Importance and Comparison of Financial Regulations in the USA, UK and Gulf Countries

Contents

Table of Figures. 4

Financial Regulations defined: 4

History and Origin of financial regulations: 5

Bretton Woods Systems: 6

Breakdown of Bretton Woods Systems: 7

Micro Prudential Regulation: 7

Characteristics of Micro Prudential Regulations: 9

Financial regulatory framework. 14

Financial Regulations in developed and developing economies. 15

Role financial regulations in financial Crisis: 2007-2010. 16

Failure of Mortgage Loan Market: 17

Contributing Factors: 18

Improvements in Financial Regulations: 19

Impact of Financial Regulations during financial crisis on economy: 20

Financial regulations and its impact on banking sector 21

Conclusion: 24

Chapter 2. 26

Research Methodology. 26

Research Objectives & Questions. 27

Research Hypothesis: 29

Research Design: 30

Explanatory purpose of research: 30

Population and sampling: 33

Setting IAS and IFRS: 34

Adoption of IFRSs: 34

United States and convergence with US GAAP. 35

Distinction between IASB and IFRSs. 35

Accounting Standards of Gulf Countries. 35

Data Collection: 36

Primary and secondary data collection: 37

Interest Margins. 37

Concentration of Financial institutions. 38

Data Analysis. 38

Results. 39

Table of Figures

Figure 1 Impact of financial regulations on economy………………………. 20

Figure 2Impact of financial regulations in banking sector………………… 21

Figure 3Financial regulations and impact on lending………………………. 22

Figure 4Impact of financial regulations on financial markets of GCC.. 41

Figure 5Impact on performance of UK financial market………………….. 42

Figure 6Affect performance of US financial market………………………… 43

Financial Regulations defined:

Most of the times an economy considered to be based on the consumer industries and the effect of consumer industries on the economy have been widely discussed over the years. As important these industries are, the financial markets in an economy cannot be undermined. The role of financial markets in the development of an economy is essential. As it is seen the consumer products markets, as freer the market would be, the more appropriately it would work, but even then, the governmental interference is inevitable. The reason behind this interference is the fact that determinants of markets are not always controlled by free market regulatory control is needed. Similarly, when it comes to the financial markets, a financial regulation is always required in order to make transactions smoother and regulate the financial aspects of the markets. The past events like the financial crisis have greatly emphasized the need of financial regulation and policies, which can perform more than an overview of the financial markets. (Financial regulation, 2015).

History and Origin of financial regulations:

This paper is based on the introduction of financial regulations and their impact on the economies. In order to do so, the history of financial regulation must be discussed so that the origin of financial regulations can be determined. The emphasis on financial regulation after the financial crisis is not the only part of the story, as the financial regulations have been in the scene for way before the financial crisis struck the economies. Thus, the history of financial regulations goes back into early 1960s. The paper would represent the transitional changes of the financial regulations and their prominent features and failures. (Brunnermeier, Crocket , Goodhart, Persaud, & Shin, 2011).

Bretton Woods Systems:

The very first monetary control was established in early 1960s named as the Bretton Woods system, which was intended to monitor the monetary transactions and devise rules for financial and commercial relations for the independent states like the United States of America, Canada, Western Europe, Australia and Japan. The establishment of Bretton Woods Systems was intended for monetary management in the independent states. The Bretton Woods Systems has some certain features for managing the monetary order in the independent economies, which was appreciated afterwards. (MILESTONES: 1969–1976: Nixon and the End of the Bretton Woods System, 1971–1973, 2013). The Bretton Woods Systems has tied up the currency of each state with the gold in order to restrict these states to adopt policies to maintain an exchange rate. In addition to that, an important feature of the Bretton Woods Systems was enhancing the ability of IMF to bridge the lapse of imbalance of payments in these states. This system had to dissolve due to the inefficiencies regarding the monetary policies for maintaining the exchange rate as after the Vietnam War, the overvaluation of the dollar trigger this inefficiency. The breakdown of the Bretton Woods Systems has predicted a vacuum in the rapid growth of economies, which was later discouraged by the free floating of the currencies. As the free floating currencies against other currencies was a relatively smoother transaction. The flexible exchange rates have provided a smoother environment for the exchange rate to change against the external shocks like the oil prices etc. (Garber, 1993.)

Breakdown of Bretton Woods Systems:

After the collapse of the systems, the transitional change has led the countries to focus on a more liberal financial control. Technological contribution and globalization has played an important role in this transition as the countries have found the need of financial liberalization. However, the markets get freer through the financial liberalization, which emphasized on the deregulation but the government involvement was required to actually re-regulate the financial markets and bring the financial stability. After the Bretton Woods Systems, the new regulation has focused on actual prudential regulation policies. These prudential regulatory standards include the capital requirements, investment policies, investor protection policies, and the risk management regimes. As the large economies were incorporating together a policy regime for the financial stability, the failure of this regime has led to the institutional forums like BCBS, IASB, IOSCO, and EMU. These institutions has provided a wide range of financial regulations and contributed immensely toward the financial stability. Before, the financial crisis in 2007-2010 the financial regulations was based on micro prudential regulations.

