Case Analyze 1: Finance 321 Financial Institutions

Finance 321 Financial Institutions
Case 1
Name
Finance 321 Financial Institutions
Date
Executive summary
Financial deregulations took place from the 80s based the premise that regulations had been generating inefficiencies and distortions in the financial market, as well as preventing more dynamic sectors getting access to financing. Regulatory authorities ought to adopt uniform policies on deregulation, but failed to do so in the 80s and 90s, which increased uncertainty. Globalization further made it possible to integrate markets and reduce inefficiencies even further in an environment where financial innovation was important more than ever before. The importance of derivatives increasingly became popular in the 1980s, 90s and first decade of the 21st century, but since transactions were complex and opaque the failure of oversight authorities to monitor risk exposed the financial system to instability in the global financial meltdown. Overregulation is undesirable as it reduces competitiveness in the financial markets and determining prices and values more efficiently.
Introduction
Financial markets and institutions change based on the policies adopted and for the US deregulation in the 1980s and early 90s influenced financial development by improving the allocation of resources and decreasing intermediation costs. Nonetheless, this was a period when there were various bank failures as the economy deteriorated and there were disagreements among policy makers on how best to adopt a new deregulated banking framework. Deregulation of the financial sector laid the foundation for the development of new institutions and spurred financial innovation in an environment that was close to perfect competition. A deregulated environment ought to result a stable banking environment, where there is no price and value distortion, but failure to take into consideration the risks that increase volatility.
Financial markets' and/or institutions' efficiency
The effects of financial liberalization have been studied based on two approaches, the first being deregulation having a positive impact on financial development and economic growth. The second approach is that deregulation exacerbates both financial and economic instability. In the first approach, when there are financial constraints in the financial system such as complex regulations and caps on active interest rates, this limits access to credit, and even the intermediaries do not allow the efficient allocation of capital to the most productive areas. Consequently, deregulating allows prices to freely determine savings and investment are necessary to stimulate economic growth in the long run. Financial deregulation consists of decrease or elimination of financial restrictions while regulations distort pricing.
The 1932 Glass-Steagall Act was adopted to expand credit where the district and regional banks lent money while there was separation of investment and commercial banking activities. Nonetheless, there has been greater support for eliminating constrains in the US banking and finance industry and Alan Greenspan the former Fed chair pointed out that repealing the Glass-Steagall Act would help to improve efficiency since there was increased interconnection ...