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23 January, 2019 00:00 00 AM

Reforms in the banking sector

A true market economy cannot be created without ensuring both full guarantees of private property and reasonable legal control over economic processes
Masihul Huq Chowdhury
Reforms in the banking sector

Law reform or legal reform is the process of examining existing laws, and advocating and implementing changes in a legal system, usually with the aim of enhancing justice or efficiency. Intimately related are law reform bodies or law commissions, which are organizations set up to facilitate law reform. Law reform bodies carry out research and recommend ways to simplify and modernize the law. Many law reform bodies are statutory corporations set up by governments, although they are usually independent from government control, providing intellectual independence to accurately reflect and report on how the law should progress.

Legal reform can be the driver for all other reforms, including reform of the economy. A true market economy cannot be created without ensuring both full guarantees of private property and transparent predictability for entrepreneurial activity, on the one hand; and sufficiently reasonable legal control over economic processes, on the other hand. Legal reform should be an integral part of any on-going reform process. Legal reform is a tool for implementing necessary reforms, to balance competing interests, create a dynamic and sustainable economy, and build a sustainable civil society. During last decades the judiciary became active in economic issues related with economic rights established by constitution because "economics may provide insight into questions that bear on the proper legal interpretation".[4] Since many a country with a transitional political and economic system continues treating its constitution as an abstract legal document disengaged from the economic policy of the state, practice of judicial review of economic acts of executive and legislative branches became to grow.

The budget of the judiciary in many transitional and developing countries is completely controlled by the executive. The latter undermines the separation of powers, as it creates a critical financial dependence of the judiciary. The proper national wealth distribution including the government spending on the judiciary is subject of the constitutional economics. It is important to distinguish between the two methods of corruption of the judiciary: the state (through budget planning and various privileges), and the private.[5]

During his presidency —especially the first two years— Woodrow Wilson focused a lot on economic reform. One of the ways he helped the country recover from the recession was to fix up the banking system.

In the early 1900’s, the United States had about 7000 independently owned banks that were all vulnerable to depression,because there was no back-up plan in place.1 Therefore, it was inevitable that when Wall Street went into a financial panic in 1907, many of these banks went bankrupt, reminiscent of what would happen twenty years later. It was this bank failure that convinced Americans that their banking system was archaic and needed reform.

Law reform activities can include preparation and presentation of cases in court in order to change the common law; lobbying of government officials in order to change legislation; and research or writing that helps to establish an empirical basis for other law reform activities.

The four main methods in reforming law are repeal (get rid of a law), creation of new law, consolidation (change existing law) and codification.

Presidents George W. Bush and Barack Obama signed into law several major legislative responses to the financial crisis of 2008. The most influential and controversial of these was the Dodd-Frank Wall Street Reform and Consumer Protection Act, which introduced a raft of measures designed to regulate the activities of the financial sector and protect consumers.According to a 2014 assessment of Dodd-Frank's impact by the Brookings Institution, the law achieved a "clear win" by increasing the levels of capital that banks keep on hand, leading to greater stability for the system as a whole. Another success, according to Brookings, was the creation of the CFPB. Restrictions on the Fed's emergency lending abilities, on the other hand, were a "clear loss," while the Volcker Rule and other provisions represented "costly trade-offs." As of October 2017, Republicans control both chambers of Congress and the White House and are pursuing a rollback of major Dodd-Frank provisions, through both Congress and the executive branch. A Treasury report issued in October identified regulations that could be scrapped to encourage growth, and in June the House passed the Financial Choice Act, which would repeal the Volcker Rule and the Sifi designation.

In 1908, the Aldrich-Vreeland Act was approved by Congress and the National Monetary Commission was formed. Headed by Nelson Aldrich, this committee was to study why the panic happened, and create a plan to prevent it from ever happening again. However, the proposal they came up with was too much like the old Bank of the United States.* While the proposed National Reserve Association did try to spread out the reserve banks into 15 different districts, it was still to be headed by the banking industry.3 With so much of the industry centralised in the East Coast, especially in New York, farmers in the south and Midwest were worried that the bankers would therefore unfairly favor their own areas. They especially didn’t like the “money trust”, a group of men who controlled a vast portion of the money and credit.The awareness of this “money trust” led Americans to search for a better solution to their banking problem, leading to the creation of the Glass-Owen proposal, and eventually, the Federal Reserve Act of 1913.5 Instead of concentrating the power into one national bank with several subsidies, it proposed instead to have the power split equally into twenty or so different regionally controlled banks. These banks would be able to issue currency and other central banking functions, but a central board that would serve to coordinate all the regions to work in tandem would also control them.

Eventually, the final decision was made to split the country into 8 to 12 regions, with each region having it’s own Federal Reserve City. There was no doubt that there would be a Federal Reserve Bank located in New York City, however, the size of the bank was questionable. Power magnates of New York like J.P. Morgan wanted the size of the bank to reflect the importance of the area in question. It was also argued that this way, banks in Europe would recognise their power. However, major figures involved in the decision like the treasurer and the agriculture secretary disagreed, feeling that a reserve bank of that magnitude would overshadow all other reserves, since they wanted approximately half of the capitalisation of the entire system. In the end, the decision was made to restrict the power of the New York branch of the Federal Reserve by restricting the limit of its control to just New York State. However, with over $20,000,000 in capital, the New York Reserve Bank still easily dwarfed the other banks, and it was impossible to stop it from becoming the dominant bank in the system.8 However, it was still smaller than what the power magnates originally wanted.

Once the bank opened in November of 1914, it rapidly gained power. The first day it opened, it gained over $100 million dollars from its member banks, and by 1927, it contained 10% of the world’s entire store of monetary gold.9 They also had to open branches in the extremities of New York like Buffalo in order to serve the counties in western New York.

The four pillars of the Nigerian banking sector reforms include: To enhance the quality of banks in Nigeria; to enhance financial stability, and by implication economic stability; to bring about healthy financial sector evolution that will result in the much-desired financial sector inclusiveness; and to ensure that the financial sector contributes to the real sector of the economy. By the time these four cardinal reform objectives are attained, the Nigerian banking system would have been positioned to deliver superior results and compete favourably with its peers globally.

Some of the reasons behind reforms can be outline below. In Nigeria, most of the banks had a low capital base, less than 10 million US dollars. The local banks in Nigeria were not very efficient and also their capacity was low. So, the government had to depend a lot on the foreign banks.

Nigeria had been suffering from a weak corporate governance and insolvency for a long time. So the government failed to provide a sound banking system.

Most of the banks in the country depended upon the public sector deposits which was lowering their capital base. The public funds had not been distributed equally among all the banks. The writer, a banker by profession, has worked both in local and overseas market with various foreign and local banks in different positions



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Editor : M. Shamsur Rahman

Published by the Editor on behalf of Independent Publications Limited at Media Printers, 446/H, Tejgaon I/A, Dhaka-1215.
Editorial, News & Commercial Offices : Beximco Media Complex, 149-150 Tejgaon I/A, Dhaka-1208, Bangladesh. GPO Box No. 934, Dhaka-1000.

Editor : M. Shamsur Rahman
Published by the Editor on behalf of Independent Publications Limited at Media Printers, 446/H, Tejgaon I/A, Dhaka-1215.
Editorial, News & Commercial Offices : Beximco Media Complex, 149-150 Tejgaon I/A, Dhaka-1208, Bangladesh. GPO Box No. 934, Dhaka-1000.

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