Vol 9 (2012) - Issue 1

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Financial Stability and the Hardship of International Financial Conglomerates: Case Study of Bear Stearns and Lehman Brothers for Legal and Policy Considerations

Market, financial stability and regulations

Money is one of man’s greatest inventions and its value lies in the heart of every individual. In many parts of the advanced world, its numeric symbol represents mere 'faith' in the financial system rather than the material value it is used to represent, such as gold. Modern economies move further into such faith using physical money less and increasingly using electronic transactions aided by technology.

There are various groups of banks in the world. Generally banks are defined as financial institutions dealing in 'deposits, loans, exchanges, or the issue of money and the transmission of funds'. Banks hold a significant proportion of a nation’s liquid assets and act as an intermediary for exchanges or payments. Furthermore, they are connected to individuals, banks, companies, and governments in various industries through credit and loans. Although there are many different types of transnational banks some, such as 'financial conglomerates', are more vulnerable to sensitive changes in the market such as client 'confidence' in the financial system.

In 2000, the world GDP was measured at USD 31.5 trillion and in 2008 it had grown to USD 71.7 trillion. The growth of the world economy showed an unprecedented development in human history. Although history can be shown to suggest that prominent banks are not prone to difficulties and failures, they can create multiple problems. The systemic risks caused by 'financial conglomerates' in 2008 reduced 'faith' and 'confidence' in the financial system.

In the US, the Dodd-Frank Act was passed to promote ‘financial stability’ and to regulate institutions to prevent further 'too big to fail' situations. This article aims to explore and critically analyse the nature of the challenges faced by the modern economy’s financial stability from the potential collapse of financial conglomerates and the legal consequences of this. In particular, this article will outline the definition of 'financial stability', the need for more efficient and prudent regulations and, through analysis of the 2008 financial crisis in the US, legal and policy guidelines.


The definition of ‘financial stability’

Recently, 'financial stability' became the main focus of many financial regulators in efforts to achieve a more efficient economy. It is difficult to achieve a uniform definition of financial stability as the topic covers a vast financial market. One feature, central to the idea of financial stability, is 'public good'. A standard definition of financial stability can be made by outlining the different features of stability and instability. Generally financial stability means that the market will be able to absorb shocks rather than magnify them. Thus, efficient allocation of finance is central to financial stability and individual nations should be in control to regulate the economy. The aim of economic control should be the management of risks. National authorities need to take control to observe and influence financial institutions in their respective markets. Unique regions such as the US and the EU share the control among different states and a central authoritative body.