Question

2. The 2007-10 financial crisis clearly showed the need for updating the national and global regulatory framework for financial institutions. Given the fast pace of financial and technological changes, policy makers have a tough time in keeping pace with these changes. However, what they can do is they consistently adapt rules, regulation, and supervision to evolving market practices so that they do not lag behind. However, all this is easier said than done. Financial institutions are adept at lobbying nations countries negotiate regulatory compromises which they hope will benefit their own financial sectors, supervisory bodies have a tough time recruiting and retaining experts.   

There is no other way out, but for all governments to beef up their regulatory and supervisory standards. At the same time, their own financial institutions should not feel the brunt of all these regulations. The question is how the regulatory bodies should keep pace with all the changes and how banks should adapt to the new regime. In the light of this framework, answer the questions given below:

1. Justify the need for capital-adequacy regulation.
2. Examine the mechanisms through which bank capitalization can amplify or mitigate credit and business cycles.
3. Evaluate the need for countercyclical capital buffers.
4. There could be a conflict of interest between politicians, regulators or supervisors, and financial institutions. Comment.
5. Diagnose whether central banks should lead or follow financial markets.
6. Illustrate how central banks should react to asset-price bubbles.
7. Debate whether the world’s giant central banks should shoulder global responsibilities.

Answer 1

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