Micro Prudential Regulation:

Micro prudential regulations are part of a big strategic financial planning on behalf of the global cooperation. The micro prudential regulations were more focused on the financial health of individual institutions. The reason behind was to avoid the effect of failure of individual institutions on the other financial institutions. The importance of the prudential regulations for the financial stability cannot be ignored as by maintaining individual institutions’ financial health, the overall financial stability of the region can be ensured. These micro prudential regulations were introduced in 1970s and they settled for good 2-3 decades. The micro prudential regulations contributed toward the betterment of financial institutions like banks and securities firms likewise. The contribution of micro prudential regulations toward the banking sector and the securities firms is invaluable as the risk of failure of insolvency for the banks is brought down to an acceptable level under these regulations. The link between the banking sector and the securities firms is relevant as the failure of banks and the brokers and dealers can bring the financial system down. The failure of brokers and dealers imply that the settlement and clearance of the transactions is in jeopardy, therefore, it can lead to the failure of the banks. Thus, the prudential regulations ensured the financial stability by lying out the rules for capital adequacy and other measures for the safety and soundness of the banks and their operations. The prudential regulations have illustrated the rules and regulations for the banks as well as for the securities firms. In order for the banks to ensure their safety and soundness against any financial crisis, the prudential regulations provide a deposit insurance system. In addition to that, the protection of investors and consumers is as essential for banks as any financial transactions. Therefore, to protect them from any inconvenience and to protect their right the prudential regulation suggested disclosure requirements, and the regulations for regulating the business conduct.

In the event of financial crisis, improvement in the micro prudential regulation is not considered enough. The need of macro prudential regulations are significant for the Europe region due to their single market strategy as this has increased the risk for the system as a whole and for the risk of connectedness of the regions. Identification of the systemic risk was the first step for introducing the macro prudential regulations. The data for the banking transactions for the European region was collected where the results showed that the half of the international bank transactions was occurred in the developed European countries. The systemic risk was estimated based on the large banking institutions’ stock returns. In addition to that, institutional reforms had also taken place in the Europe region.(Hanson, Kashyap, & Stein, 2010)

Characteristics of Micro Prudential Regulations:

The prudential regulations have covered a wide range of aspects in order to maintain standards for financial stability. Thus, these wide range aspects can be presented as the characteristics of the prudential regulations. These characteristics of the prudential regulations are discussed briefly in the next section so that their impact can be determined and the role of these characteristics can be established in the event of financial crisis of 2007-2010.

Capital Adequacy to Reduce Risk: This characteristic of the prudential regulations for banking is stemmed from the efforts of the BIS and IOSCO. Representatives from each country’s central bank are included in BIS and if the central bank is not a banking supervisor then the representative from the supervisory authority should be included in BIS. According to the prudential regulations, the capital adequacy ratios were determined for the banks operating internationally. The reason for doing this is to reduce the credit risk, which is usually associated with the lending process. The Basel I consisting under the prudential regulation was not appreciated due to several reasons, one of which was the lack of measures for the market risks.

Incorporating Market Risk: In order to incorporate market risks into regulations, the BCBS and IOSCO has been working together. However, this corporation was stressful for countries disturbing their regulatory system but the result comes up with a functional approach to prudential regulations, which was definitely not true initially as the prudential regulations had an institutional approach.

Creditworthiness: The creditworthiness was another issue left out by the Basel I that should be accounted for while illustrating the capital requirements. For purpose of incorporating the credit risk management, a new framework is presented which resulted in Basel Accord, Basel II in 2004. The implementation of this regulatory framework was due in 2007. This version of Basel was based on three basic rationales, which were supervisory review process, the minimum capital requirement and market discipline.

The micro prudential regulations provide a great insight for the efforts of international community and their emphasis on the financial regulation for financial stability. Unfortunately, these regulations were not good enough and the inefficiencies of these regulations led to the worst financial crisis to date of 2007. The next section of this paper is focused on the event of financial crisis. The causes of financial crisis and the responses of inefficiencies are discussed comprehensively.

Financial Regulations of USA

Safety-and-soundness, or solvency, regulation looks to forestall financial organizations with settled sum loan bosses from getting to be ruined. Since government regulation can’t keep all insolvencies, on the other hand, governments have made instruments to ensure at any rate little settled sum loan bosses from any misfortune when a safe establishment, insurance agency, or financier firm has gotten to be ruined—that is, has “fizzled.” These systems, for example, store protection, protection assurance assets, and speculator security assets, can appropriately be seen as an item guarantee for solvency regulation. That is, they secure settled sum loan bosses against misfortunes when the “item,” regulation, which should ensure altered sum lenders, neglects to keep a financial organization’s insolvency.

Solvency regulations are authorized by analysts who evaluate the estimation of an establishment’s benefits and decide the extent of its liabilities, an especially essential capacity in property and setback insurance agencies. A financial foundation can get to be bankrupt (its liabilities surpass the estimation of its advantages) in the event that it endures a vast sudden misfortune or a maintained time of littler misfortunes. In like manner, an apparently dissolvable bank or insurance agency can end up being wiped out if analysts find concealed misfortunes—resources have been exaggerated or liabilities have not been perceived. All the time, misrepresentation is the fundamental reason for those misfortunes.

Compliance regulation tries to guarantee “reasonable” and nondiscriminatory treatment for clients of financial organizations and to keep financial foundations from being utilized for criminal or terrorist purposes. Compliance regulation has as of late turned into a noteworthy obligation regarding the controllers and a noteworthy expense trouble for financial establishments.

