“It was necessary to dismantle the Financial Services Authority after the global financial crisis in order to make way for a regulatory structure that is more comprehensive and delivers clearer objectives.” Critically discuss.
Financial institutions are governed by rules and regulations which are set by the Financial Services Authority under the corporate governance of the banking system. Corporate governance in the banking system intends to offer protection to all stakeholders who in most cases cannot influence decision making. Efficient and effective mobilization and allocation of funds will economically decrease the cost of capital hence more capital formation and productivity. Therefore, in cases where corporate banking is poorly governed a negative effect will be felt in the economy in terms of developments. This creates the essence of having the FSA whose aim of setting standards for the financial institutions is to prevent and forecast financial crisis likely to occur in future.
It is important, therefore, that the corporate governance of the banking system be made stronger and more comprehensive to be more effective. Dismantling of the FSA after a financial crisis enables expansion of guidelines on the roles and duties of the supervisors who ensure that effective implementations are made on the risk management. Furthermore, it will give a guideline to the bank supervisors will selecting the management which could further change the means of management from the previous one which did not prevent the financial crisis from occurring.
Furthermore, a good corporate governance could have been in a position to prevent or control the effects of a financial crisis that occurred globally. Due to the losses that were experienced it was necessary to dismantle the financial service authority in order to make better regulatory structures. This would increase the performance of the banking institutions, quick accessibility of the external financing which is affordable, as well as less cost of capital which will ensure economic growth and financial stability. This is because corporate governance has a direct effect on the developments of the capital market and the protection of investors. Comprehensive and better regulations will help find investment and expansion funds in the system hence developments.
Financial service authority regulatory body was a name given to the securities and investment board in 1997. The major role of the regulatory body was to supervise the trade of shares as well as the future of United Kingdom. In the year 2007-2008 the occurrence of financial crisis led to the abolishment if the FSA for restructuring. The abolishment led to the creation of two agencies which could responsibilities and they were the Financial Conduct Authority and the Prudential Regulation Authority. Regulation of the financial institution in most cases is a difficult task thus requires a high profile duty. Therefore, it is important that a country is governed by regulatory regimes capable to maintain the financial sector healthy and stable. [1] This is because financial institutions offer services of payment as well as funding which form the focal point of economic development. Changes in the regulatory systems in the financial sector are prone to change due to several financial crisis occurrences which caused a lot of harm to the country. For instance, United Kingdom’s economy suffered to a point where the government bailed out two large financial group while some other small banks were closed. [2] Thus a decline in the economic growth of the country which could not be the cause is better measured had been taken to avoid and control the financial crisis.[3]
After a financial crisis in the financial system, it is important the institutions in the banking industry make it up to their investors and customer. It is through the dismantling of the FSA that they could realize the essence of upholding their trust to the public and show their ability to protect the depositor. A critically analyzed bank regulatory structure will give guidelines that will ensure transparency, better risk assessment and evaluation, mitigation means as well as enough capital support in the system.
This has led to the criticism of the Financial Services Authority for failure to give predictions of financial crisis in time and prevent incurring huge losses in the banking industry. Financial Services Authority commonly abbreviated as the FSA is a non- governmental body that operates independently to manage and regulate the financial service industry in a country. The regulatory body is made up of a chairperson, a chief executive officer, a chief operating officer, nine non-executive directors and two managing directors. Its major role is to sets standards upon which financial institutions should meet and thus responsible for taking any action against the firms that fail to meet the standards.
