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Theoretical Foundation of States Regulatory Response to the Financial Crisis Essay Example

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Theoretical Foundation of States Regulatory Response to the Financial Crisis

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Theoretical Foundation of States Regulatory Response to the Financial Crisis. States expect banks to finance long-term loans by use of short-term deposits, thus acting as a lender of last resort. Interbank market has also helped in regulating financial crises since it is a source of credit risk obtained from loan operations with no guarantees within financial institutions. Small investors are protected and the generalization of deposit insurance is guaranteed. Liquidification of deposits in a common bank for many states is aimed at opening of deposits in other financial institutions.Another theme in the response is the conveying to private market actors to regulate and supervise financial markets. This is manifested through the legitimization and endorsement of standards drafted by private actors, including auditing and accounting standards.

An additional manifestation was that regulators were to shift part of the duty for observing markets into the control of private investors by requesting public and private actors to disclose much information concerning their regular activities. This market discipline was elevated by Basel II agreements capital supervisions and requirements. The conformity also allowed large banks to utilize their risk management strategies and information to determine the quantity of reserve capital to be saved for credit risk. It also assigned credit rating organizations an official duty in credit risk assessment for all kinds of banks. Generally, a paradigm shift in terms of prudential policies resulted in States increasing attempts to work with, instead of against market forces.Apart from expanding international financial regulation perimeter, State leaders tried to reinforce their institutional basis by establishing joint supervisory colleges for all key cross-border monetary institutions. The Financial Stability Board (FSB) was assigned the task of collaborating with IMF in carrying out early warning practices as well as supporting and setting guidelines to the supervisory colleges. FSB was also required to undertake cooperative strategic evaluations of the policy development task of the global standard setting bodies to make sure that their work is coordinated, timely, addressing gaps, and focused on priorities. The bodies required to set bodies were to report their work to FSB in order to provide a wider accountability framework regarding their. Theoretical Foundation of States Regulatory Response to the Financial Crisis.

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Work Cited

Goodhart, Charles. The Regulatory Response to Financial Crisis. New York: Edward Elgar Publishing, 2010. Print.
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