Role of Financial Institutions or Bankers in the World Economy - Essay Example

Financial Institutions and Regulations Name Course Name and Code Instructor’s Name Date Great Depression This was a severe economic depression that last a decade just before the second world war (Watkins, 2009). The Great Depression varied across different countries but it can be summarized that it lasted between 1929 to late 1930s. In the economic history of the 20th century, the Great Depression can be termed as most widespread, longest and deepest depression. The Great Depression can be attributed to the stock market crash that occurred after a decade of prosperity and optimism in the United States but it crashed on October 29, 1929, and thus was the beginning of the Great Depression (Downing, 2008). The prices of stock plummeted resulting in many investors selling their stocks but no one was willing to purchase the stocks result to wide spread of bankruptcy (Watkins, 2009). The crash was the beginning of numerous disasters because the banks had also invested on the stock exchange and hence the banks were forced to close the banks, when many depositors saw that the banks were closing, the rushed and withdrew cash from the still open banks resulted in all the banks been closed (Robbins, 2009). In addition, many industries and businesses were affected since either they had invested on the banks that had closed or on the stock market that had crushed. This resulted in unemployment, cut of wages and other numerous effects to the employees (Cravens, 2009). In the previous recessions, the farmers were safe because they were able to utilize their foodstuffs but within the period of the Great Depression, the plains were hit by horrendous dust storms and drought-leaving farmers broke (Watkins, 2009). Many of these farmers and the unemployed people started moving y rails or private cars looking for employment (Robbins, 2009). In a single instant, there were thousands of people applying for a single post and thus resulting in many people being desperate and were continuous on the move. Recovery from the Great Depression began in 1933. The approach by the United States government especially the Roosevelt’s New Deal policies may have contributed to either accelerated or caused the recovery (Robbins, 2009). Moreover, it may be attributed to the rise on nominal interest rates and expectations of reflation that were portended by Roosevelt. In addition, the recovery may be attributed to the gold inflows that showed sign of self-correction (Robbins, 2009). This resulted in devaluation of United States dollar and also Europe political deterioration (Burgan, 2011). The recovery was also attributed to WWII because the government started spending heavily resulting in creation of employments and other means of incomes for the unemployed. Role of Financial Institutions or Bankers in the World Economy Financial institutions can be defined as institutions that provide the economy financial services. This means that they act as financial intermediaries, and the government usually regulates them (Herrmann, 2010). Generally, there are three obligations of financial institutions, which are insurance providers, deposit taking, and agency e.g. investment funds, underwriters or brokers (Bradlow and Hunter, 2010). Thus, financial institutions are important in ensuring that the world economy operates effectively within the laid regulations and ensuring that their clients and members benefits immensely through roles provided by these institutions (Siddaiah, 2009). As one of the function of financial institution is taking deposit that is currently championed by the banks, the banks can be defined are those institutions that accepts deposits from its customers and also issues loans (Bradlow and Hunter, 2010). The concept of receiving deposits differentiates banks from other financial institutions (Menzel and White, 2011). Banks are important because they reduce cost of doing business through numerous approaches such as standardized products, conveniences in doing businesses and less costly expertise through appropriate routines and tested procedures (Herrmann, 2010). Moreover, since the banks are supervised by supervisory bodies means that whatever services that they provide conforms to acceptable behavioural codes, approaches to business, ethical and moral obligations and other factors that contributes towards effective businesses (Gup, 2011). Another role that is played by the financial institutions is offering insurance services. Insurance can be defined as a form of risk management that is utilised to hedge against contingent risks and loss uncertainty (Carayannis, Pirzadeh and Popescu, 2011). Thus, it is the equitable transfer of loss risk to another entity in exchange for payment (Herrmann, 2010). The amount that the insurance company charges is called premium resulting in the insurer assumes compensation of the insured in case of either personal or financial loss (Bradlow and Hunter, 2010). In the world economy, there are numerous risks and threats that may affect businesspersons of persons negatively and thus the presence of insurance services that are used to address these issues ensures that the world economy operates effectively (Siddaiah, 2009). The last financial institution is agency that incorporates investment funds and brokers. These are those institutions that do obligations with an aim of getting their cut (Herrmann, 2010). Investments funds pools money from different institutions brings them together and formulates and implements an income generating activity to ensure return on investment (Bradlow and Hunter, 2010). Governance and Structural Weakness in Financial Regulatory System Due to increase in globalisation, corporate governance and internal control are important since it is becoming more difficult to regulate businesses externally (Menzel and White, 2011). Some of the factors that contribute towards corporate governance include integrity, the bonus culture, regulatory framework, and directors training. The issue of integrity is relative since it is based on the perception of the beholder meaning that lawyers and accountants can be viewed in terms of decency, honesty, and fairness while other activities within the same sector can be viewed as crooked, rip-off or even cheating. This means that even though many regulations such as King, Sarbanes-Oxley, and Combined