The banking industry has over the years evolved from simple to large and complex organization. They have grown from one street building into having multiple branches some of which are international. Their clients range from individual and institutions to governments and other banks. Banks do not manufacture physical things. Their work is simply services for money (Koch & MacDonald 2010). Such services include storing, lending and managing money. All people and institutions, as well as governments, need money to operate accordingly.
UK government had to take the responsibility as a salvation for this huge economic damage. Therefore in 2008, ‘The Banking Bill’ was first taken into account by the House of Commons, aim of which is to protect UK banks from continuously the depositors’ safety. (The Banking Bill 2008)
Banking regulation and legislation is a complex web, sometimes deeply political and issue ridden. Recently, in 2016 we have seen a push by the Labour government for a royal commission to be launched into the banks. The liberal government maintains that there is no need for a Royal Commission into the banking industry because the Australian Securities and Investments
Morrison suggests that government should try to make regulations that can make TBTF policy effective rather than, try to end the policy, which is impossible. Morrison discusses the role of the policy in designing suitable capital regulations, in the restriction of bank scope and in institutional design. The author argues that financial institutions receive help from taxpayers and government because regulatory authorities believe that its failure would have severe effects on the country’s economy.
Along with the greater profitability restrictions imposed on banks from the Dodd Frank comes the banks will for greater cost management, meaning job cuts. Already the Banks have begun laying employees off from burdening restrictions leading to this brutal method of retaining necessary capital needed for operations ("Wall Street Journal"). The bigger the bank, the greater resentment they have over this act. Their financial statements will have to retain a greater amount of compliance and transparency as well. Because of the large prominence of “shadow banking” and the concealed balance sheet elements that came along with this practice, the banks now are imposed with greater regulation to prevent these stealthy tactics of borrowing and investing. These restrictions, in my belief, will provide greater protection to the consumer but will also provoke institutions to begin innovating financial instruments to get around barriers, just as they did in the past with interstate banking and early consolidated services even before Glass-Steagalls act. The bankers oppose the act due to their cut in profits. Reduced outlets in revenue from specific revenue generating activities have been capped and larger expenses in order to comply with the new rules have also greatly cut profitability. The same notion is held with brokers. Because of the greater compliance costs served
Investment Banking is now at a crucial junction, where Investment and Commercial Banking are splitting up due to the ring fence which is being built around these two banking areas. As well, the new upcoming regulation, Basel III, will have a huge impact in the investment banks, with higher liquidity and capital requirements, in order to increase solvency and stability in financial industries.
The Financial Services Act of 2012 in the UK came into force in 2013 on 1st April. This Act has the government reforms on the financial regulatory structure in the UK. The Act gives the new guidelines on the management of the banking sector and other supervisory roles in the financial services sector. This Act bestowed the oversight role to the Bank of England which is therefore expected to be responsible for the occurrences in the financial system and how the financial institutions manage their balance-sheet risks. This Act also stipulates that three more bodies are to be formed to assist in managing this sector. These bodies include the Financial Policy Committee (FPC), Prudential Regulatory Authority (PRA) and Financial Conduct Authority (FCA). This Act affects significantly the two previous Acts which have been running the sector. These are the Financial Services and Markets Act of 2000 and the Bank of England Act of 1998. In this paper, the Act is clearly analyzed and mostly the effects it has on the Financial Regulatory Regime in the UK (Noked 2013). The economy of the UK has been following a laissez-faire system since 1979 (Allan and Stuart 2011)
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
The proposal currently has nine Republican signatures and nine Democrat, which means that it has enough to clear both the banking panel and the Senate if all Republicans agree with it. There has been some strong opposition again the legislation as Ohio Senator Sherrod Brown says, “it would do little to help working families”. However, Senator Crapo believes that this is the first proposal with a genuine chance of making it to the president. The authors conclude the article with two statements, the first explains that banks with assets between $50-$100 billion would be immediately exempt, and banks between $100-$250 could be exempt after 18 months. The second statement was from an analyst at Evercore ISI saying that he wasn’t sure if these regulation changes would result in cost savings because banks have been viewing them as sunk costs.
Under this rule, banks are once again limited to the type of trading they can conduct and it prohibits them from trading and speculating activities (Tracy, Ackerman). I tend to side with the critics of this rule and as it hinders a bank’s ability to benefit from available opportunities. Through this provision, we have taken a direction towards the Glass-Steagall Act where banks were forced to separate their investment and commercial segments (Investopedia). Within this provision, it also prevents banks from investing in hedge funds. By eliminating a whole class of investments, I believe this rule is too overpowering without adequate evidence to back up this claim. While some hedge funds have been cited for taking too many risky tactics, there are also a lot of hedge funds who do an exceptional job hedging out risk and eliminating large losses. As we found in our research for our presentation, hedge funds can provide many diversification benefits if properly used and can oftentimes avoid the heavy losses associated with a market collapse. Therefore, I do not believe there is a sound basis to restricting an entire class from banks to choose from. I also agree with House Representative Jeb Hensarling from Texas who argues that these rules should be scrapped in favor of a higher capital requirement (Tracy, Ackerman). I believe this would be an easier policy to implement and less costly to regulate while also allowing banks more freedom to pursue profitable
The reality of systemic risk made the task of regulating the financial system increasingly complicated, as the crises aren’t contained in one country or market. The extreme inter-dependence between the different agents is the main reason why we need regulation today, as some misconducts can cause a domino effect, affecting markets globally. The structure of the banking system in itself explains this process. In the finance industry, banks borrow money from other banks. If one bank fails, the one who lent the funds in the first place might also follow the same path, creating panic in the markets. The government’s first prerogative is to protect its citizens from these
As their name suggests, they only execute their operations online. Customers can only be in contact with their money over the internet since they do not have any physical branches. Because online-only banks require lower overhead costs, they have the capability to offer more free services and higher interest rates compared to a traditional bank. Online banking provides many customers the convenience of handling their business at any physical location as long as they have access to internet. This is possible because of the variety of services that online banks provide despite limiting interaction to only the internet. Some of their services include applying for loans online, transferring funds and paying bills online. While the convenience of being able to access banking through the internet is worthwhile, there are limits to it. For example, making large deposits to the bank is limited and can only be made through the mail, they don’t service cashier checks for transactions, and withdrawing money from the account is very inconvenient. Luckily, the role of the internet in financial transactions is becoming increasingly prominent so that spending money online is more accessible, but it is important to understand both the benefits as well as restraints of online banking. Nowadays, many large brick-and-mortar banks have caught on and provide some online services in attempts to
According to the most recent Federal Reserve study; most of us haven’t set foot in a banking hall in ages. It is a lost battle to banks that opt to use traditional methods to conduct their banking transactions (Gup 2003). By December of last year, close to half of all smartphone users in the United States had transacted some or all of their banking on their phones and iPhones. In the United Kingdom alone, rates of mobile banking transactions doubled over the course of a single year (Scn Education 2001). A banking business that invests in this type of technology gets assured of increasing their customer base.