The seen reason behind financial crisis was because of not having 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 regulatory system, the amount of such injections have been increased significantly by some weaknesses. The failures has in fact affected a lot of taxpayers and they have lost a lot of money and it likewise damaged the financial system’s ability in matching savers ad borrowers and to provide them with an information and risk-sharing service.
The improvement on regulations to protect society must focus on revisions as well as on capital requirements, developing rigorous process on bankruptcy in resolving insolvency of complex financial institutions and to reduce the interconnectedness of problems related to credit default swap contracts through the use of clearing-houses and exchanges.
The regulations likewise play a vital role to protect individuals. The economic theories of regulation could stress on the need of providing adequate information and transparency. Also, behavioral economic arguments likewise suggest on the importance of simplicity in consumer investor options. The recent financial crisis is where regulation plays a vital role to greater transparency when it comes to the securitization and 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 one would be on the need of regulatory reform in focusing on the “too big to fail”. It is in fact obvious that the failure on the policy to deal with the exacerbated systemic risk during the time of the financial crisis. The problems with too big to fail led to mispricing on the risks which gave people less safe return than what they really bargained for and the disruptions on the liquidity harmed the borrowers as well.
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.