Government regulation affects the financial system from different angles. However, the particular effect depends on the type of regulation. Increased regulation commonly implies a higher workload for people in financial sectors, since it requires time and effort to adjust strategic policies that will effectively follow the new regulation.
While the increased time and workload coming from government regulation can be negative to individual financial or credit services companies in a short term, government regulation can likewise benefit the financial services industry overall in the long term. The Sarbanes-Oxley Act was passed by Congress in 2002 in light of different budgetary outrages including such giants as Enron and WorldCom.
KEY FACTS
- Government regulation can influence the financial system in positive and negative ways.
- The significant disadvantage is that it increases the workload for people who validate the regulation application.
- On the positive side, some regulations may show that companies are accountable and increase inner control, for example, the 2002 Sarbanes-Oxley Act.
- The SEC is the primary regulatory body for the securities exchange, shielding traders from fraud and extortion, elevating investor confidence.
The act made senior management of companies responsible for the precision of their fiscal reports, while also requiring that inside controls be set up at these organizations to forestall future fraud. Adapting these regulations was costly, yet the act gave more insurance to individuals putting resources into financial services, which can increase investor trust and elevate corporate investment.
Regulation That Affects the Stock Market
The Securities and Exchange Commission (SEC) controls the securities markets and aims to protect investors against fraud. In a perfect world, these types of regulations encourage trading and help ensure the solidity of financial services companies. This doesn’t always work, as the financial crisis of 2007 illustrated. The SEC had loosened up the net capital obligations for big investment banks, permitting them to have more debts and loans than they could afford in value. At the point when the housing bubble collapsed, the debt got harmful and banks began breaking down.
Regulation Affecting the Financial Industry
Other types of regulations don’t protect financial services or asset management at all but aim to secure other interests outside of the corporate world. Environmental regulations are a good example of this. The Environmental Protection Agency (EPA) usually requires an organization or industry to redesign equipment and utilize costly services to decrease environmental impact. These types of regulations usually have a chain reaction, causing tumult in the securities exchanges and overall instability in the financial sphere as the regulations demonstrate results. Companies usually attempt to move their expanded expenses to their buyers or clients, which is another reason why environmental regulations are often controversial.
Government regulation has likewise worked in the past to help organizations that were about to collapse. The Troubled Asset Relief Program was conducted by the United States Treasury and gave it the right to infuse billions of dollars into the U.S. financial system to settle it in the wake of the 2007 and 2008 financial crisis. This sort of government regulation is usually disapproved of in the U.S., yet the absorbing nature of the crisis required fast and precise measures to keep the crisis from getting worse.
The Government and the Financial
The government assumes the role of moderator between business firms and buyers. The Abundance of regulation activities may slow down innovation and drive up costs, while too little can prompt fraud and breakdown. This makes it hard to determine the specific effect government regulation may have in the financial services sector, however that effect is regularly extensive and enduring.