Furthermore, the goals of the service are to maintain the public confidence in the financial system available in the country, harnessing the public understanding on the financial system they use, provide protection to the consumer as well as ensure that criminal business practices such as fraud are reduced. [4] It is important to note that the FSA is subjected to make reports of accountability to the political class as well as the accountability to the public in the country. The reports reflect on how well the goals set were met as verified by the national parliament. Objectives of the regulatory body are to help carry out the general role of establishing rules, giving guidance as well as determining the appropriate policies and principle that should be used for its success. Moreover, FSA is legally bound hence it should give a correct interpretation of the objectives in case of any judicial reviews to show its efficiency. [5]
To respond to the current occurrences of the financial crisis, a body responsible in the setting of the standards that should be met together with the national authorities have started a wide overhaul pertaining the regulatory framework. This makes an important contribution to making the regulations stronger as well as enhancing the resilience of the financial institutions. Reforms in the regulatory services have proven that they cannot alone provide a sound solution in making the financial system stable. There must be a regulatory structure that is more comprehensive and at the same time delivers clearer objectives and goals. In the past, the course of action to avoid and prevent the financial crisis was through increased capital requirements and increasing the liquidity of assets in the institution which is not as effective to stop losses form financial crisis. [6]
Criticism of Financial Service Authority
It is in rare cases that financial institutions took a wide range of implication cases in the past. The regulatory body failed to take corrective measures when a high population of consumers issued complains about the bank charges as well as the payment protection insurance to the service authority. [7] It was expected that after the problem was identified the FSA could take some effective measures on few firms which were not the case thus not meeting the expected duty and role obligated them. However, it was another institution that took the huge role in the case of bank charges. [8] In an internal report by the FSA, they recognized themselves as inadequate to serve the customer confidence which had collapsed due to the previous crisis. To provide the solution to the inadequacy the FSA was to consider allowing delays in revealing the financial difficulties of the bank to the public. Such failures in the regulations and rules should be controlled and strict measures taken in creating another regulatory body. [9]
FSA principles necessitating dismantling
FSA is built based on some basic principles that guide it through the performance of its roles and duties in regulating financial institutions. The principles were enabled to ensure better services when discharging their roles and duties in the financial system. [10] The principles include the efficient and economic use of the available resource, management of banking firms in the industry, limits to control over the firms as well as an equal proportion of the benefits to the restrictions in place. It was required that the system be efficient and economical in the use of the available resources in the economy. Resources in a country could be exhaustible or non-exhaustible creating the need for proper use of them to ensure maximum utility of the resources. [11] The management of the firms should ensure that the activities undertaken meet the regulations put in place by the financial institutions. Secondly, principle draws a boundary on how far the FSA can control the firm as well as roles a management should take. The importance of the principle is to ensure that activities are closely monitored and controlled.
The global economy is faced with the financial crisis challenges that seem to be increasing over the past decades. Financial institutions have collapsed while others have received recovery funding from the government. Due to such failures, the credit market will definitely collapse hence the banking sector becomes a risky place for investors as well as the consumer. As banking institution try to enhance the confidence of its customers they come up with short-term solutions which have failed in time. During such times in the economy, rates of unemployment increases and failure in businesses cannot be avoided in any way. The only recovery solution at this time and crisis is the banking stability. [12]
Banking stability can be achieved with several remedies as well as more measures which are required to restore the confidence of customers. It is important to note that consumption of the banking services is the huge providers of financial stability hence a highly considered. Nonetheless, critical factors to consider when establishing a new system depends on the analysis done by an individual when identifying the cause of the previous disaster. It is correct to infer that strong and better regulation, as well as the oversight, could bring to an end future financial crisis. However, none of the regulations could completely address financial crisis thus calling for the creation of more comprehensive and an object-oriented regulatory system in the banking sector. [13]
Several critical objectives should be included in the reforms with an aim of establishing better regulatory services in the industry. They include effectiveness and sensibility of the regulations to reduce the system risk, the stability of the market and protection of investors through the increased disclosure, improved transparency with a clear level of accountability, as well as having an international plan where regulatory systems are harmonized and brought together in cooperation. [14]
importance of a more comprehensive bank regulatory structure
It is clear that the global financial crisis is due to the shortcomings of the policies implemented in the financial institutions and the regulatory. Some of the shortcomings include inadequacy. I believe that the main cause of poor public policy making is the occurrence of a disaster. This is because the policymakers, in this case, are responding to the disaster in a thoughtful manner hurriedly to avoid the blame for the previously made policy. It is during the financial crisis that the some of the financial markets are closed due to drops in the economic growth rates. [15] Moreover, it is due to the financial crisis that the economic environment has become gloomy with less housing markets in place to an extent it could cause an economy to enter into a recession unknowingly. The income disposable to the consumers decreases hence the inability to afford better housing facilities in the country. In economics, demand for goods and commodities will decline as the prices increases. This gives a sign that the future of the financial system is not certain. Thus the need for a more comprehensive regulatory system in the banking system.
