The case for more regulation of banks' liquidity

The case for more regulation of banks' liquidity

Introduction

The article we will study represents a foray into the general bank system taking into account the necessity of the government’s intervention in the economical activities.

There are analyzed different situations in which the commercial banks-taken as a particular case-confront themselves with sudden loses of funding and other kinds of shortcomings. In this context, the article mentions the two main regulatory remedies like the deposit insurance and liquidity support and also the advantages and disadvantages of those two measures.

What we need to demonstrate according this article is the level of which the state should intervene in the policy of the financial institutions so that the general economical activity to maintain a high standard. Nowadays, we can talk about a free, modernized, healthy bank system which is ready to face major risks, but which has to accept the necessity of a regulation measure.

The government’s intervention in a free – market economy is defined as the actions needed to provide a normal economical activity in a state.

The government is the sole institution capable of issuing money, provides the infrastructure (railroads, highways, telecommunication lines), promotes laws with an economical aspect, guarantees and protects the private property, and ensures the necessary conditions to exercise free initiative.

I do approve the government intervention, but it must be as low as possible. I also agree that the state should intervene in cases with dominant companies. For example the steel giant Mechel is the largest mining and metal company in Eastern Europe. Due to it’s monopole many states made individual contracts with the russian giant to receive steel at lower prices that is resold on internal markets at more attractive prices. Romania also has it’s own contract. Mechel owns 80% of the romanian steel market, and the internal price is 700$ / tone compared to 1000$ / tone (standard price).

In a monopoly type of market the dominant firm is always the winner. Even if it has various regulations, it still has the power either to set the price and fully satisfy any demand, either set an exact amount of good or services they provide and let the price be negotiable.

The Great Depression was a worldwide economic downturn which started in 1929 and ended at different times in the 1930s or early 1940s depending on the country’s economical power and knowledge. It has marked the history as the largest and most important economic depression, and is used in the 21st century as a benchmark in how far the world's economy can fall. The Great Depression originated in the United States; Although it did not have an exact starting date, many historians use the stock market crash on October 29, 1929, known as Black Tuesday, to mark the begging of the depression..

After some large, public bank failures, particularly that of the New York Bank of the United States, panic and widespread runs on local banks were installed. The only competent organization, in these types of situations, the Federal Reserve, sat idly by while banks fell.