Financial Regulation’s Effect On Economic Growth

Financial regulations such as interest rate, inflation and reserve related items regulations play the vital part on country’s growth and economies steadiness. Their critical role in economy is for their platform they provide between savers and borrowers of funds in an economy. 

Since investors look to the protections that regulation provides to protect them from threats to their finances. Having financial regulations in place can help build the economy in that way as more investors will be more attracted to invest in where their finances can receive protection. 

In some countries, a single regulator governs over the entire financial system. As a result, regardless of whether you’re looking to open a bank account, obtain an insurance policy, or trade securities, the same regulatory body has oversight over your transactions. 

Having a single regulatory body has some clear advantages. For would-be participants in the financial markets, a single regulator avoids the confusion of not knowing where to look for guidance on a particular matter. Making one contact can address all of your financial needs at the same time. 

In addition, a single regulator ensures that there aren’t any cracks or gray areas in enforcement. Market participants can rest assured that no matter what the particular issue, the regulatory agency will have jurisdiction over it and be able to address concerns. 

Then also many financial regulations are designed to reduce the risk of a systemic crisis. A systemic crisis predictably leads to an economic downturn, and historical data suggest that the cost is 1 to 20 percent of GDP. 

Financial regulations can also for example improve market liquidity in regards to investment by providing a simply framework for enabling agencies to use empirical data in order to estimate the net effect of their regulations. This can bring about a cost effective analysis which can be good for economic growth. 

On the other hand though one of the main problems with regulating no matter how noble the initial purposes, the end result is always somehow an antagonistic struggle between interested parties.  

Although it’s upsetting and perhaps unfair to some specific who truly do live to protect the public good. The incentive is strong for regulators to make a mistake in favour of the industry they regulate.