This research will try to look at the following questions.
Did the old strong regulations help to prevent financial crises in the past?
Did the financial institutions misuse the deregulation?
Do the financial institutions need to be strongly regulated now?
What kinds of regulation are needed?
How to implement the new regulations?
What Consumer awareness of the FSA and financial regulation? (crpr57) (Crpr29)
How developments have challenged the regulatory system? (2.pdf- page 9)
What is Consumer Demand for Regulation? (op01- pages 32)
Impact of the current financial crisis on developing countries? (2462.pdf)
(6 )What measures have the UK government, Bank of England and the regulatory authorities taken to support the banks and the interbank lending market?
The UK Government, Bank of England and the regulatory authorities have taken a number of measures to support the banks and the interbank lending market during the current financial crisis. This is the chronological developments relating to one of the central pieces of this stability package.
Measures by UK Government
The following measures have been taken by the UK government:
Banking (Special Provisions) Act 2008. Under the Special Provisions Act 2008, HM Treasury had the authority to make an order to transfer to the public sector:
Securities issued by banks and building societies;
Rights, Property and liabilities of banks and building societies.
Maintaining the stability of the UK financial system in situation where the Treasury considered that there would be a serious hazard to its constancy if the order were not made.
Defending the public concern in situation where financial assistance had been provided by the Treasury to the related bank and building society for the purpose of maintaining the stability of the UK financial system.
Banking Act 2009. It was a largely came into force on 21 February 2009. It authenticate depositor defense and provides mechanisms for dealing with banks in financial complexity.
Bank recapitalisation scheme. This scheme provide the facility of capital:
UK incorporated banks which have a considerable business in the United Kingdom.
Building societies.
Credit guarantee scheme. For a provisional time only, the organization of a government assurance of new short and medium term debt issuance to support those financial institutions that have raised bank recapitalization scheme capital by an amount and in a form satisfactory to the government to refinance their comprehensive funding obligations.
Guarantee scheme for asset-backed securities. The government will issue a full or limited liquidity of qualified triple-A rated inhabited mortgage-backed securities backed by residential mortgages over properties in the UK meeting convinced procedure. Guarantees are offered to support issues by vehicles associated with those financial institutions that have bank recapitalization scheme capital by an amount and in a form satisfactory to the government.
Asset protection scheme. This scheme offers protection to competent institutions beside outstanding future credit victims on assets. Qualified institutions could apply to take part in the scheme until 31 March 2009. The Royal Bank of Scotland group and the Lloyds Banking group have conformity with the Treasury to participate in the scheme.
Developing effective resolution arrangements for failing investment banks. The government's discussion: increasing effectual declaration preparations for failing investment banks is looking at the bankruptcy measures for investment banks.
Development of profit participating deferred shares as tier 1 capital for building societies. The Financial Services Authority (FSA) (www.practicallaw.com/5-107-5761) has worked with the reserves to develop profit participating delayed shares to offer building societies more elasticity in their core bank recapitalization scheme capital. It has resolute that, in rule PPDS are competent of being treated as core bank recapitalization scheme capital. Until that time, the only source of core bank recapitalization scheme capital accessible to building societies under FSA system was treasury grown from internally generated profits. The preface of PPDS means that building societies, like banks, now have the option of raising core bank recapitalization scheme capital from exterior sources. A characteristic of PPDS is that they are supplementary loss-absorbing than some other capital instruments. This feature will recover the quality of building society capital and its going concern loss absorbency.
Measures by Bank of England
The following measures have been taken by the Bank of England:
Special liquidity scheme. It prepared available a special liquidity scheme to banks, which was accessible for drawdown until 30 January 2009.
Discount window facility. It has recognized a discount window facility according to discount window facility the banks are permitted to swap qualified collateral for UK government securities at any time. From 2nd February of 2009, appropriate institutions have been capable to make drawings for a term of 364 days, as well as in the past offered 30 days. This adjustment to the facility was made to guarantee the availability of long-standing liquidity for banks after shutting down of the special liquidity scheme.
Sterling and US dollar auctions. Up to such time as the market stabilizes, it will offer auctions to lend to banks sterling for three months, and US dollars for one week, against an absolute variety of collateral.
