Review Essay Example | Topics and Well Written Essays - 1000 words

Review - Essay Example According to the Basel system, IB’s profited from the low capital weight conferred to them. This acted as a reflection of relation safety therefore making it economical for banks to offer credit as counterparties to IB’s. The role of regulatory oversight for investment banks aided maintain the cost of capital low while at the same time allowing more control. Forth coming strategies need to guarantee that equity and credit principles are not mixed up , and that the capital rules that apply to these risky businesses are targeted efficiently to them and the cost of leverage is sufficiently high to ensure their size and risk taking activities are appropriately contained (Blundell-Wignall, Atkinson & Lee 2008, p 5-6). At the conference, some maintained that this arrangement might still not evade main systemic hitches in the future. This was because banks in the monitoring boundary would continue enjoying counter party relations with IB’s and other high-risk firms outs ide the fence thus dragging them back to where they were before. The considerable risk opportunities that should be taken are not particular and so is the independence of the cost of capital. If banks are to enter into counter party relationship with the high risk firms it should be done with very clear guidelines in some cases up to full cover in order to protect the banks’ creditworthiness. ... As a result, fewer transactions would be up to the internal rate of return requirements, and control and general risk will be proportionately smaller and so would the size and way of the monetary sector on the economy. However, it was observed that now it is too late to turn the hand of time and as such, the existing strategy in the crisis necessarily should pool the weaker and stronger institutions (Blundell-Wignall, Atkinson & Lee 2008, p 10-11). Another tactic is to work with non- operating holding company structures (NOHC’s). It will split a financial company into its integral parts in which there exists distinct panels and stout firewalls among the subordinate parts. Capital laws can be designed to the riskiness of the actions of the companies, and in an occurrence of a crisis, any subsidiary making losses can easily be handled by administrators while not jeopardizing the whole corporation. To liquidate or sell a challenging IB securities trader can be done with much more ease. For instance, the IB can be a subordinate of the non-operating holding company structure (NOHC) other than an entity at the top most of the structure. In addition, the NOHC configuration is also much more transparent and in its case, it is less taxing to reduce intra-group contacts. It also offers clear and adaptable arrangement for scarcely defined, deposit-taking banking that is superior to having the bank at the top of the group or having the bank as the group itself as in the case of the universal banking in Europe. In other words, NOHC’s would be much more stress-free to regulate. The key general point to note is that high-risk financial undertakings need to pay the accurate market charges of capital without biases caused by the rule and bank structure interface. For example,