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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.
15.1 Introduction Bank regulation 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 bank regulation
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 bank regulation, 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
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 bank regulation 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 affected
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 bank regulation has to begin, like charity, at home. And I say that as someone who has preached, and written about, the
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 bank regulation 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
campaign 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 bank regulation, redistributive taxation and revitalising industrial policy’ (2013: 108). The
’s design faults. These included lack of bank regulation, 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 fully