Critical Evaluation of Ring-Fencing and Total Separation Approaches to Banking Regulation

The Bank and the Banking sector is since a long time a significant point in the economy and in the private sector. Banking law is very important to regulate the relation between customer and bank. On the one hand it protects the interest of the bank and on the other hand also the rights of the customers that are in an inferior position. In both of them the customer- bank relation plays a very important role.

First, an overview of the Twentieth Century American Banking System. Banking regulations are implanted to strengthen the banking sector and to eliminate bank panics. For example, the creation of the Federal Reserve System in 1913 was largely a response to lessons learned in the Panic of 1907. Industry regulation and structure, risk management viz. moral hazard, adverse selection.

An unregulated banking financial institution might be fraud with unmanageable risks for the purpose of maximizing its potential return. In such a situation, the banking financial institutions might find itself in a serious financial distress instead of improving its financial health. Consequently, not only the depositors but also the shareholders will be deprived of getting back their money from the bank. The deterioration of loan quality also affects the intermediative efficiency of the financial institutions and thus the economic growth process of the country. This the reason for which the banking financial institutions are being regulated in all countries. The banking financial institutions are also the most regulated among all types of financial institutions in all countries, because of their substantial role in payment mechanism (in addition to protect the loan portfolio from decaying).

To regulate the financial industries, I would use the concept of “command and control” opposed to the “incentive system” because deregulation of the financial system is what caused it to fall and the only incentive these industries have is money, which they make more of by fraud. Command and control is regulation of businesses and punishment if they do not follow directions made by the government. Deregulation is the underlying cause for example, Iceland in 2000 deregulated the financial industries, privatizing three of the biggest banks, where they borrowed $120 billion which lead to the banks collapsing in 2008. After the US was hit with a period of deregulation, which was backed up by Reagan who was supported by financial industries, investment banks began

Alexander Hamilton proposed using a banking system in America in 1781 after seeing how beneficial they were in other nations for advancing trade. In 1791, First Bank of the United States became the first commercial bank of the United States in Philadelphia, Pennsylvania. By the 1900’s, there were almost 170 banks per every million people in the United States, but because of this, there was a lot of debate about banking and the regulations needed and the fears that people had about the amount of control it was giving the government. This paper will be starting from the Great Depression and talk its way into the current situation of the United States banking regulations and why there is a debate on if there should be more or fewer regulations on banking.

These banks should ideally be divested of any sort of commercial interest, and must act in the best interest of its nation’s economic stability. A lot of meaning is carried out in being identified as ‘independent’ authority, where the bank possess powers to take its own decisions, approve its own legislature, follow its own policies and offer stability to the nation’s economy.

One of the principal functions of financial oversight authorities in achieving a safer, more flexible, and more stable monetary and financial system is to regulate and supervise various financial entities. But following the crisis of 2007, regulatory authorities in the whole world were engaged in a fundamental reconsideration of how they approach financial regulation and supervision. Performing these functions through micro- prudential regulation and supervision of banks, holding companies, their affiliates and other entities, including nonbank financial companies, proved to be insufficient to ensure and maintain financial stability of a country, union or the world as a whole.

Banking industry is currently operating in the maturity stage. There are many players as a result of which the competition is quite high. Competition is broadly based on the levels of fees charged, reputation, the range of services and products provided. As the industry consolidates and the range of services broadens, the size and geographic spread of industry players in increasing. Providing a high set of barriers is the capital and regulatory requirements within the banking sector. Entities that want to start up as a commercial bank and/or investment bank or securities dealer face significant establishment costs in order to gain acceptance and meet market reputation. Furthermore, start-ups require up-front expenses in order to establish proper distribution channels. Globalization is high and the trend is increasing. Cross-border sales and acquisitions of banking operations are also occurring, as assets are shuffled in the race to raise capital.

Over the past several decades the world has seen what the culprits are with financial instability. From the Great Depression, to the housing bubble crisis of 2008, the economy suffers from many fundamental problems that damper our financial situation. In The Bankers’ New Clothes, Anat Admati and Martin Hellwig explain the struggles of banking regulation in order to gain a better understanding of financial intermediation and how it affects us. Admati and Hellwig provide a forceful and accessible analysis of the recent financial crisis and also offer proposals on how to prevent any future financial failures. The way they achieve this is by engaging us, in plain language, by cutting through the confusion and acknowledging the issues of banking.

What is the meaning of financial regulation? Specifically, the financial regulation means there are sets of regulation or supervision, which let the financial organizations comply to requirements, restrictions formulated by government or any other institution. The aim for financial regulation is keep the integrity of financial system, and this objective composing four parts ,the first parts is the regulation should maintain the confidence in financial system, the second part is enhancing the stability of financial system ,the third part is it should protect the consumer rights and the last one is reduce or prevent the financial crime( Kushmeider, Rose Marie,2005).

What is the meaning of financial regulation? Specifically, the financial regulation means there are sets of regulation or supervision, which let the financial organizations comply to requirements, restrictions formulated by government or any other institution. The aim for financial regulation is keep the integrity of financial system, and this objective composing four parts ,the first parts is the regulation should maintain the confidence in financial system, the second part is enhancing the stability of financial system ,the third part is it should protect the consumer rights and the last one is reduce or prevent the financial crime( Kushmeider, Rose Marie,2005).

The UK Financial Services Act of 2012 was put into effect the 1st of April 2013 and contained the government reforms on the financial regulatory structure in the United Kingdom. This Act gave new guidelines for management of the banking sector and other supervisory roles in the financial services sector, which include the following. The oversight role of the Bank of England was bestowed therefore, it is expected to be responsible for the occurrences in the financial system and how financial institutions manage themselves. Moreover, the Act stipulates that three more bodies are to be formed to assist in managing this sector, these include; the Financial Policy Committee (FPC), Prudential Regulatory Authority (PRA) and

“If it looks like a duck, quacks like a duck, and acts like a duck, then it must be a duck - or so the saying goes. But what about an institution that looks like a bank and acts like a bank? Often it is not a bank – it is a shadow bank” – (Laura E. Kodres)

The financial markets for a long time were regulated following the aftershocks of the global recession which affected several economies across the globe. It was until the 1980's that the federal government passed the Deregulation and Monetary Act which was aimed at providing deregulation for the financial institutions. This gave the banks the flexibility to compete and extend their services at a much easier and faster way in a very competitive market and a less regulated environment. The aim was to provide better and affordable financial services to the consumers.

Banks occupy a critical position in a complex financial system that supplies the money and credit needs of the economy. The unique characteristic of a commercial bank is that it also creates money, and it is this particular feature of the commercial banks which distinguishes them from non-banking financial institution.