Regulations of Financial Markets and Global Financial Crisis Essay

2933 Words May 17th, 2013 12 Pages
gula
Regulation of Financial Markets

BA (Hons) Business Management
Word Count: 2750
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Q: Explain the main reasons why financial markets are regulated? To what extent do you think that recent problems in the financial markets are the result of too little regulation?

Introduction:
Since the inception of this world, people are following rules in one way or the other. Every aspect of our lives follows a pattern. The best patterns and practices are developed in to rules. If there are no rules, there will be chaos everywhere and catastrophe ready to strike at any moment. To keep our lives peaceful and in order, we follow rules. Some of them are set by us and some by law experts and
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It occurs when people take unlawful advantage of their power and position in the financial institutions. It can be beneficial for them as an individual but it can eventually lead the financial institution in to crisis.
Another cause of market failure can be information asymmetry. It occurs when one party has more or better information than the other (Howells and Bain, 2004). This creates an imbalance of power in the transactions which can sometimes cause the transactions to go awry.
Examples of this problem are; Adverse Selection and Moral Hazard.
In case of adverse selection, the party displays immoral behaviour by taking advantage of the asymmetric information prior to the transaction (Howells and Bain, 2004). For example, some people secure life insurance, although aware of their deteriorating health conditions.
Moral hazard occurs when a party insulated from risk behaves differently than it would have if it were fully exposed to the risk (Howells and Bain, 2004). For example, people with automobile or mobile phone insurance will use their automobiles or mobile phones with lesser care than if uninsured.
All these events cause a loss of confidence in the financial markets and institutions and lead them into crisis and cause failures. A very famous example of market failure is known as Black Monday. It occurred on 19th October, 1987, when financial markets all over the world crashed and many financial

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