Finance Term Paper Sample on Financial Institutions And Markets: Current Issues In Financial Markets


Part 1

The United States still remains one of the most competitive economies in the world, despite the recent shaking of the U.S financial market. This has been made possible due to the changes and constant evolution in the financial industry, with many financial institutions keeping abreast with the evolution. Most notably, in the past years, the various administrations have implemented various measures so as to consolidate the financial market despite the turmoil in order to achieve robust economic growth.

In the early years compared to the current state, the financial industry in the United States has undergone a paradigm shift on how payments and other critical financial services have been delivered. In the early years for instance, some roles in the banking industry in terms of lending and depositing money have changed overtime due to the changes in banking and financial services regulations, including de-regulation of the financial services industry which broadened the ability of banks and other financial services providers (FSP’s) to be able to offer more financial services as compared to the early years where their abilities had been capped.

In their roles, mainly in the financial segment, banks and financial services service providers were much restricted in their abilities to offer financial services, especially in intermediation, lending and acting as deposit-taking financial services providers. These service providers were also restricted to offering more services, including in their operations and their model of business such as branching in the financial industry, an aspect that was critical to the growth of such institutions, with such curtailing the roles and functions of the financial service providers due to the much regulations enacted within the financial sector.

In the onset of de-regulation and the restructuring process in the financial services industry, more banks and financial institutions expanded the incentives and services in the domestic markets, with banks acquiring more roles with other non-bank establishments to offer financial services (Arista, 2015). These non-bank establishments helped widen the scope of doing business by enabling banks and other finance-based establishments to accept demand deposits while also facilitating the issuance of commercial loans, a concept that was not allowed before the de-regulation of the financial services industry.

Some of these changes were brought about by enactments such as the Bank Holding Company Act, an Act that gave a provision for banks to own one or more banks (Bliss, Kaufman & Connect, 2008), thereby increasing the roles of banks as financial services providers, to increase financial services reach in more than one area using the branching model of operation. On the other side, the roles constantly changed after the establishment of nonbank banks, a model which permitted banks to venture into commercial banking while at the same time merging banking and commerce.

As de-regulation brought a relief on how and to what extent banks operated, the United States financial services sector became one of the largest economies in the world, with their roles in stabilizing the economy of various households and increasing reach to financial services to the population reaching its peak, the number of deposits grew compared to the number of German, Britain and French included, due to enactments in the era of de-regulation, an era which brought about unprecedented growth especially because of the branching model, which had earlier limited banks in terms of their operations within the states of establishments.

With the enormous improvements in law, technology and processes, there have been a number of financial innovations, with these resulting to a bigger and more powerful revolution across the financial sector thereby enabling banks and financial service providers to be proactive in enhancing various systems of operations and services. This was widely seen after the merger of various banks and financial service providers, after the Leach-Biley Financial Services Moderation Act of 1999, which resulted in an explosion in the US domestic market since it allowed securities firms as well as insurance firms to purchase banks and securities establishments which increased financial product offerings. In other sections regarding trade, banks were much regulated which prohibited them from linking with other foreign-based banks, which limited their efforts in the providing financial services.

In the current financial services setup, most of United States banks and financial service providers have grown to become some of the largest banks with more financial strength as a result of the de-regulation, while also enabling them to acquire additional roles and functions in securities, insurance, banking and commercial lending across the states, borders and around the globe.

In addition to this, technological innovations in the financial services sector have also broadened the roles and functions of most banks, thereby improving processes as compared to the earlier days in the financial services history. This has led to an evolution of many technologies which act as platforms through which financial services are being offered, with the majority being some of the most modern forms of payment methods and platforms. This brought a dynamic shift from the use of charge cards to modern payment card systems such as credit cards.

In the early years of trade and commerce, many American financial institutions allowed individuals and other users to transact via legacy forms of payment systems. As they had a role in facilitating monetary transactions, the financial institutions used charga plates, a form of a departmental credit card which worked like the modern day credit card. This resembled like a key, which was stored at the store premises and was only given to a buyer or customer to be able to make a purchase at a store, one at a time.

However in the era of technology, financial institutions being more innovative, has resulted in a bubble burst in the deployment and use of modern technological platforms. Financial institutions have innovated more platforms and methods of payments with the industry moving billion of dollars through card payment methods, as well as facilitating interbank payments, a model that lacked in the earlier years.  

Compared to the Charg card, modern payment systems innovated and engineering by financial institutions have enhanced their roles and functions, especially across financial institutions. This has enabled financial service providers to link their systems with intermediaries to provide financial services to a wider reach though multiple platforms with the First Data corporation innovating a pin based card system to facilitate financial transactions. The roles and functions of these institutions have evolved in a number of ways, from their model of operations to methods of moving money through various means. This has revolutionized how financial institutions conduct business, interact with their customers thereby playing a critical role in this modern era in the financial industry of the United States.

