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Financial Crises And Banking Regulation Essay

903 words - 4 pages

For me, I do agree that there’s still the need to implement regulations for intermediaries to have sufficient capital adequacies despite of not optimizing allocations. Yes, it is true that each one has his or her preference on how to maximize their allocation. In fact, one may find it more logical to optimize allocation even if the downfall of this may lead to defaulting or a financial crisis. However, as I have said, each has his or her own preference for risk. Not all has the inclination or the appetite for such extreme risks. Even if it will optimize allocation, one cannot deny the fact that some will still want to play it safe and settle for smaller returns. This now becomes the problem ...view middle of the document...

The cost of having a failure in the economy probably outweighs the benefits of having optimal allocation. More so, the cost of financial crisis is still greater than the cost of having regulations and the benefits of having optimal allocation combined. In a micro point of view, optimal allocation is good but from a macro point of view not as good as it may seem.

Banks having capital regulations has its good and bad side as well. As stated in the Basel Accord, banks have to maintain certain adequacy of capital. This is needed so that depositors will have confidence in the financial institutions. Capital of banks must be sufficient to protect a financial organization’s depositors and counterparties from the risks of the institutions’ on and off balance sheet risks. Having minimum capital standards are a vital tool to reducing systematic risk. Thus with this kind of regulation, banks are somehow restrained from making extreme risks which could be favorable or unfavorable to consumers depending on their appetite for risk. Since everyone has their own taste of risk, intermediaries on the other hand cannot cater to all the individual preferences for risk. Thus a certain regulation has to be established so that the “majority” would be serviced to according to their preference.

Banks may have been limited by the regulations imposed on them but they can somehow cater to the individuals preferences by giving them a variety of services which satisfies these preferences. Such services may range from savings account for early consumers to long term investments for those who have more appetite for risk and are willing to wait. By...

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