The case for more regulation of banks liquidity

Trimis la data: 2010-07-07 Materia: Engleza Nivel: Facultate Pagini: 7 Nota: / 10 Downloads: 14
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The article we studied represents a foray into the general bank system taking into account the necessity of the government's intervention in the economical activities. There are analyzed different situations in which the commercial banks-taken as a particular case-confront themselves with sudden loses of funding and other kinds of shortcomings. In this context, the article mentions the two main regulatory remedies like the deposit insurance and liquidity support and also the advantages and disadvantages of those two measures.
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What we need to demonstrate according to this article is the level of which the state should intervene in the policy of the financial institutions so that the general economical activity to maintain a high standard. Nowadays, we can talk about a free, modernized, healthy bank system which is ready to face major risks, but which has to accept the necessity of a regulation measure.

1. Monopoly market
It is obvious that a free, democratic market implies less intervention and control of the state on the economy, but there are situations in which those interventions become the only way to stop an excessive abuse of power against the legal limits. This is the case of the monopoly markets that tend to eliminate the main principle of democracy-competition-by imposing their own prices and decisions without taking into account the circumstances.

That's why the state need to intervene with a series of limits and penalizations that should decrease the power of the monopolists. Because, after all, the last to pay in a monopoly case is the consumer, who is confronting with a higher price and a limited amount of goods or services. We can't talk anymore about the "era of the consumer" because the monopolist ignores the client's preferences and concentrates on its own profit. And the state's role is to protect the consumer against this kind of situation.

An example of dominant firms in Romania, which were penalized by the Competition Council is represented by UPC Romania and Cablevision of Romania SRL in 2006. But the sanctions for those monopolists are quite modest comparing to the huge profit they obtain in different regions of the country.

2. Deposits and loans
The article continues with the particular case of the financial institutions which remain the most important characters on the economical scene, as providers of credits and processors of payments.Commercial banks are what people normally call a bank, and the term refers to bank which focus mainly on companies. Those commercial banks raise founds by collecting deposits from businesses and consumers. It also buys corporate bonds and government bonds, and its primary liabilities are deposits and primary assets are loan and bonds.

The government failure to contain budget appropriations in accordance with the requirement of macroeconomic stability is the starting point of the vicious circle of the Romanian fiscal policy. To keep the budget under control, Romanian government resorted to ad-hoc taxes during the process of implementing the budget.

The capital market implies the existence of securities and the price of those securities is obviously influenced by the interest rate, and the operations realized by the commercials bank's activity determine a specific interest rate.

Thanks to the fact that what a bank owes in deposit can be called in easily, but what it is owed in loans cannot easily be converted in cash determine the mismatch between liquid debt and illiquid assets, meaning that banks are susceptible to sudden looses of funding. An important aspect is the connection between market rates and deposit rates. Banks can relay on the money market instead of deposit for funding loans which can also lead to an equilibrium of deposits and money market rate.

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