Shaping the Character and Effect of Financial Services Regulation Essay

Shaping the Character and Effect of Financial Services Regulation - Essay Example For instance, it provides credit to support growth, provides the liquidity needed for the economy to function, and offers the important risk management services2. In its role of credit provision, financial institutions have fueled economic activity by allowing businesses to invest beyond their cash at hand, household to purchase homes without necessarily saving the entire cost in advance, and also allow the government to smoothen out their spending by mitigating the cyclical pattern of tax revenues and to invest in infrastructure development3. In its role of liquidity provision, financial institutions usually offer protection against the unexpected need for cash. They are usually the direct providers of liquidity both through offering demand deposits that can be withdrawn any time and by offering lines of credit4. They are also at the core of the financial markets, offering to buy and sell securities and related products at need, in large volumes, and with relatively modest transaction costs5. In its role of providing risk assessment services, financial institutions allow businesses and household to pool their risks from exposure to financial market and commodity price risks, which are usually provided through derivative transactions6. Even though they have often gotten a bad name due to excesses in the run-up to the financial crisis, they still offer valuable risk management services through their core derivative activities. Some activities and roles of financial institutions if remain unchecked can lead to excess funds that are created by these institutions. This necessitated the need for financial regulation.