During the campaign president barack Obama made various promises among them the overhaul of the capital markets and banking industry regulations and on 20th January president Bush’s advisor gave his views on how the banking industry was going to be revived. President Obama took office at a time when the capital markets and the banking industry were in shambles due to the current meltdown and economic crisis but in United States of America and worldwide. Many people from United States of Americans and other citizens of the world pitched high hopes on the new president of the United States to turn around the economy.
In his campaign Obama promised to make change for America and helped stimulate economic growth at a time when capital markets were collapsing and thousands of people were loosing their jobs. Having finished 100 days in office, he is expected to deliver his promises by restructuring and setting new regulations to cover banking industry and capital markets.
Banking industry and capital markets
Ladies and gentlemen, before proposing the necessary financial regulations and modifications that will need to be put in place in relation to guiding the banking industry and capital markets, I need to inform your able committee of the reasons that triggered the current economic crisis that has made the world loose some wealth. The main cause for this crisis was irresponsible borrowing and lending among American citizens. This was what was called sub prime crisis where loans were provided although it was known that some were very risky an member who were given those loans were suspected not to be able to pay them. This was due to the fact that lending of the money was based on a belief that the interest rates will remain low so that borrowers can continue paying. Financial institutions became too easy to lend money without much control and consideration of the credit worthiness of the borrowers. This triggered great spending among the Americans and there was high economic growth which in my opinion was plastic growth. When interest rates started to increase, borrowers were unable to pay the interest and principle which led to the losing of the money lent out to the borrowers by financial institutions. Banking institutions started to experience a short fall of liquidity which led to the current financial crisis that we are experiencing.
The lower interest rates scenarios in most of the developed economies also allowed banks and financial institutions and finance companies to free their hands and to lend generously. Thus the excess liquidity in the market coupled with low interest rates allows finance companies to tap the areas where the return is extremely high. Personal Lending is one such area where the lending rates are higher as compared to other conventional users of banking thus finance companies tend to bet more on them and in the process sometimes violate their own lending criterion.
Credit is the mainstay for any financial institution particularly banks and financial institutions. Almost 60% of the assets side o a bank’s balance sheet is credit. It is the key contributor to a bank’s profitability. A bank’s credit management exercise is aimed at accomplishing its mission of retaining its position as a premier financial institution.
The effect of credit policy on banks and financial institutions is so phenomenal that the implications of this activity are critical and must for the survival and success of the banks and financial institutions, but also for the economic stability of a country. At the macro level, the collective operations of the Banks and financial institutions affect the debt capital available to the industry while at the same time; the spreads resulting from the credit operations of the bank will have a bearing on its long-term sustenance.
Mr. Chairman, I propose various measures that will ensure that the current financial crisis does not reoccur in future. In order to strengthen the banking industry, strict monetary policy should be put in place to regulate lending to members of the public. Their should be strict creditworthiness appraisal of individuals and ability to pay the money they borrow. In that essence the borrowers will be in a position to pay for the money they have borrowed in order to stimulate growth and make borrowing easier to the members of the public, the credit limit which should be issued out by banks to customers should not exceed 60% of a banks liquidity ratio. This will make sure that there are some funds that are being held by the bank that is not given out. The banking industry should also be controlled to make sure that the interest rates they charge are affordable to the members of the public as well as it does not got up to the level that is not reachable by many. This is because an efficient banking system is absolutely necessary for out country to grow economically. The services that are rendered by an efficient banking system cannot exaggerate economic growth as we know it.
- in ones pocket, the chances are that it will be spent and not saved. But if it is put in the bank, it is out of sight and to be out of sight is to be out of mind. Thus, the chances are that will remain in the bank.
- By encouraging savings, the banks bring about accumulation of large amounts of capital in the country from small individual savings. In this way, they add to the productivity of the resources of the country and contribute to the general property and welfare.
In the presidents election pledge, he promised our people that necessary change was going to be made to various institutions but in our case here we are interested in banking industry and capital markets. Looking at the current capital markets, I propose that a regulation should be put in place that requires all listed companies to have a limited debt capital in their capital structure. I propose that any company which finances its assets to the tune of more that 60% in debt, should be asked to restructure to reduce the debt in the financial statement to a rate less than 60%. This will not only help the capital markets to be stable by stabilizing companies but will ensure that the capital market is stable. In that essence companies, Chief Executive Officers will pursue responsible borrowing as well as managing the affairs of the company. This proposal is because most financial institutions have collapsed are said to be collapsing because of failure to observe code of ethics in managing the company.
Lastly, in all the institutions relating to this committee I propose a strict accountability regulation where all institutions under the industries will be required to implement strict ethics that will govern the idea of controlling accountability of industry player is to some extent a better idea because if you check all the reasons given for collapsing banks and mortgage providers was due to the fact that the management failed to act responsibly and ethically. This regulation should be made in the adjustment in Sarbox Act which was meant to regulate public institutions and this will ensure that financial institutions are well equipped to manage all the people.
Companies should have deadlines of when they should file necessary documents with the Federal Reserve System relating to their credit issuance to the members of the public. This will reduce future instances of similar cases like sub prime cases which were the main cause of the financial crisis. Companies which do not implement high levels of corporate governance are likely to have future financial problems. Therefore it is necessary for proper accountability and transparency structures to be proposed to avoid institutional collapse.
As our president promised to strengthen our institutions to avoid future collapse, it is upon this committee to come up with stringent regulations which of course should assist growth of the economy as well as ensure negative effects of poor ethical practices do not affect the economy again. The future of our country depends on these policies that shall be implemented by these committees. The role of capital markets and banks should be taken serious as it has proofed that the collapse of our institution as it has taken the whole world. Our stock exchange performs the following functions which is key to our success.
There should be a modification to the existing rules and regulation governing the financial services sector in order to reduce future instances of financial malpractices. In the case of FDIC insurance the government should regulate this industry in order to make sure that those policies taken are reasonable and meet the needs of the customer currently. The current regulations should be amended in a manner that it does not cover some customers’ policies which eventually they will be unable to honour or the insurance is unable to meet. Financial assistance offered for overseas programmes should be curtailed and reduced. The policy should be modified to include those activities which are beneficial to the American government. The American government should not give financial aid to any organization for the purpose of giving financial aid, the aid should have a social benefit to the USA. In regulating the housing sector, the government should ensure decent homes are constructed for the people but a cheaper rate.
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