Last Financial Crisis of 2008 - 2009 has taught great lessons to
the world. Follwing are certain steps which can avoid another
financial crisis.:
- Qunatitative Ease Quantitative easing is a
process whereby a Central Bank, such as the Fed purchases existing
government bonds (gilts) in order to pump money directly into the
financial system. Quantitative easing (QE) is regarded as a last
resort to stimulate spending in an economy when interest rates fail
to work.Quantitative easing (QE) – the purchase of assets with
electronically created cash – was the defining policy instrument of
the last financial crisis. By rebalancing investors’ portfolios out
of cash into non-monetary assets such as bonds, equities or real
estate, QE would increase the demand for these assets, which would
lead to new supply that would finance new investment in the real
economy.quantitative easing can fuel economic growth since money
funneled into the economy should allow people to more comfortably
make purchases. This can have a trickle down effect on both the
consumer and business communities, leading to increased stock
market performance and GDP growth.
- Macro Prudential Tools Macroprudential
policies are financial policies aimed at ensuring the stability of
the financial system as a whole to prevent substantial disruptions
in credit and other vital financial services necessary for stable
economic growth.Macroprudential policies aim to reduce the
financial system’s sensitivity to shocks by limiting the buildup of
financial vulnerabilities. This may include higher charges being
applied to Global Systematically Important Bnaks as they pose more
risk to the system. Higher Capital Charges will resuce the
likelihood of financial collapse because the ability to absorb
losses will increase.A macroprudential approach would assess and
control for the mechanism that banks would implement to reach their
required capital ratio, essentially encouraging them to raise
capital rather than pull back on lending.
- More Rules and not Discretion This question
addresses the issue of whether monetary policy should be made by
discretionary policy or be implemented according to a set of
rules.Tthe lesson of the crisis is that we need more rules to rein
in credit growth during a boom, not more discretion. The central
banks should act prudently and judiciously and tighten the credit
limits when they feel that it is required.A rule, based on bank
profitability or credit growth, could determine when
higher-than-now capital requirements are raised during the boom or
relaxed during periods of financial stress.
- Managing Risk in the System Risk can be
hedged, spread and pooled, but it is not so easily reduced. The
task of the new macro-prudential central banker is as a risk
manager for the financial system.All financial institutions,
irrespective of what they are called and what sector we think they
are in, to place capital against mismatches of liquidity, credit
and market risks. This would incentivize those with wells of
liquidity to draw liquidity risk from others and, in return, sell
them credit risks that they cannot easily match and vice
versa.
- Role of IMF International Monetary Fund has
palyed an important role in times of finnacial crisis and have
saved the world economy. it is essential for the process
of IMF evolution to continue – across the range of lending,
analytical and research activities as this will save the world
economy from financial crisis and promote fianncial stability.