Question

Please explain why the financial system is one of the most highly regulated sectors of the economy. (200 words or more)

Answer 1

The financial system is on of the most regulated sectors in the economy because it has direct impact in recession. An unregulated financial sector can easily lead to recession as loans will be lent to less creditworthy customers, financial institutions will indulge in speculation putting tax payers money at risk.
Probability of financial fraud might be high in an unregulated market. This could be done by manipulating balance sheet and income statement, share market, insider trading, etc. Regulations limit the chance of fraud and have strict laws against violators.
Regulators fix the reserves to be kept by banks with the central bank. They stipulate the amount of economic capital (Tier I and Tier II) that they must keep. This helps the banks in protecting against expected and unexpected loss. Failure of bank could lead to a huge crisis as all banks and companies associated with the bank will collapse , employment will be lost, public money will be lost, etc.
Regulators ensure that information asymmetry is eliminated and financial dealing is made public. They ensure that misinformation is curbed which certain financial institution do to defraud a client. The insurance, banking and securities market are all regulated also the public are not cheated and public money is not utilised by certain greedy people for their own personal gains.