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U.K. Financial Regulations

Written by A Forex View From Afar on Wednesday, March 18, 2009

The era of “free and unregulated” markets and financial institutions may be over, or at the least, its sunset is quickly approaching as regulators try to avoid further crises in the financial system. The U.K.’s Financial Services Authority released a 122-page report today, which included some of the new rules that will shape the U.K. financial system in the coming years.

The two most important conclusions of the report were that the European Union should form a new regulatory authority, which would supervise the European banking system for systematic risks and exposures. The second important change highlighted in the report is that a clearinghouse should be formed for the mortgage market.

The new regulations package comes as an increasing number of U.K. banks have failed and required to be nationalized by the government, including the biggest national banks. Before the credit crunch, London was seen as the second biggest financial center in the world, closely following New York.

One idea that might prove to be very beneficial for the financial system is that the regulator arm of the law, the FSA, should also regulate financial products and not just financial institutions. This would imply that regulators would have direct access to the investment vehicles that first drove us into the credit crisis, something that might prove to be beneficial over the long term.

Other proposals included in the FSA report suggest that banks should limit their borrowing cap, in an attempt to reduce the likelihood of overleveraging loans, while at the same time, banks should increase the percentage of high-quality assets (theoretically, government issued debts). Among other things, these two decisions would reduce substantially the bank’s profit margin, but it would also increase the overall safety.

However, rules are meant to be broken or at least to search for a way around them. I entirely support stricter rules over the financial markets, but regulators should act preemptively, something that hardly ever happened until now.

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