Describe about A New Database of Financial Reforms?
The global financial system continues to be buoyed by the risk appetite of the investor. The volatility of the financial markets affects the economic growth of the country. The failure of the financial market provides a rationale for the government intervention. The paper has tried to understand the rationale behind the intervention of the Government for the stability of the financial markets. The paper has identified the major market failures. The success of the Government intervention in the financial markets has been mixed (Szafarz, n.d.).
The study on the Government intervention is important. It will help to identify the rationale behind the Government intervention. The regulatory mechanism applied by the Government can be studied. The role of Government in era of financial innovation is important. It will help to determine the success factors of the financial innovation. The role of Government is the success can be identified (Worldfinance.com, 2015).
The paper analyses the significance of Government intervention to stabilize the financial market. The paper will identify the role played by the Government in the era of financial innovation. The various pressures on the financial organizations while reporting in the financial statements will be analyzed. It will also identify the role played by the Government during financial debacle. The positive and negative aspects of intervention of the Government will be analyzed in the paper.
The role of the Government in the financial market has been a long standing debate. The major areas of debate are as follows –
The modern capitalist form of society is marked by phenomena of financial crisis and economic recessions. The decisions taken by the banks are not enough to control the financial debacles. The costs that are associated with the collapse of the savings and the loan association in United States can be considered as big financial debacles. The financial problems have extended from United States to Japan. It has also spread across number of European countries. It is also spread across number of developing countries across the globe. Thus in order to resolve the issues and bring financial stability in the country, intervention of the Government has become mandatory.
There have been important financial innovations in the past decade. This has led to the introduction and development of new institutions and new technologies. The capital markets have developed them in order to be a hallmark of the developed economy.
Deregulation has been a dominant theme in the economic policy of the countries. It is also seen in the financial markets. The major reason behind the deregulation is to liberalize the financial markets. But there has been debate regarding the basis behind the liberalization of the financial market. It has been said that neither the economic policy , nor the government intervention has been the major reason behind liberalization of the financial market.
The existence of market failure need not justify the government intervention. Since the financial markets are complex, the regulators of the financial markets are bestowed with variety of problems. Failure of the policies of the Government is seen in the United States savings and loan debacle (Dwyer, 2005).
The impact of global recession in Australia has been less severe than the OECD countries. The financial sector has been protected by the limited negative impact of the financial crisis on the economy. The role of the Government plays a major role to combat such a financial debacle. The monetary and fiscal policies by the Government have been developed in response to the crisis. There has been positive growth in the economy of the country by 0.5% every year aftermath the financial crisis (Federalreserve.gov, 2015). This has outperformed most of the OECD countries. The intervention of the Government policies has resulted in robust growth of the labor income and payments. It was a part of the fiscal stimulus package of the Government. In response to the financial crisis the monetary policy by the Government has provided a significant boost to the balance sheet of the households. In the early 2009, Australia has benefitted from the positive contribution from the foreign trade (Lensberg, Schenk-Hoppé & Ladley, 2015). This has been possible as a result of imports from China. Unlike the OECD countries, the profitability of the banks was not affected by the financial crisis. The policy response of the Reserve Bank and the Federal Government has helped to protect the financial system of the country. The prudential regulation from RBA with the creation of the Australian Prudential Regulation Authority (APRA) in the year 1998 regulated the financial sector of the country. The regulators of the financial market responded to the recent crisis in a prudent manner. The increase in the nervousness of the financial market was regulated by the intervention of the Federal Government (Hao & Lu, n.d.).
The competition in the Australian Banking sector is healthy. The concentration of the housing loans in the country has increased (Zarutskie, n.d.). The market is still competitive as the non Australian banks comprise 30% of the business credit and the competition is considered to be a healthy alternative. However in order to boost the economy, competition has been reinforced in the mortgage market. The Government has extended its investment in the residential and mortgage backed securities (RMBS) in order to support the small lenders (Singh & LaBrosse, n.d.).