Asset purchase facility. The organization of an asset purchase facility to be accommodated by Bank of England Asset Purchase Fund Limited was announced on 19 January 2009. Since 2nd February of 2009, the Fund has been authorized by the government to purchase from banks, other financial institutions and financial markets "high quality private sector assets", with corporate bonds, commercial paper, syndicated loans, paper issued under the government's credit assurance system and assured asset-backed securities produced in "viable securitization structures". From 5th March of 2009, many variety of assets entitled for purchase by the Fund were broadened, for monetary policy purposes, UK gilts purchased in the secondary market. The Facility was originally endorsed to make purchases up to an amount of £50 billion but this limit was raised on 5th March 2009 to £150 billion (funded by central bank reserves), of which at least £50 billion was earmarked absolutely for the purchase of private sector assets. On 22 April 2009, the Chancellor wrote a letter to the Governor of the Bank of England for verifying the Facility would carry on from 2009 to 2010 financial year.
The bank of England on 8 June 2009 launched the consultation for extending the asset purchase facility by introducing a secured commercial paper facility and a supply chain finance facility.
http://corporate.practicallaw.com/9-383-6743#a510256
An efficient and effective financial services sector promotes economic
growth through the optimum allocation of financial capital. Achieving that
outcome rests primarily with the industry; however, in some cases the
market may not produce the most desirable outcomes and some form of
regulatory intervention is needed. In the United States, laws define the
roles and missions of the various regulators, which, to some extent, are
similar across the regulatory bodies. Regulators generally have three
objectives: (1) ensuring that institutions do not take on excessive risk; (2)
making sure that institutions conduct themselves in ways that limit
opportunities for fraud and abuse and provide consumers and investors
with accurate information and other protections that may not be provided
by the market; and (3) promoting financial stability by limiting the
opportunities for problems to spread from one institution to another.
However, laws and regulatory agency policies can set a greater priority on
some roles and missions than others. In addition, the goals and objectives
of the regulatory agencies have developed somewhat differently over time,
such that bank regulators generally focus on the safety and soundness of
banks, securities and futures regulators focus on market integrity and
investor protection, and insurance regulators focus on the ability of
insurance firms to meet their commitments to the insured.
What Consumer awareness of the FSA and financial regulation? (crpr57) (Crpr29)
Background
Consumers' knowledge of financial regulation varies enormously. It can range from
familiarity with some quite precise knowledge about what the FSA requires from firms and
the protections that are in place, to a more vague understanding that some form of 'watchdog'
safeguards consumer interests, or indeed no knowledge at all. It is obviously not the FSA's
intention that consumers know every nuance of the FSA rulebook and indeed, in some cases,
about knowing about the FSA per se. Many consumers, will benefit from the work of the
FSA indirectly, such as the 'treating customers fairly' initiative through the actions of firms,
and will be unaware of the direct role of regulation. But in other cases, an awareness of some
elements of regulation, in its widest sense, are likely to help consumers in making informed
decisions. Conversely, if consumers have unrealistic expectations of what the regulatory
regime can provide, this may shape their behaviour inappropriately.
Since December 2001 the phrase 'Regulated by the FSA' has been a regulatory requirement.
Firms are obliged to use this in a number of settings including financial promotions,
regulatory material associated with the sale of investment products and on financial advisers'
business cards. By promoting this message we are letting consumers know that they are
afforded some regulatory protection. So how well do people recognise the FSA and what is
their awareness of financial regulation?
Just under a third (30%) of consumers are aware that the FSA exists - 14% unprompted and
16% prompted - but this figure is much higher amongst people who own products that are
subject to FSA conduct of business rules. For example, half of people with personal pensions
or free standing AVCs and 61% of people with an equity ISA, unit trust or PEP were aware
of the FSA. But people may also be aware of the FSA through a number of sources including
the 10,000 mentions in the press during 2003 or through FSA campaigns and consumer
education.
Knowing about the FSA is not an end in itself and indeed for many this knowledge may not
be necessary. Many consumers will benefit from the work of the FSA indirectly, for example
as a result of the treating customers fairly initiative, and being aware of regulation can also
help consumers make informed decisions. But if consumers have unrealistic expectations of
what a regulatory regime can provide it could shape their behaviour inappropriately.
Over a quarter (27%) of all adults in Great Britain were aware, unprompted, that the financial
regulator aims to ensure appropriate selling practices take place and a fifth knew that only
appropriate people or firms can work in financial services. The respective figures for people
who were aware of the FSA were 38% and 32%.
When asked about confidence in the financial regulatory regime there was a fairly high
degree of confidence; people who were aware of the FSA had a higher level of confidence
that those who did not (61% compared with 52%).
How confident are people that the FSA is effectively regulating the financial services industry?
Overall nearly two thirds (61%) of people who had heard of the FSA said they were confident
that it was doing an effective job, a quarter had no view and the remainder were not confident
about the FSA's role. Similar proportions were confident that UK firms followed FSA rules.
