A discussion on possible new regulations in the finance industry.
Written in 2008; 3,506 words; 9 sources; APA; $ 98.95
Paper Summary:
This paper talks about the current financial crisis and critiques policies of central banks in lieu of the turmoil. It discusses the need to redesign the regulatory structures in order to ensure greater transparency in the financial markets and institutions and states that the new regulations mechanisms that will be put in place after the present crisis should be constantly reviewed to prevent any such recurrence in the future.
Outline:
Some Salient Features of the Current Crisis
New Elements
Reminiscences of Previous Episodes
A Critical Analysis of the Central Banks' Policies in Crisis
The future of financial regulation
Dealing with the increasing complexities of financial markets
Striking a balance between financial innovation and financial risks
Managing Financial Development with financial innovations
Stabilizing the Emerging Economies
Reforming the aid mechanism
The Heal
Joseph E. Stiglitz on the downturn and the heal
The Human Toll
Flawed Governance Structure
Concluding Remarks
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From the Paper:
"What is new is quite evident. This crisis originated from unprecedented real estate & its securitisation. Traditionally the real estate finance had been carried out through relatively unsophisticated instruments maintaining a close link between the borrower(the household) and the financier(the banks). The loans used to remain in the bank's balance sheets as they are, based on fixed or floating interest rates. This could ensure ex-post monitoring of the borrowers. But in the new form of the business, these mortgages were packed in sophisticated commercial instruments and derivatives and were dispersed widely throughout the country and across the globe. This resulted in rapid spread of the risk to far many institutions and far many countries. Because of the spread of the risk to many and better allocation, the system became more efficient and more resilient to shocks. In practice, this encouraged the banks other financial institutions to expand their mortgages to cover even increasingly risky homeowners, using Special Investment Vehicles to escape the proportionate increase in their capital. Moreover, they tended to underestimate the risk of the loans made over to sub primes. This was because these mortgages had ready market for their quick securitization and passing over to other investors. These secondary player firms and banks were not aware of the quantum of the risks purchased by the originator firm or bank and they solely relied on the benevolent credit rating agencies."
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