Regulatory Factors that Contributed to the Global Financial Crisis

Nestor  A. Espenilla Jr.,

Regulatory Factors that Contributed to the Global Financial Crisis

Abstract:

The source of the global financial crisis of 2008 may be viewed from two ideological perspectives: regulatory failure in the credit risk transfer (CRT) market; and monetary laxity, pointing to the inherent nature of financial regulation. This paper is an exposition of the regulatory factors that contributed to the global financial crisis by highlighting the weaknesses in the CRT market believed to have catalyzed the present economic slowdown. These factors include active involvement of unregulated entities in the market; divergent regulatory treatment of CRT transactions across different financial institutions; insufficient supervisory data on CRT transactions; and insufficient capital requirement for CRT transactions. The paper addresses the presence of monetary laxity evidenced by the procyclical nature of some policies that reinforced the market downturn. It looks into each factor closely before concluding that regulations are by no means, an easy task. They have to constantly strike a balance between allowing innovations for the development of the financial markets to support further development in the real economy and ensuring a stable financial system. The bottom line is for regulators to caution themselves against over-regulation that would inhibit innovation which is a tempting proposition amidst all these issues on regulatory failure.