People not aware of the FSA but who were aware or assumed that financial regulation is
carried out, were told that firms have to follow certain rules which include that staff are
qualified, that they have enough funds to pay out to consumers and that products sold to
consumers are suitable for their needs. They were then asked how confident they were that
these activities actually took place. Over half (52%) of this group were confident that the
regulatory activities described were being carried out, 18% were unconfident and the
remainder had no view.
Obviously people's views about confidence in regulation may vary according to different
circumstances, for instance if they had recently suffered or were aware of some sort of
difficulty associated with a specific sector. Across all product classes, except ownership of
unit trusts, equity ISAs and PEPs, the proportion of people who were not confident in
financial regulation was higher for those who were not aware of the FSA. For example a third
(34%) of people in this group who owned bonds or gilts and a quarter who owned a personal
pension or FSAVCs (23%) or shares (25%) were not confident in financial regulation; the corresponding figures for those who were aware of the FSA were 16%, 13% and 16% respectively.
How developments have challenged the regulatory system? (2.pdf- page 9)
Emergence of large, complex, globally active, interconnected financial conglomerates
Regulators sometimes lack sufficient authority, tools, or capabilities to oversee and mitigate risks.
Identifying, preventing, mitigating, and resolving systemic crises has become more difficult.
Less-regulated entities have come to play increasingly critical roles in financial system
Nonbank lenders and a new private-label securitization market played significant roles in subprime mortgage crisis that led to broader market turmoil.
Activities of hedge funds have posed systemic risks.
Overreliance on credit ratings of mortgage-backed products contributed to the recent turmoil in financial markets.
Financial institutions' use of off-balance sheet entities led to ineffective risk disclosure and exacerbated recent market instability.
New and complex products that pose challenges to financial stability and investor and consumer understanding of risks.
Complex structured finance products have made it difficult for institutions and their regulators to manage associated risks.
Growth in complex and less-regulated over-the-counter derivatives markets have created systemic risks and revealed market infrastructure weaknesses.
Investors have faced difficulty understanding complex investment products, either because they failed to seek out necessary information or were misled by improper sales practices.
Consumers have faced difficulty understanding mortgages and credit cards with new and increasingly complicated features, due in part to limitations in consumer disclo-sures and financial literacy efforts.
Accounting and auditing entities have faced challenges in trying to ensure that accounting and financial reporting requirements appropriately meet the needs of investors and other financial market participants.
Financial markets have become increasingly global in nature, and regulators have had to coordinate their efforts internationally.
Standard setters and regulators also face new challenges in dealing with global convergence of accounting and auditing standards.
Fragmented U.S. regulatory structure has complicated some efforts to coordinate internationally with other regulators, such as negotiations on Basel II and certain insurance matters.
What is Consumer Demand for Regulation? (op01- pages 32)
Consumer Demand for Regulation
Given that regulation sometimes fails, and has its own costs and problems, some
argue the case for private self-regulation, reinforced by common, commercial and
contract law. One rationale for regulation is that public pressure may resist such an
alternative. Although there are costs involved, the consumer may demand regulation,
supervision and various forms of compensation mechanisms. There is an
evident consumer demand for regulation and hence, irrespective of theoretical
reasoning, there is a welfare gain to be secured if, within reason, this demand is
satisfied.
Consumers may demand a degree of comfort that can only be provided by regulation.
There are several reasons why it can be rational for the consumer to demand
regulation:
• lower transactions costs for the consumer (e.g. saving costs in investigating
the position of financial firms, costly analysis etc.),
• lack of information and ability of consumers to utilise information,
• a demand for a reasonable degree of assurance in transacting with financial
firms,
• past experience of bad behaviour by financial firms,
• the value of a contract can be determined by the behaviour and solvency
of a financial firm after the contract is signed and product purchased,
• the consumer may be making a substantial commitment in financial transactions,
• a preference for regulation to prevent hazardous behaviour by financial
institutions as an alternative to claiming redress after bad behaviour has
occurred,
• to secure economies of scale in monitoring,
• depositors at banks might believe, correctly, that at least part of the costs
of regulation is an addition to the fixed costs of regulated firms, and that
given that entry and exit mechanisms might be blocked or discontinuous,
the cost will be absorbed by banks' shareholders.
In some cases, risk-averse consumers might be willing to pay a significant amount
if occasional damage experienced in cases without regulation is perceived as being
very costly. In effect, a risk-averse consumer may willingly pay a high insurance
premium through regulation.
