Of course, the activities of all financial institutions of the Western financial system are regulated by the rules of the Basel II – however, the existence of the above legislative framework had not the result expected; because of the above text, potential investors in the Western financial system are more likely to avoid appropriate check of their investment schemes – based on the fact that all relevant activities are based on specific laws; in this way, there would be no need for verification of the investment schemes developed in context of a Western financial system.
The above problem is highlighted by Goodhart who notes that ‘ the adoption of the pro-cyclical combination of Basel II and mark to market accounting served to hide the fragility of the over-extended financial and banking positions both from the regulators and from the regulated’ (Goodhart, p. Furthermore, existing regulation of firms that operate in the financial services sector – referring to the Western financial system – is not appropriately developed – in terms of the priorities set by its rules; in this way, non-compliance with the capital requirements can lead even to the cancellation of a firm’ s documentation – referring to the documents that are used for proving the firm’ s existence – because of the lack of validity; however, if severe failures are identified in this firm’ s strategic decisions – meaning the decisions on investment schemes for the customers’ funds – then the measures taken by the state against the firm can be limited – even non-existent.
In the study of Goodhart, it is made clear that the responses of the Western system to a financial crisis can be explained by referring also to this system’ s macroeconomic structure; the regulation of this system has been also regarded as being responsible for this system’ s failure to face the crises of 1997-1998 and 2007-2009.
The macroeconomic structure of the Western financial system is characterized by the key role of the executives – the power of these individuals is extended at such level that their decisions can be differentiated from the view of the government or the public on a specific issue referring to firms’ activities.
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