BANKING SECTOR

Deregulated Banking Industry and Current Economic Downturn



Deregulated Banking Industry and Current Economic Downturn

Introduction

The profound transformation of the banking industry over the past 25 years has been accompanied by radical changes in the regulatory system in the industry. Whatever may have been the relations between the two processes, the banking industry today is characterized by a concentrated structure that offers a variety of payment services and financial services. In turn, the regulatory system is characterized by an array of tools to maintain stability in the industry, in particular to prevent systemic risk. Indeed, the effectiveness of regulation is still a matter of intense public debate and academic analysis (Goldthwaite, 2009). In the current scenario of recession, which was primarily rooted in the ineffective banking practices, the proposition of deregulating the banking system is highly researched.

Recent recession created a disastrous change in global economies. Nearly all sector of the economy are affected by the economic crises. This paper explores the impact of over-reliance on a deregulated banking industry to determine if it is the key factor in the current economic downturn. In line with the proposed frameworks at the institutional and governmental level to deal with banking regulation and crisis, this paper also suggest policies to manage a double dip recession.

Discussion

Deregulation is a process undertaken by the public authority (executive or judicial) to change the areas of activity for the benefit of competition. The deregulation took place in the late 1970's in the UK (economic policies of Margaret Thatcher) and the United States (Ronald Reagan) and then spread to other developed countries from the year 1980. The deregulation began in France in 1983 with the deregulation of financial markets (after the failure of the joint program). Under the influence of the European Commission, it has accelerated from the year 2000.

The rapid changes facing the financial world (disintermediation, internationalization, progress technology, increasing complexity of products) necessitate an ongoing effort to regularize the financial system. The discussion of the U.S. banking system and the cross-border issues in Europe are the tip of a very large iceberg (Jeffery 2009, p.36). The compliance of new Basel accord is expensive and complex with inefficient supervision in some countries (Simon 2002, p.51). However, on the positive side the improved risk management along with improved market efficiency in U.S. and European banks will lead to reduced interest rate distortions. In U.K. banks market also we can conclude that with the IRB approach, it will improve the risk sensitivity and better risk management.

There were many factors that resulted in escalating the economic downturn which emerged in 2007-08. These factors vary in their dimensions; however, had significant impact in worsening the economic situation. From the banking point of view, these include low real interest rates, high credit outflow, apparent excess liquidity, sub-prime mortgages, and unreliable assessment of future risks associated with lending in consumer markets (Krugman 2009, 30). Hype in the market made the banks to focus on short-term earnings and an abrupt high-scale change was observed in ...