Congress has authorized various assurances for clients of governmentally controlled financial foundations; some of the time these insurances reach out to different sorts of financial firms, for example, little credit organizations. These laws incorporate the Truth in Lending Act, the Truth in Savings Act, the Fair Credit Reporting Act, the Real Estate Settlement Procedures Act, the Expedited Funds Availability Act, and different security insurances, to give some examples. In late decades, Congress likewise has sanctioned enactment excepting segregation in bank loaning, including the Equal Credit Opportunity Act, the Home Mortgage Disclosure Act, the Consumer Credit Protection Act, and the Community Reinvestment Act. Each new law expands compliance costs for banks and other financial foundations.

Financial Regulations of UK

The Financial Conduct Authority (FCA) is money related administrative body in the United Kingdom, yet works freely of the UK government, and is financed by charging expenses to individuals from the budgetary administrations industry. The FCA directs money related firms giving administrations to customers and keeps up the uprightness of the UK’s budgetary markets. It concentrates on the regulation of behavior by both retail and wholesale monetary administrations firms. The Prudential Regulation Authority (PRA) is in charge of the prudential regulation and supervision of around 1,700 banks, building social orders, credit unions, back up plans and significant speculation firms. It sets models and oversees monetary foundations at the level of the individual firm.

The PRA’s part is characterized by three statutory destinations: i) to advance the wellbeing and soundness of its organizations; ii) particularly for back up plans, to add to the securing of a proper level of assurance for policyholders; and iii) an auxiliary target to encourage successful rivalry. The Banking (Special Provisions) Act 2008 (c 2) is an Act of the Parliament of the United Kingdom that went into power on the 21 February 2008 with a specific end goal to empower the UK government to nationalize high-road banks under crisis circumstances by auxiliary enactment. The Act was acquainted all together with nationalize the coming up short bank Northern Rock after the bank was bolstered by Bank of England credit and a private-part arrangement was regarded “not to give adequate worth to the citizen” by the UK government.

Restriction to the Act by the Conservatives depended on: the Bill giving an exception to the Freedom of Information Act 2000, the substantial liabilities to the citizen and the charged absence of autonomy from the legislature. The Bill was likewise adequately generally attracted to permit the nationalization of any monetary establishment, prompting the worry that different banks may be in money related difficulty. After the nationalization of Northern Rock, the Act took into consideration the nationalization of the home loan and individual advance book of Bradford and Bingley on 29 September 2008.

Financial Regulations of Gulf Countries

Lately, the focal money related powers of some Gulf Cooperation Council nations have rolled out a few administrative improvements with a specific end goal to accomplish social and monetary objectives. The financial powers of these nations have fortified prudential standards. Resource arrangements and provisioning standards have drawn nearer to worldwide gauges. Banks are required to keep up money to hazard weighted resources proportions of 8 for each penny required by the BIS. Neighborhood banks take after International Accounting Standards. In spite of the fact that the focal money related powers of the GCC nations are dynamic in directing and observing their regulations on financial organizations, yet not rapidly. In a worldwide financial business sector, Islamic‐banking controllers that work Islamic banks ought to consider the similarity of the administrative setting. Through a profound comprehension of the way of the Islamic managing an account business and the late western keeping money supervisory structure, Islamic saving money controllers will have the capacity to build up a sound saving money framework without losing its own qualification.

In above paragraphs, financial regulations in the USA, UK and Gulf countries have been briefly described. The importance and comparison of financial regulation of the USA, UK and Gulf countries will be discussed in the coming parts of the dissertation in due detail.

Financial regulatory framework

The financial regulatory bodies for any country perform roles and responsibilities and try to incorporate the financial regulatory framework into the markets. The role of financial regulators in regulation is important as these regulations are primarily suggested by the regulators. Therefore, the control of regulators over the institutions in order to practice these regulations must be high. Financial regulators are the agencies under the federal and state governments in all developed and under developing countries in order to regulate the financial markets and the financial institutions like banks. The role of these agencies within a country is very specific and each agency performs its specific duties. The objective of establishing these agencies is similar though they differ in their responsibilities and duties. These regulatory bodies work independent of each other and hence, try to achieve the similar goal of financial stability of the financial markets. To name a few financial regulatory bodies, the following are the general regulators.

  • Federal Reserve Board
  • Federal Deposit Insurance Corporation
  • Office of controller of the Currency
  • Office of Thrift Supervision
  • Commodity Future Trading Commission
  • Financial Industry Regulatory Authority
  • State Bank Regulators
  • State Insurance Regulators
  • State Securities Regulators
  • Securities and Exchange Commission

Financial Regulations in developed and developing economies

The impact and control of the financial regulations over the financial markets is different when it comes to the national financial regulations. However, the objective of the financial regulation is similar in all the countries but the intensity of these regulations and the role of regulatory bodies can be quite different in developed and developing countries. Before going into the origin of the financial regulations, the role of financial regulations is discussed for the developing countries. Before the financial crisis of 2007, the major concern for the regulators in the developing countries was the effect of highly volatile capital flow on the financial systems. The effect of financial liberalization in these countries did not seem to be working at all. ( Rojas-Suarez , 2004)However, the reforms took place in the developing countries concerning the financial liberalization but these reforms did not mean to bring back the effect of controlled financial markets or the closed capital accounts from the past. In addition to the fact of volatile cash flows, this factor is highly associated with the macroeconomic policies in the developing countries. The implication of prudential regulations in the developing countries was quite evident in two respects. The first perspective of this regulation is the control over the financial aggregates and second perspective of these prudential regulations is the risk management by avoiding risk taking activities. (Light touch no more, 2012).

