Topic: 2 Bank Regulations

Background: Bank regulations have been a topic of contention across the world for decades, especially after the Great Depression sent banks into a downward spiral that took years to recover from. But it has become even more of a hot topic in recent years in response to the financial crisis of 2008. Could stricter bank regulations have prevented the collapse? Maybe with stricter laws on reserve requirements and marginal lending, the crisis could have been prevented. Reserve requirements are the amount of funds that a depository institution must hold in reserve against specified deposit liabilities, and they must be held in the form of vault cash or deposits with the Federal Reserve Bank. Marginal lending is the practice of providing overnight liquidity to banks through the European Central Bank. A marginal lender will only lend to a consumer for a certain interest rate, and if that interest rate falls the transaction will not take place. Marginal investing is considered to be high risk because the loss of investment is much higher. The purpose of increased bank regulation is to maintain economic stability and to ensure consumer protection. A lot of banks have international borrowers and investments worldwide that need to be considered. Regulations on international banking can be difficult to enforce because not all of the counties involved may agree to them. In the past, some governments have agreed on regulation, one being Basel I. Basel I is a set of international banking regulations put forth by the Basel Committee on Bank Supervision, which set out the minimum capital requirements of financial institutions. The goal of Basel I was to minimize credit risk and countries that lend internationally must maintain a minimum amount (8%) of capital based on a

percent of risk-weighted assets. The Basel Committee meets typically four times a year to discuss various issues regarding banking regulation. People want to know that the money they put in the bank is safe and guaranteed. Some governments, including the United States government and several countries within the European Union have taken steps to regulate banks in hopes of ensuring consumer safety. These regulations have been put in place to try and avoid the bank collapse that were seen in 2008, for example the Lehman Brothers collapse. The company collapsed in 2008 after holding on to subprime low-rated mortgages for years that really dragged them down. The company filed for bankruptcy and had to be bailed out by the Federal Bank of New York for $138 billion dollars. Because Lehman has investments all over the world, their collapse sent a ripple effect of losses across the world. Questions to Consider: 1. Should there be stricter banking regulations? 2. If so, what should the regulations be? 3. Should banks be stopped from lending to subprime consumers? 4. Who will enforce the regulations? 5. What international regulations should be put in place? 6. Should banks be penalized for international trading with countries that have not agreed to uphold such regulations? Works Cited: https://www.utexas.edu/law/colloquia/archive/papers-public/2012-2013/11-2912_spindler_why_bank_regulation_failed.pdf \http://www.federalreserve.gov/monetarypolicy/reservereq.htm http://www.investopedia.com/terms/m/marginal-lender.asp

http://www.investopedia.com/terms/b/basel_i.asp http://www.bis.org/about/factbcbs.htm