Structuring a comprehensive bank regulatory system
It was important that the banking regulatory system was dismantled after the global financial crisis in order to make way for a regulatory structure that is more comprehensive and delivers clearer objectives. The new bodies included the Financial Conduct Authorities (FCA) and the Prudential Regulation Authority (PRA). The objectives of these bodies were more comprehensive compared to those of the FSA. The bodies were to respond separately to the needs of a stronger banking regulatory system. The judgment by the PRA is to make sure the banking firms are safe and sound for investors, assess and evaluate risks in the present and more importantly in future and lastly focus more on those risks that pose greater risks. Thus, it was important to dismantle the FSA after the financial crisis. The international policy responses to the crisis include some key areas of regulatory reforms. [16] First, the agenda to dismantle the financial service authority should be purposed to address the risk posed to the financial institutions by making the prudential regulatory setting standards. [17] The financial crisis has shown that financial institutions such as the banks did not have enough reserve requirement for the risk they took.[18] Although the banks meet the minimum reserve requirement before, at the time and after the crisis it was not enough to cover for the losses experienced. In several banks, there was an increased reliance on financing that was a short-term which leads to the increased mismatch maturity in the financial institutions which ten led to the crisis. [19] In Australia, financial crisis impacts were felt although the regulatory authority was using a very conservative practice. With the practices, the banks were required that they met more of its capital requirements through the common equity and at the same time subtract instruments that are not capable of absorbing the losses. Therefore, stronger reforms should be taken to help make the regulations, risk management practices, as well as the observation of the measures in the financial systems, are observed. [20]
Secondly, the reform should address the capability of the bank system to withstand the losses it may experience. [21] The minimum ratios that were previously available should be raised to a point where the capital could be defined in strict terms so that they perform the role as instruments that absorb the losses experienced. This is a means through which the banks’ liquidity is highly managed through the liquidity coverage ratios which should be established. These coverage ratios require that the banks should hold enough cash convertible assets that are in a position to stand in during the time of funding stress in the economy. This would, therefore, plays as a solution to issue that cause financial crisis in the country.[22]
The financial service authority used by the institutions should be based on the approach of the whole financial system as a whole. The financial crisis in most cases will occur due to failure to follow the required paths. For example, firms in the sector are encouraged to perform as many stress test on the risk models they use as possible but they end up conducting just a few. The Financial Conduct Authority and the Prudential Regulation Authority bodies were to ensure that all the firms in the industry meet the already identified safe stress test to ensure that all the firms evade the losses. This could help the regulatory achieve the major objective which is reducing the housing pricing caused by the financial crisis in the country. This is only possible through the dismantling the FSA so as to make changes in the structuring and the management of the regulatory. [23]
Policies in the newly found regulatory were to ensure that the institutions are additionally bound to raise a reserve that is higher from the previous one during the economic booming times so that it is used during the tough economic periods. [24] Dismantling is the only possible means through which changes can be made because the rules of determining the reserves are different as compared to those used currently by the financial system. [25] The capital they reserve is a charge they pay for being in the financial industry which is different from the buffer expected to be used in the future in cases of financial crisis. The capital reserve the firms hold is required so that one is allowed to operate in the industry thus it cannot be used during a crisis. With such a policy in place then the banking system in an economy will remain standing even with a massive crisis. Furthermore, such a policy should be according to the financial accounting standards to be effective and acceptable. For example, the banking system in Spain has adopted the provision requirement which helped over the massive real-estate crisis. However, the policy here did not follow the required market- based financial accounting standards hence it should be dismantled.[26]
The new regulatory bodies purposed to align risks and uncertainties as well as individual rewards to prevent irresponsible risk taking and further the risk management systems. A common set standard should be used to deal with the risks in the system that cause the misuse of the credit markets derivatives. The common use of the custom-made over- the –counter (OTC) has rapidly increased the market complexity especially in the credit default which further increased by the complexity in the normative of writing a derivative on derivatives. Establishment of the standard contracts plays a great role in reducing the complexity experienced as well as facilitating the developments of a clearing mechanism. Therefore, the creation of a clear distinguished regulation standard for contracts will ensure a quick understanding which will reduce the downside risk of the system.
