Lack of Regulation in Banking Industry
What case can be made that it was the lack of regulation of the banking sector that led to the financial crisis of 2008-9? What are the new regulatory structures that are being proposed in the US and UK?
The preconditions of the 2008-9 crisis were high unemployment, high growth which was stimulated partially by foreign investment caused by imbalance of current accounts on the international arena (ie. Huge debt of US and the UK and surplus of China, Korea, Japan). Large part of the problem was caused by low inflation – in healthy economy house prices oscilate around the inflation rate. In this recession prices were raising faster than inflation. Finally, interest rates which were kept low after the dot com bubble (2004) in order to help the economy recover.
After the great depression in 30 's Glass-Steagal Act (1932) has been imposed. It forbidden commercial banks from taking part in any risky activities. This tight regulation did not allow Banks holding public deposits to get involved in investment banking activities, speculation and insurance business with depositors funds.
In 1956 Bank Holding Act modified the original Glass-Steagal Act and increased the amount of allowed activities of the commercial bank. Those created holding companies, which owned two or more commercial banks and could, carry out activities “closely related to banking”. Fed was responsible for the list of those activities but they have never been allowed to get involved in Investment banking and Insurance.
Financial Services Modernization Act (1999) – allowed companies like Citigroup and Bank of America to become holders of subsidiaries involved in both investment and commercial banking. Under this act Goldman Sachs and Morgan Stanley began to operate Investment Banking. The risk in this act was that holding companies ran commercial banks that took a vital part of the economy as well as very risky hedge funds. The failure of those last ones would require a bailout from
The preconditions of the 2008-9 crisis were high unemployment, high growth which was stimulated partially by foreign investment caused by imbalance of current accounts on the international arena (ie. Huge debt of US and the UK and surplus of China, Korea, Japan). Large part of the problem was caused by low inflation – in healthy economy house prices oscilate around the inflation rate. In this recession prices were raising faster than inflation. Finally, interest rates which were kept low after the dot com bubble (2004) in order to help the economy recover.
After the great depression in 30 's Glass-Steagal Act (1932) has been imposed. It forbidden commercial banks from taking part in any risky activities. This tight regulation did not allow Banks holding public deposits to get involved in investment banking activities, speculation and insurance business with depositors funds.
In 1956 Bank Holding Act modified the original Glass-Steagal Act and increased the amount of allowed activities of the commercial bank. Those created holding companies, which owned two or more commercial banks and could, carry out activities “closely related to banking”. Fed was responsible for the list of those activities but they have never been allowed to get involved in Investment banking and Insurance.
Financial Services Modernization Act (1999) – allowed companies like Citigroup and Bank of America to become holders of subsidiaries involved in both investment and commercial banking. Under this act Goldman Sachs and Morgan Stanley began to operate Investment Banking. The risk in this act was that holding companies ran commercial banks that took a vital part of the economy as well as very risky hedge funds. The failure of those last ones would require a bailout from