The early part of the twenty-first century has witnessed a sea-change in regulation of the financial system following the financial crisis of 2007-2008. Prior to that financial crisis, the official policy was directed to deregulating the financial system, whereas after 2008 the move is towards increased regulation. This book begins the study of the UK financial system with an introduction to the role of a financial system in an economy, and a very simple model of an economy. In this model the economy is divided into two distinct groups or sectors. The first is the household sector and the second is the firms sector. The book describes the process of financial intermediation, and in doing so, it examines the arguments as to why we need financial institutions. It highlights the nature of financial intermediation, and examines the various roles of financial intermediaries: banks as transformers, undertaking of transformation process, and providers of liquidity insurance. The nature of banking, the operations carried out by banks, and the categories of banking operations are discussed next. The book also examines the investment institutions and other investment vehicles. It examines the role of central banks in the financial system in principle, particularly, the role of the Bank of England. Primary market for equity issues, secondary market, the global stock market crash of October 1987 and efficient markets hypothesis are also covered. The book also looks at the trading of financial derivatives, risk management, bank regulation, and the regulation of life insurance companies, pension funds.
Bankregulation has seen
significant change as a consequence of the 2007–8 global
financial crisis. One development that was evident before the crisis
but which has come more to the fore since is global harmonisation of
regulation. After the crisis, the G20 group of leading economies
established the Financial Stability Board
enterprises is told by Story and Walter
(1997: chs 9, 10, pp. 250–306).
9 Readers may wonder what happened to Working Parties 1 and 2. Thereby
hangs a clue to subsequent history. Working Party 1 was set up to deal
with the problem of short-term capital movements. As we know, it is
these which have been the destabilising force in the crises of the 1990s, in
Mexico, in Thailand and in Korea. It had support neither from the United
States nor Britain. It was never appointed. It never met.
10 Although this relates more to international debt questions than to bankregulation
Not revolutionaries, not luminaries, just ‘normal’ guys amidst the tempest
to win the election, but even stronger deeds to modernise French capitalism
thereafter – i.e. the scenario already played in 1981 and 1997. To regroup all
left-oriented voters, the candidate had to revivify some classical slogans of the
French left in general: ‘Change is now’, claimed Hollande during his campaign.
Ben Clift rightly describes the rhetorical move of the PS before 2012 as ‘a more
radical, maximalist direction in the three important areas of financial and bankregulation, redistributive taxation and revitalising industrial policy’ (2013: 108).
into substantial policy proposals. It was the case with ideas on
mutualism. The leadership of the party was rhetorically committed to them, but
its approach to bankregulation and to the financial services industry meant that
mutualism had a modest role in Labour’s economic blueprint. It is true that Labour
proposed the mutualisation of Northern Rock, under public control since 2007, and
to create regional banks, however these ideas were not developed further.
In other instances, only parts of those ideas were adopted and adapted by the
party. For example, Labour was
imposed on Eurodollar deposits with American banks by Volcker in
October 1979 as part of the new tough monetary policy. But they only
required US banks to deposit with the Federal Reserve System 8 per cent
of funds lent to corporations in the USA – not a very severe restriction.
Similarly, the growth of tax havens and bank-regulation havens could
easily have been checked at any early stage. The home governments of
the banks, corporations and insurance companies which took advantage
of them could at any time have put them out of bounds. That the US
Congress did not do so
Republic of Korea (South Korea), Thailand, Malaysia
and Indonesia – namely, fragile bank-dominated ﬁnancial systems, poor
prudential surveillance and weak central bankregulation and supervision of
commercial banks, a large build-up of non-performing loans due in part to
excessive lending to inefﬁcient, over-leveraged state enterprises, and a largely
state-owned ﬁnancial sector that may be almost insolvent – led many observers
to conclude that the contagion’s virulent spread to China was imminent.
However, the Middle Kingdom beat the odds. Although the Asian ﬂu
within the foreseeable future. Unilateral action
must therefore be better than no action at all. A multilateral approach
is, obviously, optimal. And we need to be alert to the weasel words of
politicians and bankers who promote inaction in the name of multilateralism... I hope I am not being too cynical in believing that much of
the rhetoric about new global rules is so much camouflage for keeping
the unstable, dangerous, status quo. Sensible and safe bankregulation
has to begin, like charity, at home. And I say that as someone who has
preached, and written about, the
2005, banks, national treasuries and the European Commission held internal discussions on why the spreads between Germany and other countries did not seem to reflect the differing risks, according to a senior Brussels official involved with bankregulation, but no decisive corrective action ensued. 85
The mentality that there was no need to repair the instruments for European financial management if they were not demonstrably broken appeared to prevail. Fund managers snapped up higher-yield bonds, ignoring the fiscal fragility of countries on the eurozone periphery
’s design faults. These included lack of bankregulation, lack of
an exit mechanism, abolition of the exchange rate as an instrument
of economic policy, the ‘one size fits all’ interest rate policy, the lack of
protection for small countries from tsunami movements of capital from
large countries and inadequate fiscal transfers. Irish policy on Europe
inordinately emphasises free money from Brussels in public relations
hyperbole. Successive failed summits on the euro currency are hardly a
surprise given the design faults of the currency. Little has been done to