Arguably, financial institutions are very important in the economy of every nation. In most cases, financial institutions are heavily regulated for many reasons. The financial institution has the mandate delegated by the government to regulate the money supply in the economy. The regulation of financial institution is critical so as to maintain integrity in the entire financial system. Financial institutions are heavily regulated to sustain the financial stability of a country (Brezina, 2012). If money supply is not maintained it may lead to economic and financial crisis in a country. Some of the possible impacts include inflation, increase in debt, and financial crisis. The nature of assets and transactions carried out by financial institutions require coordination and regulations (Tatom, 2010). The financial institutions are heavily regulated so as to guarantee market confidence, consumer protection, economic stability, financial stability, and decrease in financial crimes.
The Federal Reserve plays a crucial role in regulating the financial institutions. The Federal Reserve in the United States serves the function through its regulatory and supervisory authority (Harker, 2000). The Federal Reserve regulates the financial institutions by being the policy and decision maker. The ability of the financial institutions to execute its mandates depends of some policies and decisions made by the Federal Reserve. The Federal Reserve sets the amount of money that the financial institution must keep in the Federal Reserve. In fact, it acts as the bank of various financial institutions (Wells, 2004). The Federal Reserve also conducts monetary policy, which affects the operation if financial institutions.
The regulations of Federal Reserve have various impacts in the United States financial service industry. The regulation has enabled United States to eliminate financial crisis and reduce its public debt (Wells, 2004). In addition, the banks and other financial institution have become more responsible in executing it mandates. Perhaps, they have become more responsible to the public. The issue of unemployment has been managed but not to the expected level.
The cost and benefits analysis of financial regulations is very challenging. Financial regulation has the tendency of increasing confidence among the public (Herring & Litan, 2005). On the other hand, this confidence may lead to overinvestment or underinvestment in the economy, which is not health for the economy. The regulations increases transparency in the economy, and insulate corruption in the financial firms. A regulation also reduces the rate of return, which may harm the economy. In general perspective, the benefits are more than the costs, and it is always advisable for the Federal Reserve to take control.
References
Brezina, C. (2012). Understanding the Federal Reserve and monetary policy. New York: Rosen Pub.
Harker, P. T. (2000). Performance of financial institutions: Efficiency, innovation, regulation. Cambridge [u.a.: Cambridge Univ. Press.
Herring, R. J., & Litan, R. E. (2005). Financial regulation in the global economy. Washington, DC: Brookings Inst.
Tatom, J. A. (2010). Financial Market Regulation: Legislation and Implications. New York, NY: Springer New York.
Wells, D. R. (2004). The Federal Reserve system: A history. Jefferson, NC [u.a.: McFarland.
