Financial systems exist to facilitate the flow of funds from savers or lenders to borrowers, investors or spenders. All nations across the globe have devised banking systems and financial institutions to allow the movement of funds that comprises the financial market. The financial market has been shaped largely by the economic system in which it exists. This market has witnessed continued improvements and recent developments in technology and emergence of global open markets have removed physical boundaries in which it operates.
Global financial markets continue to influence each other and government bodies play a vital role in controlling and regulating the movements in this market to a great extent. Government intervention in financial markets The government regulates the financial market through policies and regulations that enables the financial institutions to provide efficient financial services minimizing risk factor. Government regulations over financial markets are mostly aimed at protecting public interest and promote higher levels of efficiency.
Government regulation of financial markets has been widely debated by experts for a long time. Several market analysts and experts believe that government intervention is essential to ensure smooth operations of the financial markets, provide stability to the financial system, protect investors against fraud, and promote market competition for healthy growth. However, another group of experts believe in minimizing government control over market movements and allow the law of economics to dictate the adjustment of financial markets.
The demand and supply law of economics tends to regulate the market movement that helps in resolving any kind of market crisis situation. “Although the economics profession generally places great confidence in the ability of free, competitive markets, many financial economists argue that free financial market – financial markets that are unregulated and unrestricted by the government – will not provide good financial services in a stable fashion, so government supervision and regulation of financial market activities can sometimes improve social welfare” (Levine, 1996; pg 162).
Markets operating within a perfectly competitive environment will benefit from the law of economics. However, financial markets in reality “do not behave in a perfectly competitive manner” (Levine, 1996; pg 169). One of the significant aspects of government control of financial markets should encompass establishing a financial system that is efficient and structured. The system should establish uniformity in financial practice and implement policies that relate to existing market situations allowing adequate flexibility to adapt to rapidly changing conditions.
Reducing transaction costs in financial markets is yet another area that the government policies should cover to protect the investors and borrowers. Government intervention in financial markets is highly critical in conditions of market failures.