Code exists, the eye of the public or general business sector whether integrity is upheld. On the other hand, remuneration and bonus culture can be attributed to numerous financial crises. Thus, institutions formulate and implements products that drive revenues while trying to ensure that they are shield from business risks (Walter, 2008). This results in many institutions creating irresponsible lending and excessive risks leading to what may be called ‘credit crunch’. Moreover, numerous government bailouts have seen numerous directors getting huge payoffs while these bailouts are provided by the taxpayers. Thus, breaking rules that are championed by corporate governance. Structural weakness usually contributes towards domestic financial institutions. This means that institutional developments usually are left behind while real sector developments outpaces them. This means that these weaknesses distorts investment incentives that results in poor financial liberalisation, inadequate corporate governance, lax regulatory stands and lack of transparency. Such approaches results in institutions over-investing and over-borrowing that results in running highly risk investments. Recommended Changes to the Financial Regulatory System: Internationally and Locally Integrity is an important requirement that averts may business from practising business against rules and regulations that are in place (Calhoun and Derlugian, 2011). Rules and regulations should be in place to ensure that directors should not manipulate the views of managers and hence sustain the businesses. Most of crisis within business sectors are attributed to greedy directors and thus formulating and implementing rules that shields managers from the urge and demands of the directors will enable business to effective within the regulatory frameworks. Moreover, business should embrace fully the core definition of corporate governance. This means that there should be a better system of balances and checks to pick in advance signs of threats regarding these organisations (Jansen, 2010). Most of the financial crisis van be attributed to weaknesses and failures in implementation and supervision of corporate governance arrangements and thus were unable to save guard stakeholders requirements. Remunerations and director’s pay is another contagious issue and it is usually taken up by media and special interest groups, since sometimes, the remunerations that these directors are offered are not value for money (Jansen, 2010). This means that in any organisation that champions for quality should reward professionals well and not based on their greed. The issue is not the amount of pay, formulation of the pay is important but the area of contention is its implementation. Thus, strategies and approaches should be in place to ensure that ensures implementation of the aim is achieved effectively. Introduction of new regulatory systems is not important since most of the regulatory systems have pitfalls especially during implementation and follow up. When a business is registering, these rules are usually followed to the latter but after registration and the management becomes greedy, the start flouting these rules and formulate internal mechanism that results in business unethical and other moral shortcomings. These inadequateness should be should be avoided completely (Jansen, 2010). Structural weaknesses are inherent but measures should be in place to determine the best investments and how much should be invested on them. Moreover, frameworks should be in place that guides what should be invested and how much should be invested. These will ensure that risks and threats are reduced to its minimal. How these changes would help to fix existing gaps in regulation and supervision It is important for fix gaps that exist in business sector to ensure sustainability of world economies. Changing and fixing inadequateness will result in better approach to business. Business ethics – Ethics is an important requirement in any business environment and thus fixing these existing gaps will result in championing on ethical requirements (Barton, Newell and Wilson, 2003). For example, directors and high paid employees should understand that they are responsible for all stakeholders and thus whatever decision they make affects many people including the employees. This means that management and executives should embrace ethics in their daily activities, and this can only be achieved through fixing these shortcomings. Implementation effectively of regulation and supervision frameworks – numerous regulations and directives exists that are aimed at ensuring that business operates within the laid out procedures. However, some of these businesses do not follow these regulations based on the core definition of these regulations (Calhoun and Derlugian, 2011). This results in situations where rules and regulations are implemented in partiality resulting in economic crises. Structural and corporate governance improvement – Improving on structural and corporate governance ensures that internal mechanisms are fully implemented and thus internal weaknesses are addressed in advance resulting in prevention of future threats. Legislation on globalisation and international businesses Due to globalisation, new business regulations should be in place to ensure that factors associated with globalisation are monitored. Globalisation has brought into consideration different factors such as labour and production in that one country may champion one view of doing business while the other may champion another thing (Dodaro, 2010). Moreover, globalisation brings different cultures that approach business different since globalisation and presence of internet-based business has resulting in business environments are free from geographical boundaries. Financial governing bodies should formulate and implement regulations and policies that champion globalisation and internet business, bringing into consideration the intricacies that are associated to such businesses (Dodaro, 2010). Regulations should be in place that ensures that different cultures are involved and such principles are update relative to domestic laws. Moreover, these rules should include measures to prevent inappropriate business approaches such as using child for labour, corruption, and poor working conditions of workers. 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