Financial Crisis and Regulation Failure

By

[SENA KALKAVAN ]

[CASS BUSINESS SCHOOL]

[MANAGEMENT]

[SEPT 2012]

CONTENT

CHAPTER 1: INTRODUCTION3

Background3

Rationale of the Study3

Hypothesizes Development/ Statement of the Problem5

Aims and Objectives6

Proposed Dissertation Outline6

CHAPTER 2: LITERATURE REVIEW (Preliminary)8

Why Banking Regulations?8

Financial market failure and banking Regulations8

Role of Industry Regulators9

CHAPTER 3: METHODOLOGY12

Research Strategy12

Search Strategy13

Research Evidence Inclusion Criteria13

Data Extraction strategy14

References15

CHAPTER 1: INTRODUCTION

Background

The severity of the financial turmoil following the bursting of the housing bubble U.S. and subprime loans in 2007 has surprised analysts and forced them to reassess the level and scope of regulations. Although the recent crisis has several common elements with past crises, its magnitude is lot more as it channelled into global financial market rather than confining to one geographical location. Nevertheless, it highlighted the weaknesses in the regulation and management of financial and non financial intermediaries and stressed the demand for new reforms encompassing financial sector which can enhance the business models of corporation especially financial institutions. The crisis that began with subprime mortgages became systemic in 2008 subsequent to bankruptcy of Lehman Brothers, threatening the stability of the financial system internationally. Expected bank losses (from 2007-2010) is estimated at more than 1,500 billion dollars in the U.S. and the EU, and commitment to help rescue the banking sector has reached 30% of GDP. Why and how regulatory mechanisms have failed? Have anything new faulted the market? What we can learn from the financial crisis? The answer to these questions will patent what are the key issues for the design of adequate regulation and determine if there is need for a fundamental reformulation of regulatory structure.

Rationale of the Study

In the financial sector, there were all kinds of market failures. Any kind of bank failure has systemic impact on the financial sector in particular and for the rest of the economy, in general. The fragility, contagion and coordination problems involving investors are ubiquitous in the financial system. Information asymmetries in financial markets can leave the small investor unprotected and contribute to the market collapse. At the same time, the agency problems (conflict of interest) between shareholders and depositors induce excessive risk-taking, which is enhanced by assurance mechanisms and systemic institutions helps to avoid bankruptcy. The moral hazard and adverse selection are recurring phenomena in this sector. Conflict of interests is widespread. Moreover, the market power of the entities, as many banking sectors tends to be concentrated and there are barriers to entry. Finally, bounded rationality of economic agents and financial cycles sharpens feeds the bubbles.

The role of regulation in this regard is to endeavor to mitigate market failures with insurance mechanisms deposit; the central bank served a role of a lender of last resort to all financial intuitions, and prudential requirements and supervision were imposed upon the entire banking sector. The process of liberalization in banking was accompanied by prudential conditions, letting banks to trust their internally built models for risk assessment and management, and promote transparency in financial reporting by appropritae disclosure which will eventually promote discipline within the market. This liberal view of the capital requirements, supervisory review and, ...