Policy measures to reduce the frequency of banking and the financial crisis
Introduction
One of the core contributors to the recent global financial crisis can be attributed to poor banking policies that resulted to a restructuring of financial products and services, the willingness of the lenders to undertake significant amount of risks, and the adoption of low interest rates (Auernheimer, 2000). The situation was worsened by the greed of the financial investors for the increasing high yields. This poses the need for policy measures by the national and international policy makers to regulate the frequency of banking without imposing any negative consequences on the global economy. This research paper argues for three different policy measures that would be helpful to reduce the frequency of banking and the financial crisis. The paper also indicates whether the proposed policy measures require international coordination or could be implemented in individual countries even if other countries declined to implement the same measure.
The first proposed policy measure to regulate the frequency of banking and financial crisis is the use of the fiscal policy tools to regulate the financial sector of the economy. One of the fiscal policy tools that can be used to regulate the frequency of banking and the financial crisis is the use of the discount rate, which rate refers to the rate that is charged to commercial financial institutions and depository institutions for loans that they are given by their district lending bank, usually referred to as the lending window. Discount rate is a form of deposit insurance for the financial institutions in a country (Baumol, 2008). The discount rate should be set at a rate that serves to encourage banking institutions in a country to look for other source of funding while making the Central Bank as the last resort to lending. The Discount rate and the interest rate adopted by a country’s Central Bank usually have an effect on the prime rate, which in turn plays a significant role in reducing sub-prime lending. The discount rate can effectively address the issues that are imposed by banking panics, instances of bank runs are because it is a requirement for the banking institutions to retain a percentage of the money belonging to their depositors in the Central Bank. This is known as fractional-reserve banking. Because of this banking, institutions invest most of the money from their depositors. There are rare cases that many of the depositors will withdraw their money to impede the operations of a bank. This policy measure can be adopted at the national level because it entirely depends on the functioning of a country’s central bank and its respective policies that are adopted to address the imbalances in the economy (Blanchard, 2000).
The second policy recommendation to regulate the frequency of banking and the financial crisis is to reinforce transparency among the financial institutions in a country. This implies that financial institutions, especially in the banking sector must be precise regarding their goals and financial activities. It is arguably evident that there is a notable difference between the missions of banks. The underlying argument is that banks with different missions and business strategies should not compete. For instance, financial institutions that are established to fund infrastructure or Small and Medium Enterprises should not compete with financial institutions that are operating at a global scope (Epstein & Thomas, 2000). As such, small scaled financial institutions should adhere to their business level strategies and concentrate in investing in complex structured financial products. In addition, the risk management systems of the financial systems should applied properly to address any risks in the financial markets and the banking sector of a country. The financial institutions should accurately respond to the credit rating agencies according to the established criteria, and ensure that they disclose accurate information to the financial investors. This serves to ensure that there is competition in the financial and banking sector and addresses the conflicts of interests among the players in the financial and banking sector of a country. The implementation of this policy measure does not require coordination among countries because it can be effectively implemented using supervisory and regulatory measures to reinforce transparency within the financial institutions of a country. The ultimate goal is to foster transparency in the financial and banking sector (Fender & Hordahl, 2005).
The third policy measure proposed to address the frequency of banking and the financial crisis is to strengthen the present regulatory and supervisory frameworks in the financial and banking sectors. This requires the adoption of collective regulation. It is evident that the present state of financial systems reveals that the banking institutions cannot be differentiated from the securities market (Guha, 2007). As such, the best solution to address this problem is to establish a collective regulatory and supervisory framework that integrates both the financial and banking sector. The present credit-squeeze in the financial markets and the banking sector of different countries has indicated that risk is allocated to any market participant that has the capacity of bearing it. This implies that individual regulation of the financial institutions will not reveal the gaps in the regulatory frameworks that are currently deployed. Strengthening regulatory and supervisory frameworks can also be attained through coordination of the supervision and regulation activities. The present state of affairs reveals that there are diverse financial institutions that operate at different national jurisdictions (Mishkin, 1995). The globalization of the financial markets implies that systematic risks can no longer be concern at the national or regional level. Strengthening the current regulatory and supervisory frameworks should also be implemented by the establishments of markets that are structured for the existing financial products. The effects associated with sub-prime causes during the financial crisis were accelerated by the fact that a liquid market for the complex structured financial products was lacking (Wicker, 2005).
In conclusion, the paper has proposed three policy measures that can be used to regulate the frequency of banking and the financial crisis. They include use of the fiscal policy tools to regulate the financial sector of the economy, reinforce transparency among the financial institutions in a country and strengthen the present regulatory and supervisory frameworks in the financial and banking sectors. An integration of the above policies guarantees the stability of the banking sector and the financial sectors.

References
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