Why Are The Financial Intermediaries Regulated Finance Essay

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Globalization, demutualization, deregulation and the ever increasing growth and obscurity of abstruse derivative markets all stand centre stage in a debt driven financial saga which almost brought the world’s most advanced financial services industries to their knees. Politician’s attempts to vilify those within the financial markets often obscures the truth that political power, especially in emerging economies, can often be held to blame for crises within financial sectors. Both lax governmental intervention and failings within the United Kingdom’s regulatory framework have meant both a failure to recognize and appropriately respond to the systemic shocks within the financial services industry.

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Until the perpetual nature of a laissez-faire approach is ratified the elliptical nature of a boom, bust and bail out cycle is destined to reoccur. The objective of this paper is to emphasize the importance of the regulation of intermediary institutions. The rationale and reasons why in practice they are regulated and in what way regulation satisfies its demand, whilst also taking into consideration the impact of regulation on the performance of intermediaries. Past events have shown that financial service industries are prone to periods of instability resulting in extensive economic costs, leading many to the assumption that a more efficient and effective regulatory regime may be required. The importance of regulation through studying past events is clearly evident. Empirical studies such as (Benink & Llewellyn, 1995), have explored the rationale behind banking crises, namely those within Scandinavian countries during the 1990’s reaching the conclusion that even in relatively mature economies the risks of poor supervision, lax regulation and asymmetries of information are detrimental to a strong and stable economy. Comparisons can also be seen in the development of banking crises across Asia. The theories raised in (Drage, Mann, Michael, & England, 1998) through the study of destabilizing effects on capital flows, show that the banking crises across Asia have shown similar comparisons between financial instability and the risks of poor supervision. Institutions are affected by a multitude of varying forces making the nature of large institutional failures idiosyncratic. While each failure and banking crises has its own unique characteristics, studies, such as (Westernhagen, et al., 2004) suggest a similar correlation between cases of failure within the European Union and financial liberalization. Reinforcing the argument that the risks from poor or under regulated financial markets and lax supervision are largely detrimental to financial stability. The way in which intermediaries are regulated within the economy has changed dramatically in order to adapt to an evolving environment. Through liberalization, deregulation, globalization and advancements in technology the landscape of intermediation has evolved. With the development of institutions that operate within a global market offering a range of universal products, the once traditional distinctions between types of financial institutions have become blurred. The erosion of traditional distinctions [1] ,

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