Financial Institutions: Policies and Regulations

How can policies and regulations impact financial institutions?

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Whenever regulations are lifted, some financial institutions may most likely run into financial losses. In most cases, earnings are increased through protected monopolies. However, the introduction of policies and regulations often break this link and hence, financial institutions end up losing greatly (Bismuth, 2010). However, when costs and demand change, financial institutions are sheltered from the possible market dangers. It is vital to mention that this sheltering is only possible when polices and regulations have been firmly put in place. Financial service providers can indeed suffer myriads of market risks when regulations are lifted at any given time. Worse still, lifting regulations may lead to massive failures in the operations of organizations.

Some financial experts contend that customer confidence can be swiftly increased when policies and regulations are subjected to financial institutions. When customers develop confidence towards financial institutions, they also cultivate greater loyalty on products being offered by the financial institutions. In other words, regulated firms can readily attract customers and equally maintain them for a long period (Mishkin & Eakins, 2012).

Firms that are regulated by rules and policies are also highly likely to remain focused in the provision of services to clients. Besides, regulated financial institutions stand a better chance of being innovative so as to outwit market competition. Cost reduction is one of the motivating factors for financial firms that have been regulated.

Policies and regulations subjected towards financial institutions have also led to quasi-monopoly of few players in the sector. Once rules and regulations are put in place, a robust barrier to entry is created. It implies that several other interested financial players are hindered from entering the industry. Barrier to entry has a major impact in the financial services sector. Potential rivals can hardly enter such a market unless they meet the stipulated threshold. So far, the regulation of financial institutions has led to significant reduction in their numbers. Consequently, customers are being served by just a few accredited players.

While regulation of the financial services sector may lead to higher returns among financial providers, customers are sometimes compelled to comply with higher service fees levied by these institutions (Nienaber, Hofeditz & Searle, 2014). As a matter of fact, for banks and other financial institutions to make impressive interests on loans rendered to customers, clients have to be charged dearly. In the end, customers spend more when seeking services from financial institutions that are being regulated by rules and regulations. Financial institutions have to charge more on services offered to customers in order to offset the high cost of running respective organizations.

What role does the central banking system play within the global marketplace? Would you recommend any changes to the central banking system? Why or why not?

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The Central Bank system has as its institutional mission of strengthening the stability of a local currency in relation to other global currencies. The infrastructure of financial markets plays a key role in the financial system and economy at large. Its proper functioning is essential for financial stability and conditions necessary to safeguard the transmission channels of monetary policy (Blinder, 2010).

In this case, for any financial market infrastructure to work, the central banking system should play major supervisory roles such as settling transactions on securities, moderating foreign exchange and promoting financial derivatives.

The surveillance role of the central banking system ensures that the infrastructure and payment arrangements are administered consistently with the public’s interests and objectives by maintaining financial stability and reducing systemic risk.

In addition, the central banking system acts as a settlement services provider. Hence, the system operates the reserve transfer funds system and settlement system of government securities.

The central bank carries out the funds transfer orders, meets the expected financial requirements including safe handling of financial and facilitating transfer of funds to ensure continuous operation of the system. It also complies with the legal provisions applicable to the confidentiality of data (Jordan & Miller, 2011). The central banking system provides timely information to participants on the operation of the system. It may also, at its discretion, suspend or terminate a participant who is endangering the functioning of the national financial system. Individuals operating in violation of the regulation of the financial services may also be summoned by the central bank.

The central bank may grant intraday credit to financial institutions that have been duly registered in the financial system. The credit can be in the form of repurchased operations with federal securities without financial costs.

A central bank also runs monetary and exchange rate policies. It regulates the amount of money in circulation, influences interest rates and controls the amount of foreign currency in a country (Blinder, 2010). It achieves the latter roles through operations in government securities and foreign exchange market.

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Although the central banking system plays an enormous role in the financial services sector, it is necessary to institute some changes. For instance, the system enjoys total monopoly as an oversight body to all the financial institutions. On the other hand, there is no regulatory body that oversees its activities. An independent agency should be set up to act as a check and balance to the central banking system. This will enhance accountability and transparency in its operations.


Bismuth, R. (2010). Financial sector regulation and financial services liberalization at the crossroads: The relevance of international financial standards in WTO law. Journal of World Trade, 44(2), 489-514.

Blinder, A. S. (2010). How central should the central bank be? Journal of Economic Literature, 48(1), 123-133.

Jordan, M., & Miller, T. (2011). Fundamentals of Investments. New York: Mcgraw-Hill.

Mishkin, S.F., & Eakins, S.G. (2012). Financial markets and institutions. New York: prentice Hall.

Nienaber, A., Hofeditz, M., & Searle, R., H. (2014). Do we bank on regulation or reputation? A meta-analysis and meta-regression of organizational trust in the financial services sector. The International Journal of Bank Marketing, 32(5), 367.

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