among others. Investment banks include Morgan Stanley, Goldman Sachs etc. Commercial banks receive deposits from the public in the form of saving, retirement and checking accounts. In case of bank failure, the United States government assures every account holder an amount permitted by the law via Federal Deposit Insurance. However, the government necessitates commercial banks to conform to the set rules and practices in the banking sector i.e. their sole purpose is to receive deposits and give loans. The government expects Commercial banks to earn their profit via the interest they charge on loans, and are forbidden from engaging in risky businesses such as trading stocks or underwriting to make extra profit. Investment banks, on the other hand, have more autonomy for operation. Their clients are mainly investors who are willing to take high risks in financial products, stocks, as well as underwriting new companies. Incase of failure of these banks, the government does not provide them with any Federal deposit insurance owing to the high risk of their ventures (Stockfessor, 2012). The Reasons Why the Banks Should Be Regulated History of Economic Failure It is vivid from the American history that a majority of the economic problems experienced in the last two centuries were caused majorly by speculators and banks. The bank panics experienced in the 1800s and the Great Depression are examples of how the banking system contributed to the financial difficulty of numerous hard-working American citizens. Following the Great Depression, the Glass-Steagall Banking Act was enacted in 1933, to avert public panics in the case of bank runs. The Act prohibited commercial banks from engaging in speculative and risky ventures and transferring their losses to the government via the deposit insurance scheme. Consequently, economic prosperity and stability reigned in the US for more than seventy years. However, the reforms brought about by the Act were destroyed quietly, and what followed was the unprecedented act by the US Congress in 1999 to vote against the Glass-Steagall Act with an intention of adopting the Gramm-Leach-Bliley Act (Stockfessor, 2012). I am of the opinion that the banking sector either through bribery, or intense lobbying, influenced the Congress to oppose the Act. As a result, commercial banks have been able to utilize people’s money (deposits) to engage in risky ventures like trading securities and derivatives. Additionally, investment banks, in conjunction with brokerage firms have also been able to receive deposits from the public through opening retirement and checking accounts. The results have been enormous: the banks have wildly pursued risky ventures with the public’s money, and when they fail, it is the government to foot the bill. For instance, AIG lost $750 billion in the 2008 financial meltdown, and the American government fully bailed them out (Hope to Prosper, 2012). I am of the opinion that banks will continue to ignore and undermine reforms aimed at bringing sanity in the banking sector, and still do risky businesses that put the public’s money and the entire economy at stake. Therefore, regulation of banks either by the government, or other nongovernment bodies is vital, to prevent the occurrence of similar economic problems in the future. Those opposed to the regulation of banks should learn from the 2008 financial crisis, which pushed the economy of the world to the brink of collapse, and led to million of jobs being lost, and see sense in advocating for the regulation of the banking system. Excessive Leverage is Legal According to Hope to Prosper (2012), financial institutions utilize considerably high leverage in order to maximize profits. An example is the MF Global collapse that took place recently, where customers’ deposits worth $1.6 billion went missing. Forbes reported the leverage ratio of the company to be 80:1 in 2007, but by the time of its collapse, the ratio was 40:1. By regulating the banking system, such enormous leverages and risks will be made illegal. Too Big To Abide By the Law Large financial institutions have strongly resisted financial reforms, prior to and following their enactment. They have stifled modifications of loans and re-ordered transactions so as to collect from customers billions of dollars in overdraft fees (Hope to Prosper, 2012). In essence, they act as if they are above the law. Till the executives of such banks are imprisoned for going against the law, they will always continue to do so, and that is why regulations of banks are vital to bring the necessary reforms within the banking sector. Bailouts are Unavoidable A majority of significant political positions within Treasury and Fed are held by bankers, who have strong attachments with the banking community (Hope to Prosper, 2012). It is likely that when there is another pressure of economic crisis, President Obama and the Congress will be forced to give in to bailouts in order to save the American economy. Therefore, evading future bailouts necessitates that solid regulations be established, that will prohibit banks from taking extreme risks that put the country’s economy at stake. Conclusion The series of financial crises that have happened in the past such as the Great Depression and the 2008 economic meltdown, coupled with the lack of free market forces, to regulate banks is a reason enough not to trust banks to regulate themselves. With the current freedom at their disposal, banks will continue to engage in risky businesses due to the excessively high profits they attain from them, all at the expense of the public’s money and the whole economy. Therefore, in order to prevent future financial crisis, governments have a moral responsibility to step in and regulate the operations and activities of banks in an attempt to protect the interests of their economies and people. References Dow, S. C. (1996). Why the banking system should be regulated. The Economic Journal, 106 (436), 698-707. Hope to Prosper (2012). “10 reasons why banks must be closely regulated.” Retrieved 12 Nov. 2012, from http://hopetoprosper.com/10-reasons-why-banks-must-be-closely-regulated/ Stockfessor (2012). “How should banks be regulated?” Retrieved 12 Nov. 2012, from http://stockfessor.wordpress.com/2012/05/21/how-should-banks-be-regulated/ Read More

