The role of de-regulation of the finacial system – Essay Example
The Role of De-Regulation of the Financial System Overview Deregulation is the process where the companies or the financial institutes obtain more independence or freedom to compete and to operate due to the various changes in the laws related to the financial sector. Deregulation refers to the reduction of the power of the government on the industries; however, it does not mean that all the regulations are removed. Deregulation refers to the system of moving away from the range of regulations of the activities related to the finance. It helps the organizations to acquire their objective’s assistance, monetary policies and financing in the public sector among others (Strahan, 2002). In various instances, the deregulation acts have been imposed focusing on the financial systems of industrial sectors in various countries. For example, one of the most crucial changes in the financial system’s regulations was the Gramm-Leach- Bliley Act, which was enacted in US in the year 1999. Similarly, in Australia the Financial Management and Accountability Act (FMA Act) was implemented in the year 1997 to ensure deregulation in the financial system of various industrial sectors. These Acts in turn resulted in lessening the level of competition among the investment banks, traditional banks and various insurance firms. Furthermore, this act allowed the companies to take part in each and every segment of the markets based on specific situations. Hereby, the major objective of this study is to highlight the deregulation and its role towards the financial system to advance the interests of finance capital.
Role of Deregulation in Financial Systems
The deregulation on relation to the financial liberalization aspect has been comparatively a current experience in the context of globalization. The deregulation reforms have been applied in major countries all over the world through certain steps or procedures such as China, United States and Australia. It is in this context that deregulation i.e. lesser intervention of government of a country has certain roles to play towards the financial systems in the economy as deregulation reforms tend to have string impacts over the financial sectors of every country fueling the scope of globalization (Clarke & Islam, 2004). It is worth mentioning that deregulation has certain advantages as well as certain disadvantages towards any economy and its financial system. For instance, deregulation measures enacted in a financial system of an economy can motivate business entities to take part in the industrialization process more actively than compared to the period of regulated financial system. Moreover, with certain liberties in maintaining and participating in the financial system through deregulation measures, companies would also be more efficient and effective as a communicator of its viability and stability. However, as a negative impact of deregulation, companies or certain industry sectors can also engage malpractices in maintaining ethical standards while documenting their financial stability (Bowe, Briguglio & Dean, 1998). Despite, its negative impacts, deregulation measures have been observed to enhance the financial system and industrial stability as well as competition of various countries. From a generalized point of view, it can be stated that these factors accumulatively have improved the scope of development in the financial sector in different countries (Organization for economic co-operation and development, 2001).
Examples of Deregulation
In the financial planning system of China, before the implementation of the deregulation in the Chinese economy (1953-1978), the planning authority was not supposed to control the economic actions of the country. Before 1978 the business entities and the farmers had no independence and the right to take financial decisions for their businesses as the entire planning system was controlled by the government of the country. Before the revolution in China government had decided to devise a list of new economic policies to control the economy and the population of the country. After 1978 when the Chinese economy transformed due to the financial deregulation the farmers and the businessmen achieved independence to regulate their own business (Chow, 2007). This resulted in substantial growth of the financial structure of China with increased amount of investment in various important sectors of the economy along with a rise in influential creative strategies as adopted by the companies (Qichun, 2011).
Similarly, the US government has also faced the issues regarding regulation in its financial system. After the enactment of deregulation act in the 1980s, the United States market witnessed increasing competition among firms in various industrial sectors resulting in decreasing prices of multiple services and products. Subsequently, the investment and purchasing trend also depicted a more stable and competitive business environment fuelling growth along in the overall economy (Bier, 2003). However, researchers often doubt the impact of financial deregulations in the United States has been the major cause for the recent financial turmoil of 2008-2009 (Sherman, 2009).
Bowe, M., Briguglio, L., & Dean, J. W. (1998). Banking and finance in islands and small states. UK: Routledge.
Bier, V. (2003). Effects of deregulation on safety: implications drawn from the aviation, rail, and United Kingdom nuclear power industries.US: Springer.
Clarke, M., & Islam, S. M. N. (2004). Economic growth and social welfare: operationalising normative social choice theory. UK: Emerald Group Publishing.
Chow, G. C., (2007). Chinas economic transformation. US: Wiley-Blackwell.
Organization for economic co-operation and development. (2001). Policy issues in insurance: insurance regulation liberalization and financial convergence. UK: OECD Publishing.
Qichun, H. (2011). Does growth cause financial deregulation in china? An instrumental variables approach. Central University of Finance and Economics.
Sherman, M. (2009). A Short History of Financial Deregulation in the United States. Center for Economic and Policy Research.
Strahan, P. E. (2002). The real effects of U.S. banking deregulation. Retrieved from http://fic.wharton.upenn.edu/fic/papers/02/0239.pdf