Magoosh GRE

Evaluating the dynamic nature of bank regulation during and after the crisis in the UK?

| March 7, 2015

Introduction

The recent global financial crisis has been the largest of its kind for decades. This crisis will continue to have significant consequences for years to come. While the crisis originated in the USA, it also had a significant and distinct impact upon the UK (Forrest and Yip, 2011), and this paper will concentrate on the latter, to assess the dynamic nature of financial services regulation in the UK by considering the potential role played by regulation during the recent 2008/2009 banks’ failure. The paper will not only evaluate the regulatory framework existing at the time, but also current and future regulatory frameworks will be evaluated with a focus on the Financial Services Authority in the UK. The nature of the financial crisis and its consequences for regulation caused the global credit crisis to dominate much of the thinking of world leaders in recent years including the 2010 G-20 Summit in Canada. Given the scale of taxpayers’ money required to shore up banks’ balance sheets, it is understandable that governments seek to reassure their electorates that lessons have been learned. Stronger regulation is seen as a visible means of proving this point. This is why the banking system is currently experiencing an unprecedented phase of regulatory transition. In particular, the usefulness of a dynamic model of bank regulation, which is able to respond to crises such as the recent one, will be considered. The UK banking market is dynamic in nature (Tyrie 2011), and a model which is sensitive to this fluidity seems intuitively useful. The positives and negatives of a dynamic approach will be considered. In addition, conclusions will be made critiquing some current regulations and suggesting areas for improvement.

Research Questions:

The overall aim is to look at the usefulness of different models of bank regulation with reference to the financial crisis in recent years. This involves investigating the nature of the regulatory framework for banks at the time of the crisis, and uncovering different possible models of bank regulation, with particular reference to models including dynamism. The overall aim generates research questions as follows:

Which of the theoretical models of bank regulation were in operation at the time of, during and after the crisis? How did/do these models impact upon the crisis?

Why did the existing regulatory framework fail to avert the bank’s failure, and what changes should be made in order that a crisis of this scale and nature be avoided in future?

Methodology

The study will take the form of a literature review, using secondary sources. The pace of change in the financial regulatory industry implies that there is relatively little information available in textbooks. Therefore my research is mainly based upon statutes and recent academic papers. I will examine codes in order to assess the future role of banks in light of the proposals made by the Basel III Accord. Academic journal articles related to the Financial Regulatory Industry will be sourced through university library access and also through online databases. A number of keywords will be used to facilitate the search, including ‘financial crisis’, ‘global financial crisis’, ‘Northern Rock’, ‘economic downturn’, ‘credit crunch’, and similar, alone and in combination. Journals and textbooks will primarily date from 2007 and later, however in order to understand the wider economic context and draw up a relevant theoretical framework I will also consider text books from earlier dates. I will critically evaluate theoretical models of financial regulation, and use these as a framework to discuss the recent financial crisis and its management. I will present those theories and concepts that, in my opinion, caused the banks’ failure. I will look at the notion of dynamism in bank regulation and assess whether it is a useful tool for avoiding crisis on this scale. I will be critically evaluating the previous regulatory framework in light of the failures. This will help to reaffirm the current unprecedented need to overhaul the industry’s regulatory framework.

Sources
Journals and Articles

1. Mcdonnell B, (2008) “Financial Regulation After the Storm: Heavy Hand after a Light Touch”, Journal of International Banking and Financial Law 10 519

4. Demirgüç-Kunt A & Detragiache E, (2002) “Does Deposit Insurance Increase Banking System Stability? An Empirical Investigation, Journal of Monetary Economics Volume 49, Issue 7 1373-1406

5. Smithers A, (2008) “Why Banks Regulatory Capital Requirements Need to be Raised”, Journal of International Banking and Finance Law” 83

Varotto, S (2011) “”Liquidity Risk, Credit Risk, Market Risk and Bank Capital” International Journal of Managerial Finance 7:2, 134-152.

Gupta, A (2010) “Financial crisis enforcing global banking reforms” Business Strategy Series, 11:5, 286-294.

Allen, F (2005) “Modelling Financial Instability”, National Institute Economic Review, 57-67.

Dahl, D (2010) “Does flexibility hinder financial regulation? The case of CRA enforcement in the USA”,
Journal of Financial Regulation and Compliance, 18:3, 193-200

Brammertz, W (2010) “Risk and regulation”, Journal of Financial Regulation and Compliance, 18:1, 46 – 55

Official Reports

1. The Supervision of Northern Rock: A Lessons Learned Review Report, Financial Services Authority Internal Audit Division, March 2008

2. Tyrie, A (2011) Competition and choice in retail banking: ninth report of session 2010-11, Vol. 2: Oral and written evidence (House of Commons papers), London: The Stationery Office.

3. McFell, J (2009) “ Banking crisis: regulation and supervision, fourteenth report of session 2008-09, report, together with formal minutes, oral and written evidence” (House of Commons Papers), London: The Stationery Office.

Statutory Instruments

1. Financial Services and Markets Act 2000

2. Banking Act 2009

3. Financial Services Act 2010

4. The Bank Insolvency (England and Wales) (Amendment) Rules 2010

Books

Barth, J R, Caprio G, Jnr & Levine R. (2005) Rethinking Bank Regulation: Till Angels Govern Cambridge University Press.

Burton, M and Brown, B (2009) “The Financial System and the Economy: Principles of Money and Banking (5th edn.)” NY: ME Sharpe.

Burton, M, Nesiba, R and Brown, B (2009) “An Introduction to Financial Markets and Institutions” NY: M E Sharpe

Busch, A (2009) “Banking regulation and globalization”, Oxford: OUP.
Davies, H and Green, D (2010) “Banking on the future: the fall and rise of central banking”, USA: Princeton University Press

Cranston R, (2005) “Principles of Banking Law” Second Edition, Oxford University Press

Davies, H (2010) “The Financial Crisis”, Bristol:Polity

Davies, H and Green, D (2010) “Banking on the future: the fall and rise of central banking”, USA: Princeton University Press

Davis, S (2011) “Effective Bank Regulation and Supervision: Lessons from the Financial Crisis”, Searching Finance Ltd.

Dewatripont, M, Rochet, J-C and Tirole, J (2010) “Balancing the Banks: Global Lessons from the Financial Crisis” USA: Princeton University Press.

Forrest, R and Yip, N M (2011) “Housing Markets and the Global Financial Crisis: The Uneven Impact on Households”, Cheltenham, Glos. Edward Elgar Publishing

Freixas, X. & Rochet, J (2008) “Microeconomics of Banking”, Cambridge, MA: Mit Press

Green, C J (2011) “Financial Crisis and the Regulation of Finance”, Cheltenham, Glos: Edward Elgar Publishing.

Hubbard, R G (2008) “Money, the financial system, and the economy (6th edn.), Pearson / Addison-Wesley.

Websites

http://www.bis.org/bcbs/

http://www.fsa.gov.uk/ policy documents

Category: Essay & Dissertation Samples, Finance Essay Examples, Research Proposal Examples