Question

Financial institutions are subject to regulations to ensure that they do not take excessive risk and they can safely facilitate the flow of funds through financial markets. Nevertheless, during the credit crisis, individuals were concerned about using financial institutions to facilitate their financial transactions. Why do you think the existing regulations were ineffective at ensuring a safe financial system? brief in approximately 350-400 words

Answer 1

At the time of 2008 credit crisis, Financial institutions were majorly responsible for managing the money of the investors in liberalised way in which there was less amount of regulation upon them and they were trying to take excessive risk in order to manage with their assets and there was a high amount of risk associated with their management of assets because various kinds of Financial institutions like bear stearns and Goldman Sachs along with Lehman brothers where taking high exposure in real estate market and housing sector.

Financial institutions are required for managing the money of their investors in an appropriate way and they are required to keep a check upon their risk exposure because there are various hybrid securities which are available in the market which can provide them with high rate of return but they need to keep a check upon their risk exposure because the risk exposure are inflated at the time of the adverse economic conditions so they need to help their respect risk, because these Financial institutions are managing the money of the investors and any default on the the one financial institution can trigger a chain of financial failure and that would mean it would be a financial contagion in the entire market.

At the time of the 2008, there were not enough regulations in order to regulate the derivatives market because there was high amount of hybrid securities that were floated in the market and they were not regulated because they were highly volatile and these securities has the power of causing disruption in the entire securities market at the time of the adverse economic cycle as we saw in case of credit default swaps.

Hence, it can be said that there was not appropriate measure which were in place by the regulatory authorities to manage with these hybrid securities which were highly volatile and they were showing a high rate of momentum beyond the regular volatile nature of the financial market and that led to a financial collapse due to decrease in the prices of securities in the housing market and that lead to collapse of financial institution who were exposed to a higher limit in this security is like Lehman brothers and bear stearns where are unable to continue with their operations because they did not manage with their duration of Assets and liabilities and they were finding it very difficult to manage with their short-term debt repayment and hands they both opted to file for insolvency while bear stern was taken Over, Lehman brothers could not survive and it had to file insolvency completely and dissolve so there was a need of an adequate and proper system which would have control the financial securities and it would have helped them to manage with the financial crisis in a better manner.