The financial crisis was actually the result on the lack of an effective regulation. Some parts of the financial system were hit hard by the crisis and the government-sponsored enterprises and large commercial banks failed in preventing the systemic risk or the substantial loss for those on particular financial products.
Under the regulatory system, the amount of such injections have been increased significantly by some weaknesses. Such failures does not only cost taxpayers with big sums of money, but they likewise damaged the financial system’s ability in matching savers and borrowers and also on providing risk-sharing and information services.
The improvements on regulation for protecting society should focus on revisions on capital requirements, development of rigorous process on bankruptcy to resolve insolvency of complex financial institutions as well as on the reduction of interconnectedness issues of credit default swap contracts through using clearing-houses and exchanges.
Regulation also plays an essential role for protecting individuals. Economic theories of regulation can possibly stress the need to provide adequate information and on transparency. Behavioral economic arguments likewise suggest the importance of simplicity on the consumer investor option. On the recent financial crisis, regulation plays an essential role to greater transparency on the securitization as well as on information on mortgage contracts.
There in fact are some overarching themes that links on the regulatory needs for society as well as for individuals. The very first thing is on the need of a regulatory reform to focus on the “too big to fail”. It’s actually obvious that failures on policy of dealing with with exacerbated systemic risk at the time of the financial crisis. Too big to fail issues likewise led to mispricing on the risks that later on gave people with less safe return than what they have bargained for and that the disruptions on liquidity harmed the borrowers.
The other one is on the economic concern that over-regulation on financial instruments and institutions lead in causing harm, which is by raising the cost of funds to household and to business borrowers. The secret for this would be in designing regulation to ensure proper pricing on the risks and information when it comes to the risks and such approach also offers the appropriate balance of protection towards society and individual.
On the consumer protection agency, it is very important that the prudential supervisor will give its input to the consumer protection body about the impacts of the regulatory actions on the safety and the soundness of financial systems and that conflicts between supervisory and consumer body should be handled and resolved by the treasury.