The present focus on the nature of banking institutions is also another reason as to where the financial service authority should be dismantled so that clear objectives are made. Financial Service Authority regulatory system was prone to view the banking system in different angles depending on the activities performed by the institution. For instance, commercial and investment banks are regulated differently concentrating more on the function and leaving out the hedge funds. High leveraged institutions should be targeted as it is an important step after dismantling the regulatory despite their legal status governing them. [27] The current financial service authority still views commercial banks as the most leveraged institutions which are not the case today. All the financial institutions are characterized by the leverage making it essential to have another more objective regulatory in the banking system. Furthermore, it is due to the leverage in the un-intervened financial system that a threat is posted on the market. It, therefore, creates the essence of moving from the currently institutional approach to the functional approach which is a critical component in the regulation of the financial system. [28]
It is essential that the short-term liabilities and those that are long-term should be distinguished through a new and clear system of banking. For instance, using the current mark- market accounting the perspective used in risk management is the current value accounting which majors on the asset. The assets are viewed on its liquidity as well as the intent of the holder to keep it until it is mature or sell it. However, in a financial crisis, the liquidity, as well as the intentions of the holder of the asset, will change rapidly. This creates the need to view the asset in the funding liquidity because the asset will be funded.[29]
In the financial service authority regulatory group there resides some knowledgeable information that is used in operating and structuring the banking institution as well as the markets for effective management of risk predicted. [30] However, the financial service authority does not have any duty in the system risk management. It is, therefore, critical that the new regulatory institution is responsible for the financial stability in the economy. It would take up the role of sharing the stability status of the banking sector as well as making sure that risk management becomes a priority. Furthermore, clear objectives on how markets and the system risk are to be bridged should be outlined in the new regulatory structure. [31]
Newly created regulations require that the financial industry fully complies with the strengthened financial service authority which will then be accepted by the investors as well as the customers in the country. More developments in the industry are brought into existence including intensification of reports obligations for the very important banks, increased and tight supervision as well as raised measures of safety.
Currently, the regulatory system has adopted the new technique of supervision which seem to have made the service strong. Through this, the accountability responsibility has been made clear and easier. Supervisors have made both internal and external accountability whenever the financial crisis hit the economy. Under the internal accountability, the decision-making processes made within the institution while the external accountability in the financial institutions involve the ability of the supervisors to explain to the government on the impact of the activities they have undertaken. For this reason, a well-defined accountability system will support independence in the operations which enhances transparency while they work on safeguarding the confidential information of the industry. [32]
Conclusion
Financial system in a country should be protected to maintain the confidence of investors as well as consumers of the banking services. In cases of financial crisis banking sector in the country is highly hurt which eventually hurts the economy at large. It is through the economic activities carried out with the help of the services form the banks that the economy grows. It is important, therefore, that the banking sector of the country is governed by a body that sets standards that should be met. The Financial Service Authority should be well defined to ensure that it meets the requirements necessary to prevent a financial crisis in a country. It is important that a financial service authority be dismantled after the occurrence of a financial. Critics find that the currently used financial service authority is nonfunctional without additional support. This is because in most instance the policies used at that time could not be applicable in the next financial crisis. Furthermore, supervision of the banking system is said to have some positive effects on reducing occurrences of a financial crisis. It increases the level of accountability to the banking institutions which could be effective in making a prediction of financial crisis thus enabling taking control measures. In addition, the banking system should improve its means of collecting the reserve requirement in that it covers for the period of crisis. [33] They should use the capital buffer system which will ensure that financial stability will be obtained after the occurrence of a financial crisis. This makes it clear that dismantling of the financial service authority will enhance the prevention of financial crisis and in its occurrences, the losses in the industry will be minimal.
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