A financial system of an economy comprises of aspects as banks, financial institutions, markets and money. These are crucial elements which determine the flow of money in an economy, growth and development and value of an economy currency among other things. It is evident that even in the free markets such as United States government exercise regulation over its financial system due to its vitality to the economy. The paper will explain some of the reasons why the financial system is one of the highly regulated sectors in the economy.
The financial system of an economy plays a paramount role in determining the extent of economic growth of a particular country. The key element of a financial system is money which is used in the exchange for goods and services in both domestic and international market. The value of a given economy currency is a key determinant of how goods and services are exchanged in a particular economy (Borio, 2011). The government regulations are employed to ensure that financial institutions and markets are not manipulated by selfish individuals who may want to benefit at the expense of others and the economy. In the past, there have been cases of companies manipulating their financial records to inflate their success and lure investors into buying their stock or invest in those companies. These activities are devastating for the economy because millions are lost in the process without adding value to the economy. At the international level, a country ought to ensure a proper and strong value of its currency is maintained. Inflation at high levels is usually bad for an economy because it means that a given country currency is weak compared to the other; therefore it will incur a high cost when importing goods or services from other countries.
The government regulations are intended at addressing any possible loopholes that may be used at the expense of the economy. The process of government regulation is aligned with ensuring integrity in the system. The government intention is to ensure adequate and reliable information is available. Information is crucial because it drives the market especially in the speculation process or buying and selling of stock. Moreover, there the aspect of soundness of the system; investor both locally and internationally will be drawn to invest in a country whose financial system can be trusted and reliable (Naceur, & Omran, 2011) It is right to associate proper regulation of financial system with the level of economic growth. It is evident in countries such as US and most developed countries whereby they have adopted extensive regulation of their financial systems. Governments have learnt from the past cases that when financial systems were left unregulated that this usually results in unstable economy. For instance, the great depression serves as a significant example of a case where the economy was largely left alone.
In conclusion, regulation of financial system is important to an economy. The study identifies its influence on the exchange of goods and services, value of currency and influence on a government budget. The financial system is largely tied to all the sectors of the economy. It means that any negative effect on the economy could widespread affect the economy. Also, business activities do not flow smoothly all the times but there are depressing and booming times in the economy, hence, the need for an outside force such as government to regulate the financial systems. Moreover, not all people are honest, the majority are corrupt and could engage in fraudulent endeavours which will largely impact the economy negatively.
Borio, C. (2011). Implementing the macro-prudential approach to financial regulation and supervision. The Financial Crisis and the Regulation of Finance, 101-117.
Naceur, S. B., & Omran, M. (2011). The effects of bank regulations, competition, and financial reforms on banks’ performance. Emerging markets review, 12(1), 1-20.
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