UK Deregulated Banking and Economic Downturn Essay

UK Deregulated Banking and Economic Downturn - Essay Example According to Economy Watch (2010), the Banking Industry was once a simple and a reliable business; but, deregulation and technology have transformed the industry considerably. Banking regulation ensures correction of market imperfections and unfair distribution of resources (Central Banks, 2011). Therefore, deregulation of financial institutions saw the domination of the industry by the selected few, and they acted according to their selfish gain. According to Lyons (1999-2011), every aspect of banking is regulated by federal or state agencies. The Thatcherism regime in its quest to deregulate the banking industry generated a chain of imperfection towards failure in the financial sector (Enqdahl, 2009). Deregulation is expected to have considerable effects on the real economy if t significant changes were placed in the structure, and efficiency of the banking industry (Strahan, 2002). Overreliance on a deregulated banking system in the United Kingdom saw the large financial instituti ons dominate the sector across a wider geographical area. This led to loss of local market concentration as they only pursued entering the market rather than consolidating within a local market. Banks play a central economic role; thus, affecting the well being of every sector in the economy (According to about.com 2011). The motivation for bankers to undermine and hinder prudent regulation is inherent in the compensation incentives of bankers (Gilani, 2009). With deregulation, transparency in the activities of the institutions is inhibited. Deregulation of the Banking Industry in the United Kingdom saw rapid growth in credits within the financial sector (The Turner Review, 2009). This was orchestrated by the freedom in the banking sector as banks could formulate their own policies without reliance to the state approval. On the same note, significant wholesale and overseas funding surged the economy into deep crises (Economic crisis and Market Upheavals, 2011). Investment in the mar ket was heightened in the sense that one could access investment in the UK risk-free index government bonds with a yield to maturity over 3% real and this could even surge down to1% (The Turner Review, 2009). In the UK, trading activity was underpinned by the securitized credit model, and as the home of several leading banks, it was affected greatly by the impact of the economic downturn. A number of features increased risks contributing to the credit boom in the upswing and enhancing the nature of the down swing that followed (Economic Watch, 2010). This saw losses and liquidity strains escalate in the financial market, housing problems became widespread, as the prices of houses shot down, and credit supply dwindled down and the eventual problems with funding of the UK mortgage banks intensifying (Economic crisis and Market Upheavals, 2011). Factors that were escalated by the deregulation of the banking industry included among others; massive growth, and complexity of the securitiz ed credit model, increased commercial banks involvement in trading activities, heightened leverage in multiple forms followed (Economic Watch, 2010).. Also, the expanded maturity, complexity of structured credit and derivative system and lack of adequate capital buffers contributed to the escalation of the