The Practice and Enlightenment of International Financial Regulation Reform After the Global Crisis

The Practice and Enlightenment of International Financial Regulation Reform after the Global Crisis

----A Case Study of U.S. and British Financial Regulation Reform

Abstract

The financial crisis of 2008 is the most serious financial crisis since the great depression. As for the reasons, many economists hold different opinions. Only the reason of weak financial regulation seems to be a consensus for everyone. The financial crisis exposed the disadvantages of financial regulatory reform. Many countries have put forward the scheme of financial regulatory reform, and this article takes Britain and the United States as an example, to study its reform content and enlightenment to our country.

Key words: financial crisis, financial regulation, the United States, Britain

1. The outbreak of the financial crisis

The financial crisis broke out in September 2008 in American. The first problem is the America's mortgage agencies. Fannie Mae and Freddie Mac are in trouble because of the influence of the subprime mortgage crisis, and they accounted for almost 50% of total amount of the housing mortgage loan. On September 15, Lehman Brothers, the fourth-largest U.S. investment bank, had to file for bankruptcy protection. At this point, Merrill Lynch, Lehman Brothers and Bear Stearns (the third to the fifth largest investment bank) have filed for bankruptcy protection or been acquired. And the Goldman Sachs and Morgan Stanley are also from investment banks to shareholding banks. Then, the financial unrest spread from investment banks to insurance companies, savings institutions and commercial banks. Later, it evolved into an international financial crisis.

It is generally believed that the financial crisis emerged in the second half of 2007. Investors began to lose faith in the value of mortgage-backed securities after the outbreak of the credit crisis, causing a liquidity crisis, leading to the outbreak of the financial crisis. Until 2008, the financial crisis began to spiral out of control, which led to the collapse of several large financial institutions. With the further development of the financial crisis, it evolved into a real global economic crisis.

1. The causes of financial crisis

As for the reason of the financial crisis, many economists hold different opinions, some people think it is the result of highly bureaucratization of America's large financial institutions, while others consider that the habit of low savings and high consumption cause the financial crisis. However, only the reason of weak financial regulation seems to be a consensus for everyone.

In subprime mortgages, some banks and financial institutions make use of the opportunity that mortgage securitization can transfer the risk to investors to reduce the credit threshold, leading to the increase of risks of the banking, finance and investment market. In this period, the down payment rate of housing loan appeared downward trend year by year. The standard of down payments is 20%, but in this period it dropped to zero. And in some financial institutions, professional assessment of mortgage became computer automated assessment, and the reliability of the automated assessment had not yet been validated. Some financial institutions packaged high-risk subprime mortgages into securitized products and sell these defective mortgage securities to investors. Its outstanding performance is that they don't disclose to investors that homeowners can hardly pay the high adjustable rate mortgage when they issued mortgage securitization products. All of these problems are closely related to the weakness of financial regulation.

1. The U.S. and British Financial Regulation Reform

    The subprime mortgage crisis has evolved into a once-in-a-century global financial crisis, and it also highlighted the serious defect of the financial regulatory system. The United States and Britain have issued important financial regulatory reform, presenting a global reflection of financial regulation.

The U.S. financial regulatory reforms mainly include the following content.

First of all, strengthen the supervision of financial institutions. All the financial institutions that may bring serious risks to the financial system must be regulated. Therefore, the government will implement the following six aspects of reforms: establish the Financial Service Oversight Council which led by the US Treasury in order to monitor systemic risk. Intensify the fed's power and authorized the fed to solve the problems of the risk accumulation. Include the bank holding companies, hedge funds and insurance companies will also be incorporated into the fed's regulatory scope; Set up the national banking supervision institutions to supervise all federally licensed banks; Cancel the Office of Thrift Supervision and other institutions which can lead to regulatory loopholes; Hedge funds and other private equity institutions need to be registered with the securities and exchange commission.

Secondly, establish a comprehensive regulation of financial markets. Strengthen the oversight of securitized market and the management of credit rating agencies. Supervise the curb exchange of financial derivatives, and expend the Federal regulatory scope to the financial market’s gray area. The complex derivatives trading and mortgage-backed securities trading will be placed within the regulation.

Thirdly, protect consumers and investors from improper financial behavior. In order to restore people’s confidence to the financial markets, the governments need to supervise the consumer financial services and investment market. Establish a consumer financial protection agency to protect consumers from fraud in financial system. The supervision of financial products and services to consumers and investors should be strengthened. Improve the provider’s industry standard of financial products and services, promote fair competition and protect the consumers’ profits of mortgage loan, credit cards and other financial products.