Question

​The recent collapse of some banks and financial institutions and the merger of others in ghana is proof that the financial system which consists of institutional unitsand markets that interact, typically in a complex manner, for the purpose of mobilizing funds for investment and providing facilities, including payment systems, for the financing of commercial activity remains unprotected in spite of the the presence of the Regulator and a solid legal system backing it. From the discussion in class and available literature, examine some of the difficulties associated with the financial system and how these challenges have been addressed by the Banks and Specialised Deposit Taking Institutions Act 2016 (Act 930). Are there any nobel ways by which some of the challenges may be resolved in your opinion?

Answer 1

Introduction :

The basic problem banks face today is that their balance sheets are merely inflated due to their fleur to recovery. As asset prices topples, banks face a period during which their balance sheets will shrink substantially. This process is unlikely to be a smooth one, mainly because during the shrinking the devilish interaction of solvency and liquidity crises will occur. It creates a further downward. As a result, there is as yet no state on the value of the banks’ assets.

Sulution :

The shortest way to solve this problem is that the governments and central banks will also have to support asset prices, in particular stock prices. The deleveraging process of the banking system will continue to put downward pressure on asset prices. In order to stop this, governments and central banks may be forced to intervene directly in stock markets and to buy shares.

The short-term solutions of the problem would be involving of “Keynesian economics”. First governments will have to sustain aggregate demand by increased spending in the face of dwindling tax revenues. s the result large budget deficits will be desirable. Attempts at balancing government budgets would not work, as it would likely lead to Keynes’ savings paradox. As private agents attempt to increase savings (because they reduce their consumption plans) the decline in production and national income actually prevents them from doing so. Government will increase investment and paradox would be solved. This process will help banks to recover by increased saving.

The Third option is to recapitalizing banks, governments will substitute private debt for government debt. This also is inevitable and desirable. As agents distrust private debt they turn to government debt deemed safer. Governments will have to accommodate for this desire.