After the financial crisis in 2007, though the impact of this crisis was most seen in the European countries but developing countries like the Asian region were also struck by the crisis though the intensity was low. This event has made the developing countries to be more cautious regarding their financial regulations and financial markets. On the other hand, the international financial institutions advised these countries to keep on deregulating but a slower pace so that the any after effects of the financial crisis in the region can be handled appropriately. Though, many researchers find it more appealing that the re-regulation must be enhanced so that the system wide failures can be avoided. (Chowdhury, 2012)

Role financial regulations in financial Crisis: 2007-2010

The global financial crisis was not a result of only policy factors but the market factors are responsible equally. The boom and bust cycle in United States was the main reason behind the global financial crisis. As the aggravated condition of this boom and bust cycle in the credit market was actually the reason, there were several issues aroused in the credit market. The credit availability in the market was excessive, the liquidity and the lending practices with no actual credit assets were a few of many those issues. In addition to that, as this credit market boom and bust was happening, the lack of financial supervision was highly evident. The ineffective risk measures and the inaccurate pricing of the assets led to such a huge disaster. As discussed previously, the financial regulation and policy framework nothing seemed to be playing a role in improving the situation. The financial crisis can be categorized into two aspects, which are the failure of subprime mortgage loan market, and the contributing factors discussion led to the make it a global financial crisis.

Failure of Mortgage Loan Market:

The failure of mortgage loan market in U.S. was the actual reason behind the collapse and the financial crisis. The stream of events started to happen with the U.S. government’s policy of low interest rates. As the interest rates become lower, the situation of excessive credit availability occurred. As the U.S. government policy of low interest rate was purely based on the economic situation of deficit of balance of payments, the excessive credit availability made the choices harder. Financial tools such as the credit default swaps and the collateralized debt obligations are the instruments in which the credit risk is traded. As more and more people started to involve in the mortgage loans, the asset prices started to increase. Thus, the low default rate was resulted due to the excessive credit availability and the asset prices. At this point, the role of regulatory authorities and regulatory monitoring was significant, but the regulatory monitoring was lacking at that point. As the more people were involved in the mortgage loans, and the regulatory monitoring were lacking, the standards for credit worthiness of the borrowers were at their lowest. The income of borrowers was not even considered while filing them for mortgage loans. In this manner, the fraudulent activities on behalf of the borrowers and in the lending process were made possible under such circumstances. Lack of the regulatory monitoring and financial supervision had led to insufficient supervision for risk originated actors and insufficient protection for the investors in the market.

Contributing Factors:

However, the failure of the mortgage loan market was initially in the U.S. financial market, but there were a few factors, which made this one financial market collapse as the biggest global financial crisis. Several factors contributed to this while the main factor is considered to be the inability of the financial supervisory to take into accounts the risk of introducing new financial instruments and products in the financial markets. The risk of introducing financial instruments apparently does not seem to make a difference but different aspects of this factor have been established which went wrong during the financial crisis. The first aspect is the informational asymmetry, which is the inability of monitoring bodies to make knowledgeable decisions and regulations. (Goodhart, 1998)The process of securitization involves a chain of transactions and processes, which is called the OTD originate-to-distribute chain. This chain involves many participants, which create the problem of asymmetry of information. Another aspect of the financial instruments was the heavy reliance of the financial regulations on the external credit rating agencies for credit assessment of the banks’ internal models. The conflict of interest arose due to these credit rating agencies. Like the credit rating agencies cannot give bad assessment to the banks handling the accounts of those agencies, therefore a biased opinion and assessment of the banks’ internal models led to the misleading financial instruments. The third aspect of introducing new financial instruments was the capital requirements and its risk-weighted measures. Lastly, the impact of risk measurement to other financial markets was a significant aspect of the factors contributing to the global financial crisis. The impact of the monitoring of the risk on the financial markets on whole is crucial and one can affect the other. (Levine, 2012)

This discussion has provided with the invaluable information regarding the cause of the financial crisis and the reasons behind the collapse of an individual market becoming the most stressful global financial crisis. This discussion has given a great insight of the financial regulations and the impact of these regulations on the financial markets and the financial stability of the economies. As the financial regulations have been proven significant for the financial stability, the inefficiencies of financial regulations and the lapse in these regulations are important as well for future improvements. As the before and during of the financial crisis in perspective of financial regulation is discussed in the paper, it would be appropriate to include the after effect of the financial crisis as the responses of the regulatory authorities would be beneficial. The next section of this paper would include the amendments into the financial regulations and the aspects, which has been improved in the regulatory monitoring.( Adrian, 2010)

Improvements in Financial Regulations:

After the financial crisis, the micro prudential regulation needed a thorough make out in the light of the financial crisis. This implies that the risk management is focused comprehensively. The monitoring of the banks both quantitatively and qualitatively was enhanced by the regulators. The focus after the financial crisis was managing the risk by implementing the internal monitoring of banks, banks’ own risk management measures and appropriate supervision of bank’s operation etc. The regular amendments of level of capital adequacy were put on second and internal monitoring is focused mainly. In addition to the risk management related to the qualitative and quantitative aspects, the financial instruments are also assessed for high risk and the capital adequacy or capital charges are suggested to be higher for such financial instruments. As far as the financial regulation amendments are concerned, the micro prudential regulations are reviewed and monitoring in context of risk management is enhanced. This is not the only response, which was established by the regulatory authorities after the financial crisis but the regulatory authorities have come up with the idea of macro prudential regulations and a macro prudential regulation framework is presented for greater good in the future. (Harrington, 2009)

Impact of Financial Regulations during financial crisis on economy:

As the importance of financial regulations has been discussed in this paper and the impact of financial regulation before and after the financial crisis is illustrated in detail. Toward the end of this paper, the linkage between the financial regulations and the economic growth of the countries must be described so that the role of financial regulation for economies can be determined as well. The concept of growth with equity is rather interesting in this regard as it has become the most significant objective of the economies overall. The EMEs, which are the economies where the proportion of poor is still sizeable, are the economies where the equity growth matters the most. The broad objective of the equity growth is subjected to the financial policies so that these policies can best serve this purpose. However, the economists have not been unanimous over the importance of financial regulations and economy but the financial crisis in 2007 has provided the world with plenty of evidence that the financial regulations are greatly concerned as far as the two broad objectives of growth and equity are needed to be met.

