Saturday, October 19, 2019

EVALUATE THE MAIN EU REGULATORY REACTIONS TO THE FINANCIAL CRISIS Essay

EVALUATE THE MAIN EU REGULATORY REACTIONS TO THE FINANCIAL CRISIS INCLUDING THE CHANGES TO THE EU REGULATORY PROCESS FOR FINANCIAL SERVICES - Essay Example Evidently, the financial crisis began in the second quarter of 2006 in United States. To this end, there were significant losses registered banks in United States as a result of sub primal foreclosures of mortgages (Chrisdoulaki, 2010). Consequently, since the mega banks in European Union and United States were operating under business models which were similar, the financial distress facing the United States were replicated in the European Union. To this end, the mega banks located on both the European Union and United States suffered from under-capitalization and insufficient liquidity reserves. Evidently, the financial regulations of the European Union are carried out at the continental level as well as within the individual countries. The European regulatory response to the crisis was significantly slower to that of the United States. The onset of the decline in profits within the United States was immediately reflected by a similar decline in profits by E.U banks (Clark, Feldman , & Gertler, 2000). The German government and regulators in the finance industry requested the European Commission to bail them out within six months after the crisis began. The bail out of 9 billion Euros was granted and was directed at the IKB German Bank (Grote, & Marauhn, 2006). Furthermore, the governments of other member countries of the European Union pumped in capital within their financial institutions. Examples included the Northern Rock bank located in the United Kingdom. The fast pace of the spread of the financial crisis was not unexpected since most of the securitized United States debt was originated for distribution to European investors and institutions. To this end, the financial crisis that affected the European Union is blamed on the business model of â€Å"originate-to-distribute† that is synonymous with U.S banks (Mattoo & Sauve?, 2003). Evidently, the large international financial institution adopted this model which allowed the institutions to increase their lending power without disrupting the set capital standards by regulators. Moreover, this model created instruments such as credit default swaps, mortgages guaranteed by securities, and debt obligation that were collaterized (Ferran, 2012). In this regard, such instruments played a part in exploiting weaknesses evident in financial regulatory structures. In addition, under-written mortgages and securities, insufficient coordination within national regulatory bodies, and regulatory arbitrage by the regulators all played a role in undermining the regulatory structures (Smith, 2005). To this end, the challenge of identifying and enforcing effective measures in response to the financial crisis in the European Union has been slowed down since the financial regulations are normally carried out at the member country and European level ( Helleiner, Pagliari, & Zimmermann, 2010). In light of the financial crisis of 2007-2009, the subsequent sections will address the financial regulator y responses carried out by the European Union as well as changes to the EU regulatory process for financial services. Financial Regulatory Reform Plan by the European Union Following the financial crisis of 2007-2009, the European Parliament Committee for Economic and Monetary Affairs met on 21st July 2010. In this regard, they approved a version of The Dodd-Frank Act adopted by the United States. The new version would seek to improve the regulatory bodies for securities, pensions, insurance, and banking sectors. The Act would also have the authority to overrule national governments on pertinent issues. In addition, the plans by the

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