If there is a rational consumer demand for regulation, the consumer would be
willing to pay for it. Returning to the second perspective noted at the outset, if regulatory and supervisory agencies are viewed as supplying regulatory, monitoring
and supervisory services, then if there is a rational consumer demand for these
services it is economic for them to be supplied. Thus the costs of regulation are not
dead-weight costs. However, there is a major limitation to this particular rationale
in that, for reasons already argued, the consumer may have an illusion that regulation
is a free good in which case demand is distorted. The solution to this
problem is that consumers need to be made aware that regulation is supplied at a
cost, even if the price cannot be precisely calculated.
Impact of the current financial crisis on developing countries? (2462.pdf)
Impact of the current financial crisis on developing countries
The current financial crisis affects developing countries in two possible ways.
First, there could be financial contagion and spillovers for stock markets in emerging markets. The Russian stock market had to stop trading twice; the India stock market dropped by 8% in one day at the same time as stock markets in the USA and Brazil plunged. Stock markets across the world - developed and developing - have all dropped substantially since May 2008. We have seen share prices tumble between 12 and 19% in the USA, UK and Japan in just one week, while the MSCI emerging market index fell 23%. This includes stock markets in Brazil, South Africa, India and China. We need to better understand the nature of the financial linkages, how they occur (as they do appear to occur) and whether anything can be done to minimise contagion.
Second, the economic downturn in developed countries may also have significant impact on developing countries. The channels of impact on developing countries include:
• Trade and trade prices. Growth in China and India has increased imports and pushed up the demand for copper, oil and other natural resources, which has led to greater exports and higher prices, including from African countries. Eventually, growth in China and India is likely to slow down, which will have knock on effects on other poorer countries.
• Remittances. Remittances to developing countries will decline. There will be fewer economic migrants coming to developed countries when they are in a recession, so fewer remittances and also probably lower volumes of remittances per migrant.
• Foreign direct investment (FDI) and equity investment. These will come under pressure. While 2007 was a record year for FDI to developing countries, equity finance is under pressure and corporate and project finance is already weakening. The proposed Xstrata takeover of a South African mining conglomerate was put on hold as the financing was harder due to the credit crunch. There are several other examples e.g. in India.
• Commercial lending. Banks under pressure in developed countries may not be able to lend as much as they have done in the past. Investors are, increasingly, factoring in the risk of some emerging market countries defaulting on their debt, following the financial collapse of Iceland. This would limit investment in such countries as Argentina, Iceland, Pakistan and Ukraine.
• Aid. Aid budgets are under pressure because of debt problems and weak fiscal positions, e.g. in the UK and other European countries and in the USA. While the promises of increased aid at the Gleneagles summit in 2005 were already off track just three years later, aid budgets are now likely to be under increased pressure.
• Other official flows. Capital adequacy ratios of development finance institutions will be under pressure. However these have been relatively high recently, so there is scope for taking on more risks.
Which countries are at risk and how?
The list of channels above suggest that the following types of countries are most likely to be at risk (this is a selection of indicators):
• Countries with significant exports to crisis affected countries such as the USA and EU countries (either directly or indirectly). Mexico is a good example;
• Countries exporting products whose prices are affected or products with high income elasticities. Zambia would eventually be hit by lower copper prices, and the tourism sector in Caribbean and African countries will be hit;
• Countries dependent on remittances. With fewer bonuses, Indian workers in the city of London, for example, will have less to remit. There will be fewer migrants coming into the UK and other developed countries, where attitudes might harden and job opportunities become more scarce;
• Countries heavily dependent on FDI, portfolio and DFI finance to address their current account problems (e.g. South Africa cannot afford to reduce its interest rate, and it has already missed some important FDI deals);
• Countries with sophisticated stock markets and banking sectors with weakly regulated markets for securities;
• Countries with a high current account deficit with pressures on exchange rates and inflation rates. South Africa cannot afford to reduce interest rates as it needs to attract investment to address its current account deficit. India has seen a devaluation as well as high inflation. Import values in other countries have already weakened the current account;
• Countries with high government deficits. For example, India has a weak fiscal position which means that they cannot put schemes in place;
• Countries dependent on aid.
While the effects will vary from country to country, the economic impacts could include:
• Weaker export revenues;
• Further pressures on current accounts and balance of payment;
• Lower investment and growth rates;
• Lost employment.
There could also be social effects:
• Lower growth translating into higher poverty;
• More crime, weaker health systems and even more difficulties meeting the Millennium Development Goals.