As financial markets would be stronger given the viability of business activities, their stability and that of a domestic market often depend on the country’s Federal Reserve System. In the United States, for instance, the Federal Reserve plays a critical role in maintaining the stability of financial markets, assisting with the development of monetary policies as well as regulating banks and supervising other government agencies (United States. General Accounting Office, 1996). However, in maintaining a number of monetary functions, the monetary tools being used may have an impact in the US and other global markets.

One of the monetary tools used by the Federal Reserve is the Reserve Requirement. This refers to the lowest specified bound which ensures that a minimum reserve level is maintained (Pardalos, 2009). It is a tool primarily used in the banking and financial sector that ensures financial stability of the financial services providers in the United States and in some instances may have an impact on both local and global financial markets. The Reserve Requirement has led to stability by ensuring that local banks and financial institutions have the ability to conduct fair businesses. This has reduced chances of liquidation, thereby strengthening the domestic financial markets. Through this, the US government is able to regulate banks by allowing firms that are competitive enough to offer banking and financial services to its population, thereby enhancing competitiveness in the dynamic financial services sector.

In addition to this, as the Reserve Requirement hinges to strengthening the domestic financial market, it has also played an important role in maintaining a constant global cash flow. This particularly attracts international borrowing as countries in emerging markets tend to borrow from financial institutions with strong financial power.

In other instances, the monetary tool may be used to increase lending to international markets. This can be done by regularly adjusting the reserve requirements to increase the amount of money in the system, which directly affects other global financial markets. The Monetary tool thus has been used to strengthen other global markets by maintaining stable performances of other foreign markets so as to maintain a stable global economy with constant cash flow.

Apart from the Reserve Requirement, a monetary tool used by the Federal Reserve is the Fed Funds rate. It is referred to as the rate at which a bank pays to the lending bank (Organization for Economic Co-operation and Development, 2000). This has had an impact on the US economy by increasing lending especially when banks have excess money in the reserve. This occurs especially when the Fed funds rate is lower thereby enabling most banks to borrow more for both domestic and global markets. The Feds Fund rate has impacted heavily on both domestic and global markets, since banks are able to borrow a lot from others when the lending rate is lower, while on the other hand also reduces economic activities especially in the financial services sector, when the rates are extremely high reducing borrowing and lending, to both the domestic market and other global economies that rely on the United States.

Other than the Fed Funds rate and the Reserve Requirement, the discount rate as a tool has enabled banks to borrow during the discount window. This has increased borrowing at a much lower rate thereby stabilizing the US economy, as well as increasing lending to other global economies due to a more attractive economic climate, as a result of lower borrowing rates.  

Stock market investments can also impact on business borrowing and lending, especially in instances where businesses borrow money in order to invest in publicly traded companies. This is because such investments like stocks and bonds particularly depend on the performance of a given market segment. In instances where such market segments perform better, the returns on money borrowed to be used in investing in a stock or bond is likely to be better given the interests earned.

However, when there is poor economic climate, such a bond or stock is likely to fetch poor returns. In instances where returns are good, businesses make extra cash which can be lent to others, and at the same time given an opportunity for such a venture to borrow more in order to invest in such as investment. Whilst a positive economic climate may impact on the ability of a business to borrow and lend at the same time, a poor economic climate results to reduced financial returns and optimism by businesses. This directly affects the ability of such a business to lend or borrow for a stock market investment.    

The money markets, stock markets and the over the counter markets also play a key role in the US and global economies. It affects the performance of key sectors as it regulates and facilitates constant cash flow which is used in various areas. The money market forms a part of the global system, channels through which money flows (Choudhry & Beehler, 2011). It also  

refers to the central point in which all participants in a market, which in a case could be banks, other financial institutions and various governments engage in order to manage their state of liquidity.

In most instances, the cash shortages are met since this type of market only meets the requirements in regard to short-term cash requirements (Fabozzi et al, 2002). This is met especially through the use of certain money market instruments, with the United States money market using treasury bills, bills of exchange and other tools to raise funds for common good. The major role is to finance other corporate companies, organizations and governments participating by raising funds for their ventures or projects for short-term gain. On the other end, the US money market also provides a platform through which entities may invest and also help in the provision of additional monetary resources for commercial banks, entities and global governments participating.

Whilst money markets play a crucial role, the stock market also plays an important monetary role. It is a regulated market where several activities including securities, bonds and shares are traded through buying and selling at different prices. It serves as a primary location where entities such as governments, corporations and other bodies can raise money from stock being traded. In the New York stock exchange for instance, a number of Wall Street companies trade and move billions of dollars in shares in order to raise money for investments. The stock market can be used to raise capital for major companies including governments around the globe, hence sustaining some global economies which rely on monetary investments to operate their various segments of government.

