The Role of Finance in the

Economy: Implications for

Structural Reform of the Financial
Sector: Summary
Bernadette Estrella
2015144102
MBA International Business

The Role of Finance in the

Economy: Implications for
Structural Reform of the Financial
Sector: Summary
The Financial sector of the economy is a critical component. And also the United
States is in critical to function the economy as a whole, banks are the central of financial
system. The Result of the structure of the financial sector under the great scrutiny are
crisis and some significant changes is mandated.
The financial sector has impact to the overall economy because its been measured from
the past through direct contribution of the employment and GDP. Way back in 2006
there were 6.19 million people who are employed in the finance and insurance sector of
the American economy, and also there is 5.4 total percent of nonfarm private sector
representing payrolls, according to the Bureau of Labor Statistic. by 2010 he
employment of Financial Sector had dropped to 5.76 million together with the total
payroll employment had down, the employment share in the sector still comparable.
Last 2012 the employment in the sector was risen to 5.83 million but the share of the
employment it's still decreasing from the 5.4 by 2010 to 5.2 percent. Even though
there's fluctuation happened still the financial sector still remained as a large part of the
economy and major employer.
A modern financial system exist to provide three types of service to the rest of the
economy:
Credit provision: The US economy operates with high private and public sector debts
levels, according to the US Federal Reserve Flow of Fund. The US economy has a high
leveraged but very dependent on the availability of debt. Even there are in the peak of
crisis. The total outstanding debt equaled to 300% of GDP. But there's economic activity
by allowing businesses to invest beyond their cash on hand, households to purchase
homes even without savings and Government spending smooth out by mitigating the
cyclical pattern of tax revenues and to invest in infrastructure projects. Banks can
provide directly a substantial amount of credit in the US. Some banks provide key
elements of infrastructure to the credit and risk management markets to operate
efficiently. they can do activities smoothly to the wider economy through the provision of
clearing services, securities lending and the other activities. but in the other economy
almost financial markets are the ultimate providers of credit.

Liquidity Provision: In the role of finance there 's existence of wholesale and retail
market. by simple holding those inventory to sale to interested investor or by being
temporarily to take substantial long or short positions in order to hold those buying or
selling demand of investor. Their willingness to do is partly dependent on "wholesale" (it
is a method that banks use to add the core demand deposit to finance operation and
risk management.) there's a large other network that securities dealer can layoff their
own exposure easily. On other hand, the other dealers transfer their positions to the
"retail" (this is refers to the non-dealers) . The important is the initial dealers can reduce
their own direct exposure in short the wholesale market hold down their risk.
Businesses and households needs to have their own protection against in shortage of
money or should I say need of cash. And the main provider of liquidity is Bank they can
both deposit and withdrawn their money anytime. In fact there's a responsibility
involvement between banks and the clients so anything happened they will get their
money easily.
Money Market Funds is one of the important structural changes in financial markets that
has play in past thirty years to provide liquidity to both wholesale and retail level and
that experienced happened there is substantial stress in the financial crisis. The funds
grew up almost as a result of financial regulation, specially regulation Q that has limited
interest that could pay like on deposits. Regulation Q aims to provide stability to banks
by preventing them from competing funds, they offer the high interest rate to depositors
to lead them to make riskier loans in order to be able to pay the higher rates. Although
money market funds have totally taken over the portion of depositor base there
traditionally resided in bank is still have relationship between banks and money funds to
buy short-term securities issued by the banks.
Risk Management Product: Banks are the major player to provides risk management
product to business. Finance allows business and households to pool their risks from
exposures to the financial markets and commodities. Some derivatives, are the most
standardized and liquid futures and there is an option like traded on exchanges.
However, there is been traded many derivatives historically by bilateral basis where at
least one side of the transaction is a derivatives dealer. Like what happened in the auto
company they hedge to financial risk due to the European rates that rise and squeeze
profitability of its operation.
The Banks are important to participate in the exchange-traded derivatives market as
well. This is to simply executing activity from their clients, in case where an transaction
or exchange-traded contract is the best option.

What is the right size for the Financial Sector?

