The financial systems support a particular organization for its planning and action plan, it also help to track and manage the resources required for the completion of the work
At the turn of this century it is clear that rapid growth in size, complexity and diversity of the global financial markets has added new dimensions and challenges to the process of maintaining financial stability. Traditional concerns remain that unwise credit exposure can result in insolvency, and systemic instability. But today there is a new series of hazards. Credit risk transfer has introduced new holders of credit risk, such as hedge funds and insurance companies, at a time when market depth is untested.
Systemically significant issues could increasingly arise from market-related risks, or from single point of failure risks in the market infrastructure as ever greater volumes of transactions pass through. Equally the growth of derivative instruments and advent of a range of new asset classes, despite added dispersion and better risk management, have added to the risk of instability arising through leverage, volatility and clarity.
It is fair to say that reforming the regulation of the financial sector is currently one of the most passionately debated issues on the policymaking agenda. Proposals for such reform are proliferating, and the official sector appears committed to adopting at least some meaningful reforms in the near-term. Broadly speaking, this movement toward regulatory reform emphasizes the need for structural reforms, outlines specific rules and regulations targeting primarily the perceived causes of the current crisis, and is carried along by a strong sense of the moment. Rather than add to the body of institutional and substantive proposals, this Article articulates a strategic approach to regulatory reform as a process of designing and implementing a fundamental change in the paradigm of financial regulation That process would begin with a comprehensive survey of emergent post-crisis financial markets. That inventory-taking would identify the key risks present in various market segments and would provide the basis for articulating the desirable substance and scope of financial regulation and comparing the optimal framework with the existing one. Finally, policymakers would employ the current and comprehensive data and analysis obtained in these first two steps to determine whether, and how, to reform the institutional structure of financial regulation. Ideally, such an approach would reduce the potential for unnecessary or unproductive regulatory reforms and help policymakers achieve the right balance between efficient regulation and crisis prevention going forward.
First and foremost, it offers a model approach to redesigning the regulation of financial services sector in a coherent and measured way. At the same time, even if this approach is not carried out in practice, there may be significant value in holding it out as a theoretical ideal. It may be, for example, that articulating an ideal process for financial regulatory reform will help frame important issues that may influence whatever reform process is actually undertaken. It may cause policymakers to try to limit the impact of crisis-containment measures and to reduce the chances that these measures will constrain future options for reform. It may also help influence policymakers to eschew an approach that begins with changes to regulatory structure and to focus more on what they perceive will be the significant risks embedded in post-crisis financial markets.
The global financial crisis of 2008-9 produced losses of financial wealth estimated by the IMF at more than $US 2.7 trillion in the United States, and another $US 1.4 trillion in the rest of the world. The crisis nature of the problem decreased in mid-2009, with house prices stabilizing in the US and GDP growth returning to positive numbers in the third quarter of the year. Even so, the approximately 10% unemployment rate in late 2009 was quite alarming, and it was not likely to be resolved quickly. We have identified four categories of behavioral finance elements in the financial crisis.
- Irrational exuberance of people involved in the market for US homes, where prices rose unsustainably for several years, and thus a bubble should have been evident.
- Market structural imperfections, most importantly the lack of short-term financing available to major investment banks when the bubble burst.
- Lack of adequate regulatory oversight over the risk-creating behavior of mortgage lenders and repackagers, and over the valuations that were assigned to the risky assets.
- Lack of financial institution oversight over their own lenders and analysts' activities that produced the assets that became toxic. So in conclusion, the field of financial stability oversight presents us with plenty of challenges. Not only is the world more complex, but we need to devote real thought as to how best to operate and organize ourselves so as to contain risks.