The Australian Government has introduced measures that will favor stability as well as competition in the economy. The efficient financial system will be able to promote the growth and standard of living. On the other hand the competition policy has been introduced in order to encourage innovation and efficiency. RBA has undertaken long standing measures to prmote the financial stability of the economy (Hauge, Löfström & Mellegård, 2014). The APRA has been developed to taken systemic review of the financial position of the economy while conducting its prudential regulation. The systemic risks are minimized by the clearing and systems of settlement. The treasury is responsible for advising the Government on the issues of financial stability. The regulatory systems in Australia have “instrument independence”. They have the freedom to exercise their responsibilities so that the goal of the Government can be met in an efficient manner and a stable financial system can be restored. This will support the growth of the economy. The independence of the financial system requires the explicit support from the Government which is critical to ensure the effectiveness of the financial regulators (‘Government failure versus market failure: microeconomics policy research and government performance’, 2007).
The extent to which the competition policy can be applied in the financial sector remains unclear. But the attitude towards the competition in the banking has changed dramatically. The mergers in United States are under constant review of the Government. But the intervention of the Government is liberal than it is visible in other countries. The mergers are assessed by the Government on the basis of the relevant regulator (Kettl, 2000). The implementation of competition policy in the banking sector in Europe has strengthened substantially. In Canada it is seen that the merger of the financial institution will be exempted from the control of merger if the Minister of Finance certifies that the merger will be in the best interest of the financial system of Canada. Similarly in Switzerland, the competition authority may be replaced and a possible merger of the bank will be approved if it becomes a necessity to protect the interest of the creditors (Chen & Findlay, 2003). In the financial sectors, the Governments are under constant pressure to support the industries in order to favor the economic recovery (Financial Stability Review, 2014).
One of the policy intervention mechanism by the Government has been in the form of guarantee arrangements is some parts of the financial sector. The fiscal outlays for such type of arrangements are less. There will not be a rise in the fiscal costs even if the coverage of the risks does not materialize. Conscious policies were introduced by some countries in order to form a firewall into the financial system. This was done to prevent the real shocks in the economy. In this context it was suggested by Wylie (2009) that Australia and United States can be considered as opposite ends of the spectrum in the policy use of guarantees to address the financial policy objectives. The domestic financial market of United States has been benefitted from the government supported guarantee arrangements for the depositors and the pension fund beneficiaries. On the other hand, Australia did not have any insurance on deposit prior to the financial crisis. The sense of complacency has been potentially harmful among the beneficiaries. The role of guarantee arrangements has been reassessed by the Government aftermath the global financial crisis. The Government has introduced certain measures to maintain the investor and consumer confidence in the system. In the year 2010, the European commission has launched a public consultation regarding the methods for the improvement of the protection for the insurance policy holders. It was stated that the policies would be implemented in all the member states (Hanazaki, 2000).
Recapitalization
The selling of the Government stakes in the market place has negative impact on the equity markets. The financial position for the banks could be improved by repayment from the recapitalized banks. This was demonstrated by United States where the banks had welcomed the repayment of the Troubled Assets Recovery Plan funds by the various financial institutions.
Purchase of assets by the Government
There are several cases where the Government has purchased assets which are impaired and illiquid. This is done mostly to help the bank to clear their balance sheet. The impaired assets can be sold by the banks in the market or it could be held by the Government until their expiry. In such cases the role of the Government is to raise highest possible return by efficient management of the asset. Inefficient management of the assets could be potential cost to the Government. It largely depends on the price to which the assets are sold in the market (Claessens, 2006).
Government intervention affects Global trade
The international trade is affected by the interventionist Government. Free market regulation is beneficial for the countries like America and Europe. Excessive pressure on the banking system has adverse impact on the banking system of the countries. But it was argued by Friedman that the market has to be free so that it can operate freely. But intervention of the Government introduces political intervention which results in poor performance of the financial markets. According to him free market is the best way in which an economy can run. There is no exchange takes place and both the parties are benefitted (Goldstein, Kaminsky & Reinhart, 2000).
Failure of Government strategies
Many Governments have been reluctant to sanction high level of funds. They had taken the initiative foreseeing better opportunities for the growth in the investment from the private sector. The Government had undertaken the measure in order to take advantage of the better business environment by using skilled work force. There has been a cutback in the public spending and the stability of the debt levels has been achieved by the measures taken by Government of Britain and Germany. But the strategies implemented by the Government gave rise to mixed results (Abiad, Detragiache & Tressel, 2009). The growth in UK stalled and there was double dip recession in the country. The Government was forced to cutback expenditure (Mason, 2009).