Figure 1 Impact of financial regulations on economy

Source: http://www.oecd.org/gov/regulatory-policy/ria.htm

Hence, the evidence has suggested that the EMEs i.e. emerging market economies are focused on implementing the Basel I and Basel II regulations as these regulations would contribute toward the strengthening of their banking systems. In addition to that, development objectives in these countries emphasized to be achieved by following the financial regulations in order to strengthen the economy itself. Thus, the importance of the financial regulations cannot be undermined for the development of economies.(Sinha, 2011)

Financial regulations and its impact on banking sector

There is a clear distinction between different financial regulations in terms of securities and regulations relating to banks. The primary justifications for regulations by banks involve the elimination of financial loss as well as systematic risks. (Acharya, 2001)The regulations by securities exchanges are aimed to protect the investors while enhancing the market efficiencies. In addition, investor protection, efficiency enhancements and avoidance of systematic risks are not merely the main purposes of these two financial institutions because it also includes wider social goals like facilitating domestic ownerships as well as other regulations and its justifications. The basic aims of these two financial institutions are termed to be protection of retail depositors and investors, elimination of systematic risks, attainment of wider social goals and improving the efficiencies of such institutions.

Figure 2Impact of financial regulations in banking sector

Source: http://mercatus.org/sites/default/files/C3-regulatory-restrictions-title-12.png

Costs in budgetary markets are utilized by families in distributing wage in middle of reserve funds and its utilization in dispensing their wealth stocks. This applies not just to data in regards to backers of budgetary instruments, but to money related establishments and to item they offer. At last, money related markets give basic data that facilitates decentralized choices in the economy. These costs will assist the firms in choosing which speculative undertakings to be chosen and what ought to be financed. Monetary markets will give value signals and distribute assets more proficiently as well as it will allow better entrance of members to high caliber data on an auspicious premise. Revelation gauges therefore likewise serve a proficiency reason and additionally a buyer assurance method of reasoning.(Allen & Herring, 2011)

Figure 3Financial regulations and impact on lending

Source: http://www.advisorperspectives.com/commentaries/pimco_63011.php

The governments also have a role to play in exploiting the centralized role of the financial sectors for attaining the social goals. The constraints in budget would be utilized by the financial institutions to raise their funds despite of borrowing from other banking institutions. The complex structures in different financial regulatory bodies promote the role of intermediaries in a way to reduce the systematic risks involved in their procedures.

Conclusion:

This part has focused on the financial regulations and history of financial regulations internationally. The need of financial regulations for the economies is discussed comprehensively and the regulatory bodies are illustrated. This paper suggests that the financial regulations were started with the Bretton Woods Systems and after the collapse of this system die to the fixed exchange rate, the micro prudential regulations were introduced. Under these regulations, several regulatory bodies were established who worked for improving the financial regulations for financial stability and higher monitoring and supervision. The micro prudential regulations have introduced Basel I where Basel I was reviewed for several changes as it lacked in several aspects of regulations.

The improvement in the Basel I is introduced as the Basel II regulations and these regulations were intended to focus highly on the risk management. Before the Implementation of this supervisory regulation, the global financial crisis struck the financial markets. The financial crisis primarily related to the failure of the mortgage loan markets while the interconnectedness of the financial institutions had made the crisis a global event and all the economies has seen the after effects of this financial crisis. After the financial crisis, the macro prudential regulations were devised internationally which has led to the current economic and financial recovery around the globe. Thus, the importance of the financial regulations cannot be avoided for the growth of economies whether developing or developed countries are in focus.

Chapter 2

Research Methodology

For assessing the financial regulations and its significance for the markets of US, UK and GCC countries there are certain facets, which need to be checked for that purpose. These facets or factors would include influence of financial regulations, development of institutional efficiencies while controlling the specific features of regulations. Gulf region also need regional financial regulation (Cunningham, 2011). The financial environments of these economies have also been seen in this specific research about financial regulations and its impact or significance. The macroeconomic factor would be highly relevant in this specific research.

Although literature provided evidence regarding assessment of financial regulations and its significance for financial cost and value information, research gap exists in terms of cross evaluation of US, UK and GCC markets for financial regulations. These markets represent significant economic zone, which affects overall economic situation in their respective countries. It is also finalized that major reforms in regulation in EU (out-law.com, 2015).Therefore, need for study arises to evaluate the degree of territorial monetary mix in the nations of the Participation Council of the Arab States of the Gulf (GCC) as well as in UK and US market perspectives.  Therefore, present study fulfills research gap by taking a gander at the structure of the budgetary framework and utilizing financing cost and value information.

