Economics
Economics of Money and Banking
National and International Policy for Reducing Financial and Banking Crises
Introduction
The increased incidence of financial and banking crises in many countries around the world, and more recently the global credit crunch is raising a need for mitigation measures. Preventive measures for the future to avoid occurrence of the same are becoming increasing necessary. This paper presents three measures that may be employed to reduce the frequency of financial and banking crises occurrence.
National and International Policy for Reducing Financial and Banking Crises
Establishing Strong Regulatory Frameworks
Finance and banking institutions would benefit from setting up policies that require the establishment of strong regulatory frameworks. This is important especially when it comes to credit polices such as the issuing of credit facilities or services such as mortgage acquisition. This would ensure that those who benefit from such services are credit-worthy and are able to pay back. Policies need to address regularization of macro liquidity . excess liquidity created by low interest rates resulted in large part to the financial crisis experienced in the last two years .
The global financial crisis witnessed in the recent past resulted largely from laxity of the regulatory frameworks that vet loan or mortgage applicants to ensure their credit-worthiness
( Nanto, 2010).The issue of subprime risk is an issue that can be solved through the establishment of sound regulatory practices. These can be instituted through the formulation of supporting policies. There should be the Matching of the regulatory influence on the cost of capital to the risks that institutions actually take.
The subprime mortgage acquisition in the U.S.A over the last few years was in large part responsible for the national and international financial crisis that hit the world. The lack of regulations created a loop hole for un-credit-worthy individuals to benefit from mortgage facilities. The same individuals were not able to pay their monthly installments and this led many banks to insolvency. Regulatory framework policies would help institutions to adjust to subprime risk. The establishments of strong regulations measures by the government has the effect of saving money which would otherwise be lost through defaulters. This in turn reduces sovereign debt.
These policies may be implemented within individual countries even without the cooperation of other states. However maximum benefits would be achieved if this was done internationally.
Setting up Austerity Measures
Financial and banking crisis could be reduced by establishment of policies that ensure austerity measures on governments are implemented. This would require governments to cut down on unnecessary expenditure that strains budgets and consequently increases sovereign debt. Such policies would encourage internal production of good s and services where possible and the reduction of unnecessary imports where the same strains budgets.
The ongoing euro zone crisis resulted largely due to over expenditure by governments .this resulted in a lack of sufficiency of fund s to support the extra spending ( Nanto, 2010). This resulted in a lot of borrowing which drastically increased sovereign debt. Had there been policies to regulate these high expenditure levels, the crisis would have never happened. Avoidance of unnecessary wars for instance is a way through which a county may save its finite financial resources and channel them towards more productive and economic-centered activities.
Austerity measures are best instituted within individual countries as each country has its own set of unique Financial, economic, political, geographical and social factors that determine how it formulates its policies and the manner in which they are implemented. Homogenizing the procedure by making it an international policy would create many complications. However, exceptions may be created when issues affect the international community and where it would be easier to implement.
Reforming Incentive Systems in relation to financial and banking Services.
Policies that change the incentive system governing financial and banking sector could reduce the frequency of financial and banking crisis. They could accomplish this by curtailing the relaxation of rules which is usually done by financial institutions to attract more customers. However in their attempt to get more clients, these institutions end up opening themselves up to subprime risk and eventual subprime collapse. Policies that put a cap on the number and nature of incentives that a financial institution may offer to potential customers. Such incentives also usually include a waiver on collateral requirements for loan facility recipients, reduced requirements for mortgage applications.
The subprime collapse in major U.S.A banks that set forth the financial and banking crises and which escalates to a global recession was set in motion by indiscriminate offering of incentives to clients. These incentives were designed to attract clients to banks in the competitive banking industry and more so in issuing of mortgage facilities. Had there been policies in place that limited the number as well as nature of incentives the financial institutions offered, then subprime risk would have been greatly reduces and the collapse likely avoided ( Nanto, 2010).
Such policies are best implemented internationally as this would create uniformity in the system. However, it may also be implemented n an individual country basis.
References
Nanto, D.K. (2010).Global Financial Crisis: Analysis and Policy Implications. New York: Diane
Publishing.
