Financial Institutions and Markets. Financial Regulations and Crisis

FINANCIAL REGULATIONS CANNOT PREVENT A FINANCIAL CRISIS
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Financial Regulations and Financial Crisis
In 2017, global central bank regulators and governors met in Frankfurt to complete the final chapter of the bank rule which had been written down since the last financial crisis in 2008 (Ewing, 2017). The meeting proved to be an important step geared towards preventing financial meltdowns in the future. Since banks are to be blamed for the last financial crisis, the banking rules are meant to prevent them from causing another meltdown. Nonetheless, the rules and regulations might help to make the banks more resilient. However, it does not guarantee protection from a financial crisis. The lack of a guarantee can be linked to a couple of factors which will be discussed in this essay.
The 2007-2008 financial crisis affected millions of individuals across the globe, and the impact could still be felt even six years after the crisis (Poledna, Boschmann, and Thurner, 2017, p. 1). There was a slow recovery from the aftermath with a significant number of indirect losses. Hundreds of people lost their jobs, homes and the level of income dropped significantly. Consequently, there was a need for new financial regulations which was aimed at mitigating the risks that were present in the entire financial system. As revealed by the crisis a significant number of financial institutions appeared to be doing fine, but internally they were vulnerable (Ewing, 2017). Many banks with not enough money lent out large sums of cash and eventually, they could not be able to recover. Afterwards, banks lacked the trust to lend to one another, and the global financial system came to a halt. The creditors ran seriously low on money, which led them to depend upon payouts from the taxpayers to recover. The practices by banks of lending more money and failing to reserve enough for sustenance led to the inclusion of rules which require the institutions to hold more capital. Moreover, the banks are required to prove that they have enough liquid asset to help them survive a cash crunch. These regulations are therefore meant to reduce risks.
The inherent instability of the banking system makes it harder to regulate (Prates 2013, p. 6). This is partly because the development of the entire banking system is dependent on financial leverage and the multiplier effect is in its origin. The banking system is highly dependent on confidence. Financial institutions are required to hold only a part of the money received from depositors and lend the rest so as to meet reserve requirements. Eventually, banks always owe more money than that saved in their vaults (Svilenova 2011, p. 87). Moreover, the behavior by the banks to fund long term assets using short term borrowing resulted in a maturity mismatch between assets and liabilities. During normal operations, there is great confidence between banks and its lenders and depositors, however, when there is a crisis, and the depositors want to withdraw their cash, the bank’s reserves normally lack sufficient funds and the majority of their assets are illiquid, this ruins the confidence of depositors. That said, the primary in...