Finance

While recovering from the recession, Americans face constant new financial regulations to ensure the safety of the nation’s economy. With President Obama taking charge of the country’s financial security, there are new financial regulations that every American must be aware of. Below is information that will help make you an informed consumer and/or American business person.

finance

The Role of Finance in the Economy

According to Martin Neil Bailey, “The U.S. financial system is critical to the functioning of the economy as a whole, and banks are central to the financial system.” Essentially, finance serves three major purposes: credit, liquidity and risk management.

Credit

After the great recession of 2007 and 2008, credit provisions made regulations stricter. Credit practices, including home and car loans, came under scrutiny by regulators, and lenders were required to make deeper and more critical assessments of a borrower’s ability to repay a loan.

Liquidity

With liquidity provisions in our financial system, according to Bailey, “Businesses and households need to have protection against unexpected needs for cash. Banks are the main direct providers of liquidity, both through offering demand deposits that can be withdrawn any time and by offering lines of credit. “

Risk Management

Risk management provisions that allow business and households to “pool their risks from exposures to financial market and commodity price risks” are critical, especially in the wake of a volatile economy. There are now new proposals for financial regulations since many banks’ reputations and credibility have been tarnished. Such proposals include stricter risk management requirements and reserves.

Recent Financial Regulations on Transatlantic Trade

Because more than 70 percent of all global financial transactions are between the United States and the European Union, EU Commissioner for Internal Market and Services Michel Barnier suggested that “the United States and European Union need to ‘lead by example’ by carrying out necessary economic reforms to meet G20 commitments ‘rigorously and sensibly.’” In 2009, “the European Union and the United States came to an agreement about how to regulate cross-border swaps at the G20 summit in Pittsburgh, Pennsylvania.” At this summit, both the United States and the European Union agreed to follow through on three essential global financial regulations:

Clearing

They agreed to reduce the risks in financial firms by clearing all standardized swaps via central counterparties.

Transparency

They agreed to shed light on the global market and report all trades to trade repositories. Both the European Union and the United States must know where risk is building up in the system.

Trading

“Where appropriate, [the EU and US agree] to move standardized swaps to venues to increase market transparency,” stated Brookings.

How Recent Financial Regulations Affect the Economy and Businesses

With the new financial regulations that apply to transatlantic trades and numerous nations, the G20 summit of 2009 will play a vital role in the United States’ approach to financial globalization. To the American people, this means that the economy and businesses will become more intertwined with other nations’, reducing the risk of economic and financial instability. By doing so, the United States and the European Union create new and lucrative connections and a stronger, more global economy.