According to what I've read in some article the recent global finance re-think the
contribution of the financial sector to the real economy. And the most policymakers and
analysts believe that the financial sector grew to be too large like what they didn't expect
and this certainly matches public sentiments. However, it is hard to determine the right
size of the financial sector based on the well-grounded economic theories.
There is an argue about the finance grew too large and also there is a remain
reasonable ground to argue. The intuitive level, and there is an easy way to view the
increasing in the relative importance of finance over recent decades and also in the last
decades, as evidence that the sector over expanded.
Throughout the history, still there is an argument to attack changes in the composition of
the economy. Like the inconceivable that many manufacturing could grow to employ
more people than farming, giving the central importance of food to life.
According to the article there is more analytical extension of the intuitive arguments is
the connection that a large portion of the growth of finance consisted of activities that
are not socially useful. but then some people agree that some activities that were
created or substantially expanded during the bubble times were socially useful or
harmful. And in additional to that there is the best arguments that the financial sector
grew too large revolve around policy distortion to the extent that the government policy
provide subsidy to financial activity.
Key structural proposal
This are the important proposals to the major changes in the structure of the financial
industry.

Diminish too big to fail banks by downsizing

Limit the functions of banks
Set some rules and policy

Proposed remedies for Too Big to Fail financial institutions

Bank are our financial source in terms of money matter whether through sheer size or in
the critical nature of the service. this are perceived by many to benefit from an implicit
government guarantee. The government actions preserve their financial system around
the world during the financial crisis. and also to avoid the bank failure that might spread
panic, having seen the disastrous effects of the Lehman Brothers failure.

Break up the largest banks There are forcing the larger bank to break up into pieces
like some arguments forcing them. Every details have transition and it would be very
complex, but the core idea is simple.
Mandate a size limit Governor Daniel Tarullo of Federal Reserve Board, offered
consideration of ideas for the size limit of the largest banks. The proposal would
essentially growth by firms. But with the size limits there is one problem that they would
actually make it much harder to resolve failing institutions of certain type. The FDIC has
plan to develop the solution to the over time process by which failing banks are
restructured and then sold to another bank. And also the FDIC would not able to sell the
bank to the other entity because it will happen that they need to support the bank until it
could be restarted or else they need to close the bank with potential disruption.
Push large banks to shrink voluntarily by imposing stiff cost for size Brown-Bitter
proposed bill in the senate would impose much bigger capital requirements on the
biggest bank so they can operate flexible, and which industry analyst believe effectively
to force the largest banks to breakup or shrink dramatically. SIFIs (Systemically
Important Financial Institutions) have other proposal that still floated, including the
global agreement to impose a capital"surcharge".
Limitations on mixing commercial banking and securities and derivatives
business
The commercial bank in U.S and their other affiliates have always faced the limitations
on the business they are need to take it, in order to reduce the risk of business disaster
that can endanger their ability to fulfill their critical role in the middle of the economic
system. Like the uncontroversial in America that banks allowed to undertake only quite
limited business activities that are not clearly financial in nature.
The proposal range is to further limit the ability of banks to operate in the securities and
derivatives business. Some wants for a restoration of the anti-affiliation provision of
Glass-Steagall.
Our Views
There are so many proposal that they present but we do not favor in any of that
because we believe that America can stand by themselves because U.S. capital
markets are world leader and that is their strength and advantage of America. Some
commercial banks are closely affiliated to those market underpinned by the role of
major securities dealers. The desire of the corporate customer is to be able to deal with
the financial firms that can provide a solid range of products from financial advice to

loans to securities offerings risk management via derivatives to purely operational

products, that is the major reason for the close linkages.
Conclusions
This study is intended to contribute to that research goal. We have looked at the
different side of financial institution to performed this function and how they changed as
a result of regulatory reform. To add more there is one major conclusion is that we do
not support any case for breaking up the large banks, for several reasons. Size is not
matter and it cause in the crisis, instead the result of risky lending and buying risky
assets by both large and small institution. some of the bad assets tied to real estate
which is not good and quite risky. The significant advantages of having both large and
small financial institution is to mix the financial sector and in which banks they can fall
into like large to large or large can support small institution so there is no shortage
happen.