The paper will examine the money related incorporation in the Euro zone, few studies to the creators’ information have done as such for regular money ranges among developing markets. We. Instead, the result of money related mix and value meeting may mirror the significance of worldwide stuns as opposed to monetary combination along these lines should be supplemented by the accessible data on the structure of business sectors and volume information. Our appraisal depends on a depiction of the business sector structure and the volume of capital streams, and on an examination of value information. Regulatory development is required Euro zone as well (qfcra.com, 2013). The volume and value information are required in light of the fact that, from one viewpoint, capital streams may be high that would produce higher differentials in the rates of return.

The extent or characterization of macro prudential methods in terms of financial regulations provide the way forward in controlling the social expenses which are associated with the shrinkage of financial institutions having a common stock.

Research Objectives & Questions

The objectives of this research paper about the financial regulations is to keep the institutions acting in accordance with the international financial regulations as well as imply safeguard or control measures to avoid the de stabilities in the financial regulations i.e. micro and macro prudential regulations. The objective functionality of the individual financial institution is to maintain adequate returns on its equities as well as the values at risks in such a scenario there would be pro cyclical advantages.

A sharp cost decrease may flag that we are going to enter times that are more unstable. Second, the instability of a value procedure could be time changing. Subsequently, edges ought to be bigger as well as loaning ought to be lessened after such a value decrease in the financial institutions equities. Before the emergency, resource upheld business paper was practically hazard free due to overcollateralization i.e. to begin with misfortunes would be expected by lower tranches. An amazing case was the circumstance in August 2007, when the resource sponsoring the business sector went away totally.

Accounting standards are define as the authorities practices, rules and conventions for providing detailed and broad guidance for handling the specific accounting situations and for preparing the financial statements (Oppermann, Oberholster, & Binnekade, 2009). For comparing and judging the financial data, they provide the objective standards and its presentation, and limit the freedom of the directors through the creative accounting for showing the unrealistic pictures. The purpose of this study is explaining the scope of the accounting standards, meaning in the gulf countries with the reference of the international accounting standard. There exist the difference between the international accounting standards and the gulf countries accounting standards. If there exist any of the difference between the standards from the view point of auditing and accounting  professions body, then which of  the standard will be the most supportive.

Thus, financial specialists were unwilling to let organized speculation vehicles move over their obligation. On the other hand, in August 2007, the overcollateralization pad dissipated, making such resources much more dangerous. The third motivation behind the research is that when the costs are dropped as a result the asymmetric information grindings would develop. In addition, agents turn out to be more cautious about whether to acknowledge a pool of benefits as guarantee since the financial institutions including banks, security exchange apprehension getting an especially awful determination of benefits. As misfortunes mount, obligation turns out to be more dangerous and thus more information sensitive.(Young, 1985)

The questions that needs to be addressed:-

  1. What is the best strategy in formulation of accounting principles as well as the dependence of particular economies?
  2. Are there inevitable improvements in the accounting standards or regulations needed to overcome the financial crisis?
  3. The IASB frameworks serves as a guide in resolution of financial issues not addressed directly in the financial accounting standards
  4. Comparison of different countries financial regulations would be beneficial in eliminating the financial crisis or risks of future.

Research Hypothesis:

Based on the conducted studies and theoretical literature research hypothesis were developed. Our study has two main or the important hypothesis.

  1. There is the difference in the accounting standards issued by the Gulf country audit organization and then compare them with the international accounting standards.
  2. Gulf countries accounting standards which are issued by the audit organization are more relevance, understandable, comparability and reliability than the accounting standards that area issued by the international accounting standards.  To target or support the accounting standards that is “For providing the fair or the true view of the firm’s financial positions these rules must be applied to all of the financial statements, and standardize the comparison method with the financial statements of the other firms.

Research Design:

The arbitrary impacts determination is bolstered by the Lagrange multiplier test, which emphatically rejects the invalid speculation that mistakes are autonomous inside of nations. Since the model incorporates nation particular variables, we would be utilizing a summed up slightest squares estimator with arbitrary impacts for assessing the impact or significance of financial regulations in a developed economy.

To lead the examinations, we would need different measures in the form of

  • Interest Margins (Net) /Premium edges,
  • Concentration of focuses,
  • Factors/ attributes of bank that may influence margins of interest,
  • Administrative or regulatory arrangements as well as policies,
  • Cross-country contrasts in macroeconomic environments
  • Various levels of securities exchange and its advancements, and
  • Cross-country contrasts in the level of institutional advancement, e.g., the extent to which national establishments bolster the private property rights while helping financial and rivalry among the financial institutions.

Explanatory purpose of research:

The vast majority of the observational confirmation on keeping money structure and productivity looks at the U.S., U.K and other GCC nation’s monetary situations, creating mostly equivocal results. Our examination is identified with a huge writing on bank structure and effectiveness. Some confirmation proposes that banks in exceptionally focused neighborhood markets have bigger overhead uses, charge higher rates on advances, pay lower rates on stores, and are slower to lessen rates in light of Federal Reserve diminishments in loan fees than banks in less thought markets. We concentrate on a couple key papers that propel our methodology and elude peruses to far reaching surveys.