CHECK THESE SAMPLES OF Why Banks should be Regulated

An Evaluation of the Service Quality of Islamic Banks in Bahrain: An Empirical Study Abstract

Apart from this, employees should also be involved in planning and organizing sessions, due to their own satisfaction having a spillover effect on the customers they deal with directly.... The present study aims to evaluate the service quality of Islamic banks in Bahrain.... Differences between Islamic banks and Conventional banks 13 2.... Service Quality and banks 21 2.... Service Quality and Islamic banks 22 2....
68 Pages (17000 words) Dissertation

Finance and accounting assignment: Royal bank of Scotland

The bank, controlled by The Royal Bank of Scotland Group (RBS Group), was established in 1727 by King George I's Royal Charter of the National Westminster Banking Organisation, which can track its ancestry back to 1650, as well as the Ulster Bank in Ireland.... .... ... ... The Royal Bank of Scotland plc (RBS) refers to as British banking, as well as an insurance holding firm in which the HM Treasury of United Kingdom Government, as of 31 March 2012, manages and holds an 82% stake through UKFI or UK Financial Investments Limited....
12 Pages (3000 words) Assignment

Regulations of National and Commercial Bank

It should be noted that banking regulations in the US are not governed by a single, body, unlike UK or Japan.... Banks are regulated in the types of products, mainly financial products; the total number of branches.... Many banks however are regulated by the state governments under respective state laws.... banking sector works under the highly regulated environments in the world.... Previously, the word 'banks' used to indicate only commercial banks, but now credit unions, savings banks provide nearly the same kind of services; however, they differ in some respects as some specialize in providing housing finance and some on-consumer credit....
8 Pages (2000 words) Term Paper

Bank Regulations and Letter of Credit

The author of the paper will discuss the statement that banks deal with documents and not with goods, services or performance to which the documents may relate.... As a result, banking regulations serve to lower or alleviate the risks that banks are exposed to and any disruptions and interruptions emanating from adverse economic and banking conditions.... Additionally, banking regulations reduce the criminal risks to which banks are exposed, not to mention promoting and ensuring the confidentiality of banks....
17 Pages (4250 words) Term Paper

Control of Risk Related with the Management of Customers Personal Data in Banks

From the paper "Control of Risk Related with the Management of Customers Personal Data in banks" it is clear that according to Cebenoyan et al.... The current paper focuses on the examination of risk management in banks; a specific part of these businesses' activities is examined – the management of personal data of customers.... It is proved that the risk involved in the management of customers' data in banks can be significant; however, with the implementation of appropriate policies this risk can be limited – the use of risk management cycle for the control of risk involved in the management of personal data of customers in banks has been proved to be the most appropriate solution for addressing the specific problem....
8 Pages (2000 words) Research Paper

Key Roles of the Central Bank

he Bank Charter of 1844 gave the Bank of England the monopoly over the issuance of banknotes and the reserves which any financial institution should have in the bank before issuing a certain value of banknotes ('The Bank' n.... banks have evolved in size, power and functions to what they are today.... Despite the different structural forms, central banks in most countries have the same functions.... The European form of central banks came into existence in form of the Knights Templar's promises of payment....
13 Pages (3250 words) Essay

Reasons of Bank Failures in the US

Seven more local and regional banks have closed their doors in the United States, bringing the total number of US bank failures to 103 this year, federal bank regulators announced.... In Banking terms, banking failures occur when the banks may become insolvent or too illiquid to meet its liabilities.... Such a scenario will prevent the banks from meeting the customer demands.... In such cases, it is quite possible that the failed banks may be taken over by the regulating agencies to protect the interests of its customers and the shareholders....
10 Pages (2500 words) Term Paper

Rationale for Bank Regulation

ne of the reasons Why Banks should be Regulated is the fact that they are inherently unstable.... The reason why banks are regulated seems to be a perplexing concern from most of the banking industry stakeholders.... The reason why banks are regulated seems to be a perplexing concern from most of the banking industry stakeholders.... There seems to be no reasonable policy that can justify regulating banks.... Most of bank regulations are enhanced through the central banks, which performs the....
10 Pages (2500 words) Essay
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us