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Article

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As in most debates in Pakistan there are sharply polarised views on the regulation and deregulation of private-sector activities. Some advocate re-gulation by the state as an effective tool to curb the market’s excesses. Others think markets should be left to themselves and the state should have few regulations. The argument put forward by the advocates of regulation has got much traction since the 2008-09 financial crisis. The global response has been to enact legislation to enhance the regulators’ powers or set up new regulatory agencies. Europe, for example, has several new institutions that have appeared on the scene in the post-2009 period. The Dodd-Frank Act has given birth to financial stability, consumer protection and oversight bodies in the US. Financial markets have some unique features that are missing in product and factor markets. This distinction is lost sight of in this polarised debate. Shareholders’ equity in bank balance sheets ranges from 8pc to 10pc. The banks are highly leveraged as they raise 90pc to 92pc of their money from depositors and borrowings from other financial institutions and markets. This high leverage effect magnifies both upside gains and downside risks, inducing the bank management, whose compensations are linked to short-term profits, to resort to excessive risk-taking.

Publication Source

Dawn

Publication Date

11-15-2014

Pages

1-2

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Economics Commons

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