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Financial systemic risk

Taxing activities that inflict negative externalities on any given financial system is the same as taxing any activity that may lead to a financial systemic risk. According to Acharya et al. (2008); The tax has two benefits: (i) it discourages behavior that leads to systemic risk, and (ii) the generated levies would go towards a general “systemic crisis fund” to be used in the future by the regulators to inject capital into the system (at their discretion). Of course, in equilibrium, some institutions will find it optimal to still engage in these behaviors and therefore pay the higher taxes, while others will lessen their use (p. 8).

Though small firms may have minimal or not tax imposed on them due to low effect on the systemic risk incase of financial hardships, the large and complex financial firms would be the greatest to get the tax burden imposed on them as their failure would effect great deterioration in the financial system. In this regulation method the regulators would let the financial and broader market evaluate and give an estimate of the financial systemic risk. All firms under regulation would then have to purchase insurance against future losses in a universal crisis only.

This regulation scheme would help firms keep externalities internal and enhance every firm’s willingness to either purchase the insurance or build a capital base that would cushion it against future losses that may be incurred in the event of a financial failure. In the event of a firm opting to purchase insurance against future losses then the purchase contract would have to be drafted in detail and the insurance company would have to pay the regulating firm a percentage of any rate that falls below the target.

I case of increasing insurance market that the private sector may not be able to fully cover the market; the government can come in and insure the financial firms’ capital against future losses. To ensure that the firms continue to be monitored, then they have to keep buying the insurance. Restructuring the read more be the most challenging of all tasks that any government or restructuring body may have to undertake.

In the event of a financial failure, complete corporate restructuring may be the remedial step for any country’s economy. For this to be achieved, the local government in any given country has to take the lead in the restructuring process that would then ensure all sectors of the financial market and the economy at large makes a turnaround. Wholistic and transparent policies and strategies should be the guiding lines for corporate restructuring. With every crisis comes the aftermath of social costs impacted by the people’s outlook on the economy.

This should then be part of the restructuring initiative initiated by the government to ensure private investors do not shy away from making investments in the future with the brevity to take risks. All goals set for the restructuring of the corporate and financial sectors should be clearly communicated to all stakeholders on the onset of the process to ensure maximized participation and effective implementation of the restructuring process. Though a systemic and financial crisis may be taken to be a negative impact on the economy, it has notable benefits in that it brings change that may have not been embraced otherwise.

With sound legal and macroeconomic frameworks, governments can take on a higher role in the restructuring process as soon as a crisis hits in. System protective measures such as liquidity boost can shield the economy from a total collapse and help shorten the restructuring process that usually takes upto five years to successfully implement. In any crisis situation, the aftermath may be severe, however, without restructuring the economy cannot be able to get back to its feet – restructuring is therefore critical after economic crisis.