Then again, the best performing monetary establishments are for the most part not situated in exceptionally thought markets where the organizations are less credit-obliged markets. Credit derivatives are also important in this regard (Hitchins, 2000).Others differs and finds that loan fee spreads are smaller in concentrated managing an account frameworks, while a few specialists reported more blended results. Different scientists don’t discover unambiguous proof that mergers and acquisitions that increment money related establishments fixation efficiently brings down the store rates and expand development of commercial enterprises that depend intensely on outside account. The gainfulness of these money related organizations presumes that there ought to be a relationship between bank focus and proficiency. (Knoll, 2010)

The components drive the cross-country contrasts in managing an account and money related organizations as far as their opposition. We add to this work by extending the investigation to countless and controlling for cross-country contrasts in institutional advancement and administrative arrangements. In the United States and other created economies ought to be subordinate fundamentally on what different elements are held steady.

The first research is based on the interpretation of the IAS and IFRS. European dimension of accounting of financial instrument is important (Moore, 2002). This research is used by the European professional accountants in accounting standards. In research, the thirty terms and expression are enhanced which enhance the fair reflection of complexity and diversity related to the IAS and IFRS.  The predominant research method is assess as well as interprets through the survey and interpretation of respondents with the help of research instruments. The studies majorities focus on usage of samples, which is less than the 100 respondents as compared to those who aimed students as registered respondents as they are less skilled in comparison of professional accountants. For the assessment of interpretation of IAS and IFRS, several methodologies are used.  (Darabi & Salmani, 2012)The students are asked followings:

  • Analyze IAS and IFRS series which for interpret in terms of numerical percentage. The full indicators are provided through this method which is typical perception of respondents
  • The probability can be presented best in numerical range, which is having association with IAS and IFRS. This method remain helpful  because it overcome the natural difficulty which is assigned to single value for estimation
  • The terms and expressions are identified in concern of activities, which are carried out through stimulation of real professional’s situations. The possible scenarios are generalized when it is given to a certain situation
  • It also analyze the terms and expressions which are in isolation as without context
  • The terms and expressions should be reviews as these are contextualized according to standards and excerpts of accounting standards.

The methodology objectives understand of perception. Such as VPE which is used in different accounting contexts and standards. There is enhancement of observe patterns based on IAS and IFRS interpretation. This is related to different accounting scenarios. The respondents consider the professional experiences as the accounting contexts remain under the analysis. This must lead to the considerations as vast arrays of scenarios. There are several studies, which highlight inconsistent interpretation of expression and terms among professional accountants. The inconsistencies are showing the results through existences of accounting contexts.  The literature highlights and enhanced the IAS and IFRS, which is considered suitable for the probabilities and inconsistency interpretation. This enhances and shows the accurate applications of accounting standards. These are having compatibility to the financial reporting. (Darabi & Salmani, 2012)

Population and sampling:

For this research population area includes, experts, financial management and postgraduate accounting students in Gulf countries. For sampling, this technique is divided into probability and non-probability techniques. Probability sampling is the technique that all the units of the universe get the equal opportunities to be a unit of the sample. While on the other hand in other technique, which is non-probability sampling by the researchers the items for the sample are selected deliberately. Non-probability technique in this study includes the purposive sampling and convenience sampling as a sampling technique, which is used in this study. For this study, the data, which is collected from the questionnaires, is collected from the auditors, certified public accountants, auditing professions, and university professors from accounting who are satisfy, are available to issue, and share their opinions’, information, attitudes and views. (Darabi & Salmani, 2012)

Setting IAS and IFRS:

The IAS or international accounting standards are issued through the international accounting standard committees. This is ranged from the year 1973 to 2000.  In 1973, the comprehensive reorganization in 2000 structure settings is enhanced, as this is known for the IASC. There is lack of actual committee. The standard setting board is also known as the IASC board.  The international accounting standard board is considered as private sector and independent serving body. This sector develops as well as approves the IFRS. The IASB is also operating under the oversight for the IAS. This is replaced through the IASC. The replacement is occurred in 2001. Some of IASs are amend through IASB as this proposed to amendment others. Furthermore, the IASs are replaced through the IFRS and proposed some certain IFRS for certain topic as these topics were not having IAS. The interpretation of standards is issued through committees such as IASB and IASC.  The IASB is framework which is related to financial statements’ preparation and presentation.  This also serves as guide for the resolution of accounting issues. These issues cannot be address directly in any standard. The IFRIC also develop as well as solicits the comments related to the interpretation of guidance. These are applied standards promulgated through the IASB, as IASB need to approve through the interpretations, which is developed through the IFRIC. (Iasplus.com, 2012)

Adoption of IFRSs:

In many parts of the world including the Australia, Hong Kong, GCC countries, Malaysia UK, South Africa, Russia, Turkey and in Singapore IFRSs are still used. In august 2008 in all around the world more than one country including Europe permit or require IFRSs reporting large number of the countries that require IFRSs for all listed or the domestic companies. (Darabi & Salmani, 2012)

United States and convergence with US GAAP

In New York in the year 2002 in  a meeting IASB, Connecticut and the financial accounting standards of US show agree to harmonize the work or the agenda to reduce the difference between the IGAAP and IFRS. In 2006, IASB and FASB issue the memorandum that includes the programs of the two bodies that will find convergence for achieving in 2008.

