The new regulatory framework proposal and the Turner Review are both being published after 2007 f... more The new regulatory framework proposal and the Turner Review are both being published after 2007 financial crisis in order to resolve the current financial crisis and to prevent the potential financial instability from the origin of the problem. The notes will analyse the two documents from the perspective of the rationales and techniques to deal with the risks and the actual institutional change implementations in the UK. The 2007 financial crisis was caused by the absence of prudential management of financial institution and the inability of the regulator to detect the potential risk which may affect the whole financial system. (HM Treasury, 2011) Systemic risk can be referred as the financial system instability, which have the potential capability to bankrupt all the financial market and make the global economy vulnerable. (Freixas et al, 2000) In order to build a stronger, sustainable and competitive financial regulatory framework, the following rationales and techniques will be considered. The major trigger of the financial crisis is the capital inadequacy and market illiquidity. Some emerging economies such as China, have assisted to stimulate the growth of credit extension and risk-taking in major account deficit countries such as the US and other developed economies at the centre of the financial crisis. (Borio and Disyatat, 2011) Also, the population of securitised credit has provided the great contribution to the credit booming in developed economies and lead to the expansion of financial sector, which strengthening the problem of bank capital inadequacy. The technique: Switching from Basel II to Basel III. Basel III has improve the standards in order to strengthening the international capital and liquidity requirements. (HM Treasury, 2011) Firstly, increasing the quantity and quality of bank capital in order to make sure that bank capital is sufficient to absorb the heavy losses. It may require barriers of entries of the capital so as to make sure the bank capital quality is guaranteed. One of the problems that cause the capital inadequacy is the increase in leverage ratio. The resolution technique is to limit the leverage rate which can balance the proportion of capital and debt financing requirement. The current minimum leverage ratio is 3% so as to ensure the capital inadequacy. (Bank of England, 2014) The other cause is procyclicality problem. The resolution technique is to introduce counter-cyclical buffer. It is the method to store the enough capital in the economic booming period in order to prevent the huge losses in the capital when the bank experienced the financial crisis. The current counter-cyclical buffering rate to assist the financial resilience is 2.5%. (Basel Committee on Banking Supervision, 2010) The previous regulatory structure in the UK was called as 'Tripartite'. It was constructed by the Treasury, Bank of England and FSA, all of the authorities are supposed to be coordinated together to ensure the financial stability and prevent financial crisis. However, the problem of 'underlap' refers to that the macro-prudential risk analysis and mitigation was neglected between the gaps in the UK regulatory system. (HM Treasure, 2010) The problem lead to the 'Tripartite' failure of detecting the macro-level risks which build up the in the early stage of the financial crisis and making correct mitigation before the problem becoming severe. (Davies, 2010) Also, both Bank of England and FSA were dysfunctional in dealing with financial stability in their own working range. FSA is proved to be failed in using the principle of light touch in the Northern Rock Bank bankruptcy. (Avgouleas, 2009) For purpose of resolving the previous mentioned problem, the UK government decided to reform the previous regulatory structure after the crisis. The new regulatory framework put the Bank of England as the centre of system, which control macro-prudential authority and micro-prudential authority. Hence, the
The new regulatory framework proposal and the Turner Review are both being published after 2007 f... more The new regulatory framework proposal and the Turner Review are both being published after 2007 financial crisis in order to resolve the current financial crisis and to prevent the potential financial instability from the origin of the problem. The notes will analyse the two documents from the perspective of the rationales and techniques to deal with the risks and the actual institutional change implementations in the UK. The 2007 financial crisis was caused by the absence of prudential management of financial institution and the inability of the regulator to detect the potential risk which may affect the whole financial system. (HM Treasury, 2011) Systemic risk can be referred as the financial system instability, which have the potential capability to bankrupt all the financial market and make the global economy vulnerable. (Freixas et al, 2000) In order to build a stronger, sustainable and competitive financial regulatory framework, the following rationales and techniques will be considered. The major trigger of the financial crisis is the capital inadequacy and market illiquidity. Some emerging economies such as China, have assisted to stimulate the growth of credit extension and risk-taking in major account deficit countries such as the US and other developed economies at the centre of the financial crisis. (Borio and Disyatat, 2011) Also, the population of securitised credit has provided the great contribution to the credit booming in developed economies and lead to the expansion of financial sector, which strengthening the problem of bank capital inadequacy. The technique: Switching from Basel II to Basel III. Basel III has improve the standards in order to strengthening the international capital and liquidity requirements. (HM Treasury, 2011) Firstly, increasing the quantity and quality of bank capital in order to make sure that bank capital is sufficient to absorb the heavy losses. It may require barriers of entries of the capital so as to make sure the bank capital quality is guaranteed. One of the problems that cause the capital inadequacy is the increase in leverage ratio. The resolution technique is to limit the leverage rate which can balance the proportion of capital and debt financing requirement. The current minimum leverage ratio is 3% so as to ensure the capital inadequacy. (Bank of England, 2014) The other cause is procyclicality problem. The resolution technique is to introduce counter-cyclical buffer. It is the method to store the enough capital in the economic booming period in order to prevent the huge losses in the capital when the bank experienced the financial crisis. The current counter-cyclical buffering rate to assist the financial resilience is 2.5%. (Basel Committee on Banking Supervision, 2010) The previous regulatory structure in the UK was called as 'Tripartite'. It was constructed by the Treasury, Bank of England and FSA, all of the authorities are supposed to be coordinated together to ensure the financial stability and prevent financial crisis. However, the problem of 'underlap' refers to that the macro-prudential risk analysis and mitigation was neglected between the gaps in the UK regulatory system. (HM Treasure, 2010) The problem lead to the 'Tripartite' failure of detecting the macro-level risks which build up the in the early stage of the financial crisis and making correct mitigation before the problem becoming severe. (Davies, 2010) Also, both Bank of England and FSA were dysfunctional in dealing with financial stability in their own working range. FSA is proved to be failed in using the principle of light touch in the Northern Rock Bank bankruptcy. (Avgouleas, 2009) For purpose of resolving the previous mentioned problem, the UK government decided to reform the previous regulatory structure after the crisis. The new regulatory framework put the Bank of England as the centre of system, which control macro-prudential authority and micro-prudential authority. Hence, the
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