Similarities and Differences Between Financial Systems - Paper Example

The 2020 stock market crash is the latest financial meltdown in the history of the contemporary world. It began on March 9th with history's most massive point plunge for the Dow Jones Industrial Average (Mazur, et al. 2020). The crash in the stock market involved three of the worst point drops in the history of U.S financial markets. The crash was caused by the rampant global fears concerning the spread of the global pandemic, the coronavirus, oil price drops, and the potential occurrence of a 2020 recession.

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The financial crisis of 2007-2008 is one of the most significant crashes in human history. Occasioned by Enron Corporation, it is interchangeably termed as a subprime mortgage crisis centered around the sale of mortgages (Fligstein, N. and Roehrkasse, A. 2016). The U.S housing market collapsed after Enron pioneered a myriad of questionable financial practices leading to a severe contraction of liquidity in the global market. Once the company liquidated a large amount of money in the housing market, it led to the failure of several significant investments and commercial institutions that were unable to have the liquidity they needed to steer their operations, thus, precipitating the Great Recession, matching the 1929-1939's The Great Depression (Gertler, M. and Gilchrist, S. 2018).

The 1997 Asian Financial Crisis is about a macroeconomic shock that hit several Asian economies, including Thailand, the Philippines, South Korea, Indonesia, and Malaysia (Woo, et al. 2020). The countries affected in the financial crisis got to the situation when the investors who were once exuberant about their economy began to pull out due to the structural imbalances in the governance of the nation's financial markets. Thus, the nations' economies experienced a rapid devaluation and massive reductions in capital outflows. The crisis came immediately after several years of financial and economic growth in the occupied countries, marked by substantial capital inflows and a massive build-up of debt leading to an unstable economy.

One of the similarities between the three financial market crashes is that they led to a worldwide economic recession, making life difficult for the people experiencing them. Secondly, in all three financial crises, the day before the crash, the Dow was at one of the highest points ever reached. The significance of the observation is that just before the crash, the Dow points usually seem to be on the highest, which is becoming a common trend in the financial systems. For the 2020 stock market crash, the Dow was 29, 551.42 on February 12th (Mazur, et al. 2020). Thirdly, the crashes have always had a bearing on the prevailing conditions leading up to them. For instance, the 2020 stock crash was due to a global pandemic inciting fears over the future financial markets. The 2007 financial crisis began with subprime mortgages initiated by Enron Corporation, and from then on, the markets began to crash at an alarming rate, occasioning one of the worst financial crises in human history (Fligstein, N. and Roehrkasse, A. 2016). The other similarity among the three crises is that there was a massive imbalance in the economies of the nations involved. The 2020 stock market crash came about due to an imbalance in the significant sectors steering the country's economy and led to a recession in the stock market. The 2007 financial crisis hit all the major markets and institutions in the financial world as there was a massive loss in liquidity. The Asian Financial crisis occurred due to an imbalance in the economies of the countries involved when the massive debts that they had accrued could not sustain their operations anymore.

There is a myriad of differences among the three crashes, and one of them is that the Federal Reserve Bank of the U.S bailed out Enron Corporation once the market began to crash (Mazur, et al. 2020). Enron Corporation would have filled for bankruptcy had the Federal Reserve Bank bailed it out the first couple of times it began to register losses in the housing market. The bailouts caused massive crashes and far-reaching consequences on widespread investment and commercial institutions around the world. The second difference among the three crashes is that they each had diverse causes. The financial crisis of 2007 was mainly due to subprime mortgages and, thus, began in the housing sector while three factors occasioned the 2020 stock market crash; the coronavirus pandemic, a fall in oil prices, and a fear of a potential occurrence of a financial recession (Balleisen, E. 2018). The Asian crisis, on the other hand, came about due to an unbalance of factors that were mainly foreign-based or external (). In the Asian Financial crisis, the nations that were in the crosshairs reached the depression after several years of foreign direct investment, which had bolstered their economy before the crash in the financial market.

Additionally, the Asian Financial Crisis is different from the other two as it is predominantly in Asia, encompassing a myriad of countries. The Financial Crisis of 2007 and the stock market crash of 2020 began in the U.S. and are, therefore, predominantly American-caused. The absolute difference between the three is that the loss of confidence in investors occasioned the Asian Financial crisis while the rest were internal factors in the financial sectors. For instance, the 2020 stock market crash occurred when the variables in the stock market could not match up the projections of growth while the 2007 financial crisis took place when the financial institutions did not have enough liquidity to operate.