Distinction between IASB and IFRSs

IFRSs has the broad or the narrow meaning, it refer to the new series of the pronouncements the IASB is distinct from IASs series and IASB is issued by the predecessors. More broadly the entire body of IFRS s refer to the IASB pronouncements including the interpretations or the standards approved by the SIC interpretations and IASB, IASs approved by the IASC predecessors. There are IASs, and IFRSs and interpretations. (Iasplus.com, 2010)

Accounting Standards of Gulf Countries

On the bases of the international accounting standard, accounting standard of the gulf countries have been developed. By the audit organization of the Gulf countries, about 31 accounting standards are issued. From 1973 to 2000 international accounting standards of the accounting standards has been published. Only about 41 statements number of the standards reaches. (Iasplus.com, 2010)

IFRS: it is the abbreviation of the international financial reporting standards; in 2001, it sets the accounting standards by the nonprofit or the independent organizations, which is called the international accounting standards board. In some of the important industries, the standards of the reporting laws are important, and offer the comprehensive instructions. Link of IFRS and stock price is also important to consider (Beisland, 2002). Currently there are only 100 countries in the world that are using the accounting standard for the state owned enterprises and are required. the use of the such kind of the firms especially for the large firms or the companies can be important.

Data Collection:

The two main sources of the data used in the research paper would be generated from information of the financial institutions of UK, US, and GCC countries based on capital adequacy frameworks, which are commonly called as Basel I, II. The Basel Committee has a wide coverage in most of these nations or economies. The data utilized in this research paper would be ranging from 1999-2007 periods. The advantage in using this particular data because in this period variables might varies over time.

The focus on the financial institutions as well as banks would enhance their comparability’s as well as significance in such markets or developed economies in the sample selected. The various sources of the research paper would be Interest Margins, Concentrations of financial institutions, Specified Controlling variables, regulatory or administrative variables, Financial and Macroeconomic System controlled variables, Impediments in competition, etc.

Interview is the method in which researchers ask the different transparently questions from the subject during the register their answers and their predefined plan. For the interview researchers ask different questions in a systematic way. It is the way of the collection of the data for these only valid questionnaires are approved by the experts. This part is not used in the analysis of the data unless in the validation of the research tool or interpreting the research results.

On the four qualitative criteria that are reliability, comparability, evaluation and understandability questionnaires are developed. Through the interviews with the experts, reliability was evaluated. For the identification of the validity and reliability, interviews are conducted with the approval of the experts.

Primary and secondary data collection:

  1. For the collection of the data, researchers conduct the interviews and uses field visit, it is the primary source for the collection of the data.
  2. Researchers uses the books, internet, magazines, websites and different documents for the collection of the data, it is the secondary source.

Interest Margins

The Interest margins are equaled to interests’ income subtracting the expenses of interests from it and then by dividing interest on the demeanor assets as well as its average for this specific time period. There is measurement of gap in between the payment of funds by the financial institutions what is received by the economies from their investments, while utilizing the bank credits. The study focuses on the lending operations and conventional borrowing by the financial institutions of different economies.

We need to hold an adequate sum consistent such that we can decipher more noteworthy net premium qualities as reflecting either operational wastefulness or business sector power. We utilize an assortment of control variables and affectability checks to alleviate issues with deciphering the net interest edge variable. Frustrating issues emerge in the study as well. For instance, business banks may lessen loaning rates to borrowers that additionally utilize bank benefits that produce expense and commission wage, for example, guaranteeing of securities and counseling guidance on mergers and acquisitions. Case in point, banks taking part in expense salary creating exercises may have distinctive net premium edges because of cross-appropriation of exercises.

Concentration of Financial institutions

The concentration of the financial institutions would equal with the assets held by the countries during the periods of these selected years for this current study. This concentration varies with country to country and economy to economy. On the other hand, the higher rate of concentration could not be found or assessed as being the phenomenon of developed economies as there are certain other factors as well.

Data Analysis

Third source use for the analysis of the data FROM excel and SPSS software. Normal distribution can be made known and can be calculated with the help of the standardization of the scores. Moreover, macroeconomic flimsiness, as proxied by expansion, is absolutely connected with net premium edges, while more prominent securities exchange advancement (Value exchanged) is adversely connected with overall revenues. Besides, the relationships demonstrate that better foundations (Property rights insurance, Economic opportunity) are contrarily corresponded with budgetary establishments’ interest edges and adversely connected with administrative limitations. The outcomes show that more tightly administrative confinements (more Fraction passage denied, more Activity limitations, less money related establishment opportunity) and more focus that is elevated are connected with greater net premium edges.

Moving past connections, we now analyze the relationship between net premium edges, benefits and monetary regulations, fixation, and the institutional environment while controlling for bank-particular qualities and the macroeconomic and budgetary environment. The connections among these national qualities propose that it is critical to control for a scope of elements in surveying the effect of any of these nation attributes on the expense of monetary intermediation.

Results

Relapses of interest margins on bank particular variables, bank fixation, and the administrative variables that are contingent upon information accessibility for the administrative variables, there are between UK, USA and GCC nations and between money related foundations. The aftereffects of the exploration gives that Substantial banks have a tendency to have lower net premium edges than little banks. Banks that hold a high division of fluid resources have lower net premium edges. This is steady with models that underline the positive part of size emerging from scale effectiveness. (Darabi & Salmani, 2012)

Profoundly promoted banks have higher edges, which is steady with hypotheses focusing on that exceptionally promoted banks can charge more for credits and/or pay less on stores in light of the fact that they face lower chapter dangers. This is steady with banks getting lower profits for holding money or securities, yet confronting a focused business sector. At last, banks participating in expense-based exercises have a tendency to have lower edges, reliable with – however not direct confirmation of cross-sponsorship of bank exercises.(Iasplus.com, 2012)

Countries Coefficient from relapseEdgeDeviation
UK2 (2.3)8.45 to 7.970.25
US0.78 (2)20.10
GCC0.75 (1.4)2.250.6

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