Financial Regulation

After 2008, the Bank of England was given powers to ensure the stability of the financial markets and prevent 2008 occurring again.

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Interventions

  • "Stress-test" -> Check capital ratios to ensure they could survive 30 days of economic turmoil
  • Can ask Commercial Banks and Lenders to increase capital buffer in difficult economic circumstances
  • FPC can make recommendations to PRA and FCA
  • FPC can recommend changes in regulation
  • Ask to look at unregulated markets

Reasons for Regulatory changes

  • Proactive instead of reactive
  • Reduce likelihood of future financial crash
  • Monitor activity more closely and have an early warning system
  • Can take actions to risks of a crisis that might happen

Evaluation

  • Regulatory capture - Paid for by firms, incentive to not regulate. Conflict of interest.
  • Undermined by standards not being international - lenders may just move abroad to countries with less strict regulations.

Benefits of Deregulation

  • Credit increases, increasing AD, due to higher investment and consumer spending
  • Living standards increase - easier to get a mortgage and more jobs
  • Profits for banks - create jobs
  • Draws business into the UK - lower regulations will make the UK more internationally attractive since banks could make higher profits