Regulation of Banks

In the current, intense activities, in the financial institution occasioned by the resent crises, the public does not have a clear understanding of whether regulation is necessary in the financial institutions. However, it is tremendously crucial to understand that regulation is highly fundamental for the wellbeing of any system. The whole field of the financial institutions comprises many players who are all out to make a profit, for this reason; a regulator is needed to ensure fair play in the markets.

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A recent survey has show that financial crises have been highly prevalent in the recent history; additionally, their effects are exceedingly ravaging on the economy and may take many years to get a reverse. The crises have mainly occurred due to lack of regulation or application of faulty regulation measures. For these reasons, there is a significant reason now than ever to regulate the various money lending institutions to ensure a stable economy.

Among the leading theories that support regulation of the money, lending institutions is the economic theory. According to this theory, regulation should be carried out for several reasons and to avoid the repeat of economic crises. One of the weightiest reasons why regulation is crucial is to prevent the financial institution from exercising monopolistic power over the consumers.

There are several countries in which only a few lending institutions control the banking industry

Recently, America experienced merging of financial institutions in an attempt to counter the effects of the economic crises. This shows how this market was exceedingly concentrated. Analysts think that the problem is with the regulator, who should something. The merger should not lead to the creation of a monopoly; this rule is in line with international banks regulation. 

Secondly, regulation is done for the welfare of the people, the welfare of the people in a given economy is considered first and this warrants regulation. In the united state, the regulation is done so that the banks are fair to other players in the economy especially regarding to prices as well as other services given. The public in most cases lack the necessary information or sometimes cannot access information at affordable prices. In situations that are morally risky or the ones that may lead to losses to consumers, the regulator counters this by requiring the depositors and the bank to have a minimum capital/balance.

The third reason, which makes regulations necessary, regards to the external conditions

In most cases, the financial institutions do not have control over external forces and sometimes these forces may affect their operations adversely. The debt holders, the bank managers as well as the bank owners do not have unlimited power over everything; hence, they need protection. One external factor that banks need protection against is the informational contagion.  In the above principle, the collapse of a bank causes the public to doubt a related bank. This has particularly adverse effects on the economy. This was also observed during the financial crisis. For this reason, the regulator comes in to protect each bank. Other problems that affect banks include; limited access to funding in the future, the problem of interconnection with other banks. The problems with disposal of bank assets especially when a bank is in financial problems are avoided with the help of the regulator. The regulator helps the banks deal with all the above challenges for them to proceed providing their services for the good of the economy.

Since the resent financial crises, there has been a controversy regarding the regulation

This occurs due to disagreement on the extent to which regulation should take place. This is because a group of people thinks that the bank and the financial institution require regulation because of their importance on the economy while the other group disagrees. The recent crisis shows that the banking sector is vulnerable to various externalities. Other people argue that sometimes these institutions overexpose themselves to a large cobweb of interconnected internalities such as fire sale externalities.

In conclusion, it is economically reasonable to regulate the financial sector for the crucial pillar it is to the economy. If this ignored, some of these institutions would exploit the public. On the other hand, if left alone, these institutions may overexpose themselves to unfavorable external factors, which may lead to their collapse. The collapse of these institutions may spill over to the other sectors of the economy and may affect the whole country. This was well demonstrated in the resent financial crises.

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