Government Regulations on Financial Institutions

Governments all over the world regulate the financial sector. This could be due to a number of reasons. These regulations affect investment and even performance of the sector.

In the aftermath of the global financial crisis of 2008, the banking sector in the United States became subject to a number of new regulations established by government legislation. These bank regulations continue to impact the administration and operations of banks and other ancillary financial entities. They also call for increased vigilance and safeguards to protect the government, financial institutions and most importantly, the people.

The Housing and Economic Recovery Act of 2008 was the first in a series of regulatory laws designed to strengthen the U.S. economy. This act was created to prevent home foreclosures through debt counseling and community development programs. This act also required mortgage lenders and other banking institutions to register with the Nationwide Mortgage Licensing System and Registry through the Federal Deposit Insurance Corporation (FDIC) while broadening the scope of the good faith estimate document to cover a wider group of loan products. Consequently, banks and lenders are required to conduct business with greater transparency towards their customers.

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To most people, government regulations are unnecessary as far as any business is concerned. There is also the question of what would happen when fraud or misrepresentation was committed? Every business even financial institutions know that and illegal matters would drag them down so why the regulation?

In the absence of regulation, virtually every industry would do the same thing, because legitimate enterprises know that being known for selling faulty products would ruin their reputation and put them out of business. Unfortunately, as a result of ceaseless propaganda from pro-government interest groups, most Americans have been brainwashed into thinking they need regulatory agencies to protect them.

A most provocative paper has just been published by the American Enterprise Institute, written by former U.S. Treasury General Counsel Peter Wallison, entitled “Why Do We Regulate Banks?” Mr. Wallison argues that “it is difficult to identify a sound policy reason for regulating banks. Most of the conventional explanations — inherent bank instability, deposit insurance, the Federal Reserve’s role as lender of last resort, or the Fed’s role in the large-dollar payment system — turn out on examination to be either unfounded or based on risks that the government need not take in order to foster growth of the economy.” Mr. Wallison goes on to detail “the huge costs to the taxpayers and the economy” caused by bank and S&L; failures that have been due to regulation. Finally, Mr. Wallison, who has had major regulatory responsibility, concludes as to the question, “Why do we regulate banks? That we do so because we want to, not because we must.”

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Financial institutions have no problem with being regulated. The only problem they have is the expense that accompanies the regulations. There is also increase in workload and thus need to hire more workforce to see the regulations implemented.

Regulatory compliance challenges are widely expected to create heavier workloads and spur hiring in the financial services industry, according to a new survey of executives in seven countries.

Governments, regulators and accounting standard setters have enacted and implemented numerous new rules in recent years in response to the recent financial crisis. The financial services industry has been a target of many of these new regulations, which executives report difficulty managing.

Almost nine in 10 respondents (88%) said they are challenged in managing regulatory change, according to a survey of 1,100 financial services executives conducted by staffing services firm Robert Half International. Executives from Canada, France, Germany, Hong Kong, Singapore, the UK, and the United States participated in the survey.

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Categories: Personal Finance