The reason behind the financial crisis was due to the lack of having an effective regulation. Some parts of the financial system were hit hard by the crisis and the government-sponsored enterprises and large commercial banks failed in preventing the systemic risk or the substantial loss for those on particular financial products.
Under the said current regulatory system, the amount on the injections were increased significantly by several weaknesses. Such failures does not only cost taxpayers with big sums of money, but they likewise damaged the financial system’s ability in matching savers and borrowers and also on providing risk-sharing and information services.
Improvements on regulations for protecting society should put a focus on revisions and capital requirement, developing rigorous process in bankruptcy to resolve the insolvency of complex financial institutions as well as in reducing interconnectedness of issues that relates with credit default swap contracts by using clearing-houses and exchanges.
Regulations likewise play a vital role in protecting individuals. Economic theories of regulation can possibly stress the need to provide adequate information and on transparency. Behavioral economic arguments likewise have suggested on the big importance of simplicity on consumer investor options. Recent financial crisis also plays an important role for the transparency on the securitization and the information on mortgage contracts.
There are in fact some overarching themes which links to the regulatory needs of society and for people as well. The first thing to it would be with the need of a regulatory reform for focusing on the “too big to fail”. It’s actually obvious that failures on policy of dealing with with exacerbated systemic risk at the time of the financial crisis. Too big to fail issues likewise led to mispricing on the risks that later on gave people with less safe return than what they have bargained for and that the disruptions on liquidity harmed the borrowers.
The other one would be on the economic concern to which over-regulation on financial instruments and institutions that lead to cause harm through the case of raising cost of funds to household and business borrowers. The secret for this would be in designing regulation to ensure proper pricing on the risks and information when it comes to the risks and such approach also offers the appropriate balance of protection towards society and individual.
When it comes to the consumer protection agency, it is very important for the prudential supervisor to give to the consumer protection body its input about the impact of the regulatory actions with regards to the safety and soundness of financial system and that conflicts on the supervisory and consumer protection body needs to be resolved by the treasury.