Roles of Deregulation on Banking Sector Essay

The banking industry has undergone major upheaval in recent years, largely due to the lingering recessionary environment and increased regulatory environment. Many banks have failed in the face of such tough environmental conditions. These conditions

New government regulations there have made it easier and cheaper for customers to change banks. For example, banks in Australia are no longer able to charge early exit fees such as deferred establishment fees on mortgage and personal loans due introduction of new regulation in early 2011.

Compare and contrast today’s structure versus historical structures. Why has consolidation occurred and who will experience benefits and losses – customers, the institutions, etc. Why have bank failures occurred? Are there any consequences of consolidation and failure in the industry?

There are various categories of banking; these include retail banking, directly dealing with small businesses and persons. Commercial and Corporate banking which offers services to medium and large businesses (Koch & MacDonald 2010). Private banking, deals with individuals, offering them one on one service. The last category is investment banking. These help clients to raise capital and often invest in financial markets. Most global banking institutions provide all these services combined. With all these institutions in existence within the same localities and offering similar services, there is a need to regulate the industry so as to protect the consumer and provide fair working environment for all banks (Du & Girma, 2011).

During the 1930s, the most prominent reason for U.S. banking regulation was to prevent bank panics and more economic disaster like those that had been experienced during the Great Depression. Later deregulation and financial innovation in industrialized countries during the 1980s eroded banks monopoly power, thus weakening their banking systems and seeming to embody the fears of post-Depression policy makers who instituted regulation in the first place. Fear that individual bank failures could spread across international borders creates pressure to harmonize bank regulation worldwide. One advocate suggests that universal banking, at least for industrialized countries with internationally active banks, would “level the playing field” by eliminating competitive advantages created by government subsidies. Although this is a valid point, one of the major driving forces behind the globalization of the banking world is the ability of banks to take

True. I believe risk management has become one of the primary concerns for bank management. Banks deal with an overwhelmingly large number of exchange securities, for example, ( loans, treasury bills, forex trading, ect...) This causes bank managers to have skills to properly analyse and manage what securities they trade and what type of contracts they enter into, ( such as in hedging etc...). If banks do not shift their focus on such new financial instruments they might go bankrupt as a result of excessive risks in such securities. Hence the focus of bank supervision has shifted to risk management, rather than on capital requirements. Although both are key to running a successful bank.

The Glass-Steagall Act of 1933 that defined the roles for commercial banks, investments banks and insurance firms was over ridden by the Gramm-Leach-Bliley Act (1999) which repealed the provisions that restricted affiliations in financial institutions. Hence one solution is to overcome the incentive problem and the conflict of interests that arise when financial institutions simultaneously undertake financial activities of varied nature.

‘ in markets with concentrated banking, potential entrants face greater difficulty gaining access to credit than in markets in which banking is more competitive.' ( journal) this is because if the banking industry is competitive they would try different ways in order to attract different customers, moreover they would be in favour of consumers as they do not want to lose them to competitors.

Extensive research has determined that the banking industry is in an unstable state. The industry’s profits have

The banking industry is highly competitive. The financial services industry has beenaround for hundreds of years and just about everyone who needs banking servicesalready has them. Because of this, banks must attempt to lure clients away fromcompetitor banks. They do this by offering lower financing, preferred rates andinvestment services. The banking sector is in a race to see who can offer both the

In this essay I will be addressing the “Too Big To Fail” (TBTF) problem in the current banking system. I will be discussing the risks associated with this policy, and the real problems behind it. I will then examine some solutions that have been proposed to solve the “too big to fail” problem. The policy ‘too big to fail’ refers to the idea that a bank has become so large that its failure could cause a disastrous effect to the rest of the economy, and so the government will provide assistance, in the form of perhaps a bailout/oversee a merger, to prevent this from happening. This is to protect the creditors and allow the bank to continue operating. If a bank does fail then this could cause a domino effect throughout

(Lecture 2, Law of Commerce, Investment and Banking). For example, Martin Wolf wrote in 2009: "...an enormous part of what banks did in the early part of this decade – the off-balance-sheet vehicles, the derivatives and the 'shadow banking system ' itself – was to find a way round regulation." (Wolf M., 2009). Off balance sheet financing made it possible for firms to look less leveraged and allowed them to borrow at cheaper rates. (Simkovic M., 2009). Analysis by the Federal Reserve Bank of New York showed that big banks hide their risk levels just prior to opening data quarterly to the public. (Kelly K., McGinty T., Fitzpatrick D., 2010). From this moment it is possible to ask the question: What did regulators do at that moment? Critics have argued that the regulatory framework did not keep pace with financial innovation, such as the increasing importance of the shadow banking system, derivatives and off-balance sheet financing. In other cases, laws were changed or enforcement weakened in parts of the financial system. Several critics have argued that the most critical role for regulation is to make sure that financial institutions have the ability or capital to deliver on their commitments. Another critics have also noted de facto deregulation through a shift in market share toward the least regulated portions of the mortgage market. (Simkovic M., 2011). In overall, regulatory system makes bad impression as it seems not working properly. Author Roger

In response to the financial crisis of 2008, there has been much criticism of the banking and financial industry. Critics have expressed their opinions on potential causes and shared their ideas on what steps need to be taken to help prevent future financial crises of such magnitude. Authors Anat Admati and Martin Hellwig share their thoughts in the 2013 novel The Banker’s New Clothes: What’s Wrong with Banking and What to Do about it.

In the wake of the crisis, governments across the world were forced to step in and bail out many of their banks. This emphasised another issue which regulators have to face due to

Private banking industry has changed in a very basic way, driven by many key factors such as: free competition systems, modern developments in information technology (in particular, developments of the internet), and changing demographics. Private banks now operate in an environment shaped by increasing and shifting regulations, and in markets influenced by the uncontrolled situations of the world economy and geopolitical issues.