Question

Various regulatory tools have been introduced subsequent to the credit crisis. Construct an argument that the regulatory tools such as loan-to-value ratio, the debt service-to-income, Capital Requirements, the loan-loss provisioning requirements, the Consumer loan limit and the credit growth limit can be expected to contribute to a more (or less) robust financial sector.

Answer 1

Regulatory tools like loan-to-value ratio, the debt service-to-income, Capital Requirements, the loan-loss provisioning requirements, the Consumer loan limit and the credit growth limit can be expected to contribute to a more robust financial sector. This is because these tools, in the long run, will help in managing the credit risk (which had substantially risen during the credit crisis) on one hand and will help in meeting the funding challenges on the other hand. These tools will ensure both microprudential stability as well as financial stability and this will help the financial sector to gain strength. These tools will lead to better risk management by banks and financial institutions and as the risks are managed better the risk reward ratio for banks and financial institutions will get optimized, enabling them to grow in a systematic manner. This systematic growth will contribute to the robustness of financial sector in the long run.