How Important Was “Regulatory Capture” in Causing the...

The purpose of this paper is to show that the â€Å"regulatory capture† has played a role not easily measurable in causing the global financial crisis. To illustrate this, the first step will to describe the â€Å"regulatory capture† in its three possible qualifications; then, I will explain, providing some examples, how each of these categories played a possible role in posing the basis for the financial crisis. While illustrating the different forms of capture I will present some questions that leave space to different answers. Finally, I will conclude that the regulatory capture have surely played a role in generating the crisis, but it is not possible to evaluate the effective role it had in causing it. â€Å"Regulatory capture† is not easily†¦show more content†¦For instance, the increased importance of networks and the rise of highly systemic banks created a system in which the banks became, on one side, too big to fail, and, on the other, too big to save. Indeed, the lesson from Lehman Brothers Chapter 11 is that letting go bankrupt a systemic player (even not one of the largest) might bring about unknown undesirable effects. The policy makers are, therefore, definitely captured because banking sector is architecture in such a way that constrains the policy makers to go through a bail-out in case of a relevant financial distress. So which are the consequences of this behaviour? The outcomes are double: the ex-ante banks’ possibility to engage moral hazard behaviour and the ex-post debt burden on the tax payers. This creates an incentive for the banks to take more risks due to the implicit protection of the government, that rely on the tax payers to pay for the bailouts, creating a substantial problem of fairness and social equity, in which low income class has to pay for the top income class’ errors. Another example of this theory is the state dependence on taxes generated by the financial sector. For instance, in the UK â€Å"the financial sector’s gross value added (GVA) rose over the last decade, but has declined since 2009. Its contribution to UK jobs is around 3.6%. Trade in financial services makes up a substantial proportion of the UK’s trade surplus in services. Estimates of the sector’s contribution to Government taxShow MoreRelatedEvaluating Basel10414 Words   |  42 Pagescategories that include shareholders equity, retained earnings, reserves, hybrid capital instruments, and subordinated term debt. Capital ratios are commonly measured as a percent of bank assets or risk-weighted bank assets. Bank capital serves as an important cushion against unexpected losses. It creates a strong incentive to manage a bank in a prudent manner, because the bank owners’ equity is at risk in the event of a failure. 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