Question

The financial sector is heavily regulated. Explain how government regulations help to solve information problems, increasing the effectiveness of financial markets and institutions.

Answer 1

There was a need to regulate the financial market after 2008 crisis because financial markets were trying to engage themself in excessive risk which can ultimately increase the risk for the overall economy so there was a need for regulation by Federal Reserve and securities and exchange commission in order to establish better rules and regulation to protect the interest of the stakeholders and market participants.

government regulations in the financial markets will be curtailing upon any kind of insider trading and they will be making liable the institution of various penalties and they can even suspend their listing on the stock exchange if they are even found defrauding the financial statements, and they are also trying to limit the exposure of various Financial institutions to various high risk securities by introducing of various Basel requirements for the banks and they are also limiting the exposure of investment bankers to various derivative instruments and they have also checked the trading in derivatives by introduction of the merchant account in order to have a better and fair mechanism to protect the interest of the stakeholders.

They have also strengthened the public disclosure norms in order to to maximize the interest of stakeholders and introduce a financial system which is full of high transparency and interest of the stakeholders are protected at any cost so they are also introducing various kinds of insider trading provision rules and checking up on various large transactions so that there is a fair regulations in the market and it would increase the effectiveness and efficiency of the markets and it will also attract market participants to engage more into the market.