Conclusion
The paper has identified the positive and negative aspect of the Government intervention on the financial markets. The intervention of the Government in the financial market of Australia has been successful in recovery of the economy from the financial crisis. The recovery of the Australian economy was faster than the OECD countries. This is due to the policies implemented by the Government for the financial stability. The competition policy of the Government has driven the growth of the economy. Other country like United States, Europe and Asian market has been able to recover from the financial turmoil as a result of government intervention. But the intervention of the Government has posed threat to the economy. The purchase of illiquid assets has resulted in poor growth of the banking sector. The intervention of the Government in the financial market has also been a result of political pressure. This has resulted in instability of the financial markets. But the Government intervention by formulating certain policies has been beneficial to stabilize the economy from the financial debacles of recession. The disdain of the financial market could be controlled to a considerable extent by the measures implemented by the Government.
References
Abiad, A., Detragiache, E., & Tressel, T. (2009). A New Database of Financial Reforms. IMF Staff Pap, 57(2), 281-302. doi:10.1057/imfsp.2009.23
Chen, C., & Findlay, C. (2003). A Review of Cross-border Mergers and Acquisitions in APEC. Asian-Pac Econ Lit, 17(2), 14-38. doi:10.1046/j.1467-8411.2003.00129.x
Claessens, S. (2006). Access to Financial Services: A Review of the Issues and Public Policy Objectives. The World Bank Research Observer, 21(2), 207-240. doi:10.1093/wbro/lkl004
Dwyer, G. (2005). Introduction to the journal of financial stability issue on regulation and financial stability. Journal Of Financial Stability, 1(3), 275-278. doi:10.1016/j.jfs.2005.02.001
Federalreserve.gov,. (2015). FRB: Speech with Slideshow–Powell, Financial Institutions, Financial Markets, and Financial Stability–February 18, 2015. Retrieved 19 March 2015, from https://www.federalreserve.gov/newsevents/speech/powell20150218a.htm
Financial Stability Review. (2014) (1st ed., pp. 1-20).
Goldstein, M., Kaminsky, G., & Reinhart, C. (2000). Assessing financial vulnerability. Washington, D.C.: Institute for International Economics.
Government failure versus market failure: microeconomics policy research and government performance. (2007). Choice Reviews Online, 44(09), 44-5165-44-5165. doi:10.5860/choice.44-5165
Hanazaki, M. (2000). Is Japan’s financial system efficient?. Oxford Review Of Economic Policy, 16(2), 61-73. doi:10.1093/oxrep/16.2.61
Hao, Y., & Lu, J. The Impact of Government Intervention on Corporate Investment Allocation and Efficiency: Evidence from China. SSRN Journal. doi:10.2139/ssrn.2512351
Hauge, Å., Löfström, E., & Mellegård, S. (2014). How to Maximize the Chances of Sustainable Renovation in Housing Cooperatives. Energy Procedia, 58, 193-198. doi:10.1016/j.egypro.2014.10.428
Kettl, D. (2000). The Transformation of Governance: Globalization, Devolution, and the Role of Government. Public Administration Review, 60(6), 488-497. doi:10.1111/0033-3352.00112
Lensberg, T., Schenk-Hoppé, K., & Ladley, D. (2015). Costs and benefits of financial regulation: Short-selling bans and transaction taxes. Journal Of Banking & Finance, 51, 103-118. doi:10.1016/j.jbankfin.2014.10.014
Mason, C. (2009). Public Policy Support for the Informal Venture Capital Market in Europe: A Critical Review. International Small Business Journal, 27(5), 536-556. doi:10.1177/0266242609338754
Singh, D., & LaBrosse, J. Developing a Framework for Effective Financial Crisis Management. SSRN Journal. doi:10.2139/ssrn.2001978
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Zarutskie, R. Competition, Financial Innovation and Specialization in Credit Markets. SSRN Journal. doi:10.2139/ssrn.1364196
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