The Types of Financial Regulation Imposed By The Government

The stock market crash of 2020 is a relatively new occurrence that has not received additional regulation from the government. However, the regulations that have been in place are still working on trying to mitigate any adverse effects of the stock market crash to prevent further collapse and make it easier for the economy to bounce back. However, there are regulations and regulatory bodies in place to prevent the crises that a free market can cause to the economy and the financial sector. To this end, there are three types of financial regulators in the U.S. One of them is bank regulators whose functions are to maintain trust within the system by examining the Bank's safety and soundness, ensuring that there is adequate capital within the Bank to allow for trade, insuring deposits of consumers, and evaluation of any potential and actual threats to the banking sector (Baker, et al. 2020). These regulators are essential to prevent a bubble, which, when burst, will lead to a crisis in the free markets where the financial variables of demand and supply are important in the stock market. The second regulator deals with financial markets whereas the Securities and Exchange Commission deals with maintaining the standards which oversee the business implementation of stock markets. Of importance is the investigation and prosecution of violations of securities laws and regulations in the stock market, which are essential for the smooth running of stock markets in the contemporary world. Thus, the Securities and exchange commission is especially crucial to the stock markets. The final regulator deals with the consumers where the Consumer Financial Protection Bureau, under the U.S Treasury Department, oversees the operations of banks and other financial institutions to ensure that they do not overcharge for loans, credit, and debit cards.

Following the financial crisis of 2007, various governmental bodies and departments responded in a myriad of ways. One of the emergency responses aimed at mitigating the crisis was implementing the U.S financial regulatory framework. The U.S. Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act, dubbed the Dodd-Frank Act, or the Act in 2010 (Taskinsoy, J. 2019). The Act is one of the most remarkable legislative changes to U.S. financial regulation since the 1930s following the Great Depression. The Act sought to focus on the large and complex financial institutions, which were the cause of the financial depression of 2007. Smaller institutions also came under the heavy regulation of the Act. The Act, which is still in place to date, does not change the fundamental structure of the U.S. financial regulation; instead, it only increases the stringent measures to mitigate unscrupulous deals and brokerage of finances within the financial markets. For instance, the Act allowed for the creation a systematic risk council of regulators, which will protect the consumers from unscrupulous individuals like the proponents of the financial crisis of 2007 steered by Enron Corporation accountants.

Additionally, the Act will enhance the prudential standards of the various financial institutions within the country to ensure accountability. The Financial Stability Oversight Council created as a provision of the Act, serves as an early detection system that will identify risks in financial institutions to enhance the scrutiny of the moves that the players in the financial markets take (Walter, J. 2019). Doing so will ensure that individuals who control various financial institutions will be accountable for their actions and answerable for any decision. The other provision under the Act is the Systemic Risk Regulatory Scheme, which provides the framework for other financial institutions that do not conduct their business models like banks. The regulatory scheme also identifies financial institutions that are not banks but are essential to the financial markets and, thus, require intense regulation to prevent a similar event like the 2007 financial crisis.

The Asian Financial Crisis especially hit South Korea the most, and the government responded in a myriad of ways. The regulation implemented by South Korea aimed to reduce the likelihood of a similar event in the future and to come up with a financial solution that would offer a long-term reprieve to the crisis within the economy of the country. Thus, the first step in the process was for the government to strengthen the legal and regulatory infrastructure regarding financial institutions and policies. The government enacted a variety of bills that sought to consolidate the financial supervisory authority for ease of monitoring the financial markets within the country (Lee, J. 2019). The bills passed allowed for the formation of the Financial Supervisory Commission (FSC), established in 1998 with statutory authority to order mergers, write-offs, suspensions, and closures of financial institutions not performing well.

Additionally, the Korea Asset Management Corporation underwent a reorganization to allow it to facilitate the purchase of non-performing loans from financial institutions within the country. The government also strengthened its prudential regulation by introducing a future approach that would classify assets by taking the future performance of borrowers using their track record in debt servicing. All these regulations aim at averting a future financial crisis within the financial institutions in the country and ensuring that the market is healthy for successful business operations.