An over the counter market is a network of one or more dealer having a database of securities that can be bought at a given price (Gallagher & Andrew, 1997). It is a virtual kind of business where dealers float their securities to the available buyers to enable them buy at negotiated prices. It is used for trading in bonds, stocks and securities, and also provides capital to firms and governments. Such as the OTC bulletin board and pink sheets, is an OTC market that trades in bonds and securities, which help American firm’s not listed in formal stock markets to raise capital for their use. In the global front, OTC market’s enables global entities and governments to engage in stock trading from virtual locations thereby boosting their economic stability as they generate additional revenue from a remote location.

As much as the financial segment plays an important role in US economy, the industry is regulated so as to help it remain competitive. It is also regulated to ensure that firms trading in financial activities are sound financially in order to maintain the competitiveness of other financial systems around the world.

Part 2

The US government regulates the financial system through various state agencies, with each mandated to perform and ascertain that given guidelines are met. In their capacity, the government has a wider arm consisting of federal and state, as well as private institutions. The federal arm carries out their mandate nationally while state agencies are centered on their states.

Federal Reserve System

The topmost regulative body that regulates the entire monetary system. It oversees all the essential components of growth including prevailing prices.

 U.S treasury department

It performs various roles, but in terms of regulation, the arm performs its regulative roles through the office of the comptroller of the currency, as well as office of the thrift supervision. The office of the comptroller of the currency (OCC) regulates all banks to ensure the stability of the system while the office of the thrift supervision (OTS) ensures that all saving deposits often held mutually adhere within the stipulated financial practices. The arm also acts as a regulator by regulating the new formation of thrifts (The U.S financial Regulatory System, 2008).

Securities and Exchange Commission (SEC)

It is an agency tasked with overseeing the security markets in the United States. It oversees and implements laws regarding securities, and oversees how stocks, bonds and other securities are traded. It is also tasked with promoting safe trading practices as well as maintaining transparency within the securities market. It is a broad arm of the government and performs its functions by implementing the Sarbanes-Oxley Act of 2002 and the Credit rating agency reform act of 2006.

Federal deposits Insurance Corporation

It is a government agency that checks and ascertains the true standing of all members in all bank accounts in the United States. It checks on the deposits in order to guarantee a safe representation by banks.

Commodities Futures Trading Commission

It governs the futures contracts given the ever evolving market. In terms of regulation, it regulates derivatives and checks on all trading organizations which handle contracts. It however also prevents fraud in the trading of contracts.

National Credit Union Administration

A government arm mandated to regulate credit unions. This agency also oversees the insurance of funds in both federal and other unions administering credit to members within the US.    

The banking sector has undergone quite a number of regulations, enactments that have given birth to the current banking laws, and capability of banks to carry out their operations with the first bank charter being granted to the Bank of North America. This was as a result of the passing of an enactment by the continental congress, a resolution that was made by the delegates to support the country after it had attained independence.

After the then establishment of the Bank of North America, a constitution was changed to allow for the creation of a central bank that could act as a fiscal agent of the central bank, at a time that the regulatory processes varied across various states. Despite the banking zones across different states, the Banking Holding Act of 1970 was enacted which enabled most banks to operate beyond the stipulated bank areas, with the enactment of the International Banking Act of 1978 which gave bank more opportunities to operate beyond their borders (Damanpour, 1990), as a result of mounting political pressure. Given that most American Banks have been limited to their areas of operation, the landscape has changed, especially after the 1990’s hence expanding the financial system by specifying how banks would operate with other intermediaries, with changing laws speeding the uptake of new products being offered by banks as a result of competitive pressure as noticed in this internet generation. This further led to the emergence of modern financial engineering techniques that has emerged in the 21st century.

There is also a need to improve the regulatory practices in the banking sector in order to streamline the banking operations and financial services as a whole. This will also reduce the loopholes emerging from given legislations that can be catastrophic and may also hinder compliance with internationally accepted practices.

One of the areas which can be improved is reform policy. There should be a policy in place that can allow different participants including the government to implement laws that have been merged as a result of a resolution from industry players. This is because industry players understand various loopholes and weaknesses that need to be addressed so as to promote cohesiveness and co-operation among various stakeholders. This would also reduce instances where the laws enacted do not fully address emerging issues. In addition to this, one of the key areas to be addressed would be in reform appraisal. This would promote a method of assessing legislations before an improvement is done to ensure the regulatory practices meet the specified threshold. 

Whilst central banks continue to play an important role especially in controlling inflation through stabilized interest rates, the role will shift to enhance price stability as a domestic function. This will also lead to a change in roles and expertise as more expertise will be needed for the macro environment. On the other side, with the ever collapsing financial markets, the future of international central banking will shift to policy making. This will help in the establishment of modern banking techniques to keep the volatile financial markets at bay, especially after the great economic crisis which shook the global economic systems. There will also be the need to maintain the required levels in various banking and financial segments for a more healthy global financial system in order to avert potential financial crisis in the future, as well as to cushion middle lenders against shocks and possible financial crisis.  


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