Financial regulations are rules created and imposed by the government on financial institutions, such as banks. The objective of financial regulations is to prevent the abuse of financial services to customers, to protect the savings of the public, and to keep the financial economy stabilized (Rose, Hudgins 2008 p. 31).
It is accurate to state that the impact of past financial crises has established and contributed to the amelioration of financial regulation over the decades. In 1929 when the Great Depression occurred due to the stock market crash, this caused one of history’s worst financial crises. The impact on the banks was severe as they lost a lot of money on their investment in the stock market. As a result, depositors no longer had confidence in their banks which caused them to panic and to demand their savings in cash. However, due to the high demands of cash, the banks did not possess enough to supply mass demand all at once. Banks were forced to liquidate loans and a substantial number of banks failed (History. com Editors, 2009).
Similarly, in 2008, what was called the Great Recession was also a historical financial crisis. The cause of the Great Recession was due to financial intuitions issuing mortgages to individuals who simply could not afford it. This is called a subprime mortgage. According to Sraders (2019) “During the mid-2000s, the housing market was booming due to the banks giving mortgages to high-risk candidates”. These securities were then marketed as low-risk investments to get them sold to investors. As subprime mortgages began to increase some began to see the potential destruction of the housing market. Fiorillo (2018) stated in an attempt to avoid this the Federal Reserve raised its interest rate to slow down the rapid increase of the housing market. However, the market bubble inevitably burst causing lenders and other financial institutions to fail and file for bankruptcy.
These two historical events are evidence of the importance of financial regulation. Due to the Great Depression, the 1933 Banking Act was established when Franklin D. Roosevelt became President of the United States. This legislation aimed to restore trust in the banking system by implementing various regulations. The 1933 Banking Act also created the Federal Deposit Insurance Corporation which insured deposits (Maues, n.d). Likewise, as a response to the Great Recession on July 21, 2010, the Dodd-Frank Act was put into place and implemented several changes in the U.S. financial regulations (Guynn, Polk & Wardwell, 2010).The aim, according to Guynn, Polk & Wardwell (2010) was to “reduce the likelihood and magnitude of future financial panic, end taxpayer bailouts of Wall Street, and to enhance consumer protection.”
Therefore, as history shows, the need for financial regulation is vital and necessary to enable financial stability and to protect consumers.
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This article stands true on any day. The mistakes and consequences of them paves path to better approach. Throughout the history, financial regulations have been updating according to the changing needs and requirements. The Great Depression of 1929 and The Great Recession of 2008 have been a grave mark on the impact they have on our present financial regulations and working.New rules were implemented and financial systems were refreshed. The Central Bank and the government should always strive for consumer protection and general well being for a smoother financial flow in economy or things eventually starts to fall off.
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