Monetary Policy and the Need for Reform in Financial Institutions

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1. Purpose of Government Intervention and Regulation in Banking Industry

In the current environment, investors are not much protected from the violation in financial industry. The recent banking crisis caused the decline in the value of savings of thousands of investors, which create the need of an increases in government interventions and banking regulations. The banking regulations help to shape the industry and to control the economic conditions of the country by making the banking industry as a supportive instrument in the monetary policy (Gup, 2003). The main purpose of the banking regulations is to increase the confidence of depositors, which has declined due to the current banking crisis in US. Banking regulations also prevent the risks for the investors involved in the financial transactions.

The recent financial crisis has occurred due to lack of control over the mortgage finance by banks. So, the banking regulations also protect the financial institutions from any suspicious banking activities (Spong, 2006). These banking regulations restrict the criminal activities and international terrorism in the banking industry. Government interventions and regulations are also effective to increase the efficiency of financial institutions and lower the cost of operations, which enables each person to avail the banking services (Gup, 2007). Government interventions are also significant to improve the credit in certain industries, which are socially desirable.

Banking regulations are also imposed to facilitate a stable framework for financial transactions which is quite beneficial for the growth of economy. It is because stability in financial and monetary system of the firm creates an efficient and competitive financial system, which ensures the quality services at competitive prices (Bolt & Tieman, 2004). It brings growth in industries and consequently increases the income level and living standard of people in the economy that is directly linked with the growth of an economy. In light of recent banking crisis due to increase in the flexibility and less government intervention, these purposes increase the significance of banking regulations and government interventions (Spong, 2006). The transaction of the banks should be more ...