There is a strong relationship that exists between the government and different financial institutions, especially banks. It is impossible for banks to exist without the help and the support of the reigning governments in their areas of operation. Governments offer different regulations that control the way financial institutions conduct business thus streamlining the industry and ensuring that fair competition prevails among all the financial institutions within a given area ( Tsaurai, 2018 ). Apart from coming up with regulations and policies, governments also facilitate the creation of conducive environments for conducting business. Such environments enable different financial institutions to achieve their objectives. The subject of the role of government in the banking sector has been addressed by many scholars and researchers in the past ( Tsaurai, 2018 ). The information and literature that can be drawn from the topic are in-exhaustive further explaining the continuous research and study into the topic. This paper is also aimed at shedding more light into the topic of discussion by identifying and discussing the various roles of government in the banking sector.
Tsaurai argues that one of the most fundamental roles of governments in the financial sector is to act as regulators of the industry. It must, however, be noted that to be effective as regulators, governments need to be independent and accountable. Mechanisms must be put in place to ensure that the instruments of power within governments are not used to target other financial institution or to create unfriendly regulatory policies. The regulations set by governments are important as they help banks and other financial institutions to know what is expected of them thus enabling them to avoid any conflicts with the law. The policies set by governments are also critical because they promote financial deepening in different countries. Some of the policies that are regularly implemented by governments include policies focused on macroeconomic stability, strong institutional frameworks and security measures to ensure the stability of the banking sector. Most comparisons involving different governments have shown a strong relationship between macroeconomic stability and financial development (2018). Other studies carried on different governments have confirmed the importance of good financial institutional infrastructure and financial deepening ( Seccareccia, 2014 ). For the regulations to be effective in improving the development of banks and other financial institutions, they must be moved to the supra-national levels where they are not subject to local political influences.
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The government also has a role in monitoring banks and other financial institutions. Governments monitor how banks and other financial institutions relate to each other and the government. The monitoring role of the governments is to ensure that banks adhere to the several rules and regulations that have been set by governments ( Seccareccia, 2014 ). Failure to monitor banks and other financial institutions might lead to disruptions to the economy as the banks might take up other processes that negatively affect governments. As Tsaurai discusses, the effective monitoring of banks carried out by related government agencies increases the discipline that exists in the sector and makes it easy for other financial institutions to join the financial sector of any country (2018).
The different types of governments also play a crucial role in the banking sector. More free and open governments positively contribute to the development and expansion of the financial sector. Governments that are authoritarian affect the growth of the banking sector in many different ways. Ping argues that when governments are more inclusive and open, they allow the free collaboration and interaction of various financial institution thus resulting in healthy competition. Governments that are open also encourage the exchange of information and resources among various financial institutions making it easier for different banks to learn from each other and to grow (2018). Totalitarian governments, on the other hand, have a common characteristic or restricting the flow of information and collaboration among various financial institutions. Such governments make it difficult for other players in the sector to penetrate the industry thus lowering the level of competition which leads to the stagnant financial sector. Additionally, most banks and financial institutions prefer places where there is a free market due to the numerous advantages that come with them.
Tsaurai further discusses that another major role of governments is to provide various players in the banking sector with the resources needed to ensure that they grow and achieve their objectives. Most governments acknowledge the fact that the growth and expansion of the financial and banking sector have many benefits to their economies. An expansion of the industry will provide many employment opportunities thus raising the standards of living of people. The expansion of the sector will also improve the economy by improving the flow of money within the economies. Due to the above advantages, different governments ensure that the sector is well supplied with whatever is needed to ensure their prosperity. Foremost, governments ensure that there are ideal economic conditions that favor the banking sector. Favorable economic conditions are created through the passage and implementation of various economic reforms. The governments also ensure that there is enough human resource available for the sector to source for their human resource needs. A qualified human resource pool is developed through effective educational policies which enable many people to attain the required levels of education (2018). Through the provision of the resources required, governments contribute to the growth and expansion of the financial sector in different areas.
It is therefore evident that governments play a crucial role in the banking and financial sector. It is also clear that there is a strong relationship that exists between the government and different financial institutions, especially banks. The relationship is strong to the extent where it is impossible for banks to exist without the help and the support of the reigning governments in their areas of operation. One of the most fundamental roles of governments in the financial sector is to act as regulators of the industry. It must, however, be noted that to be effective as regulators, the governments need to be independent and accountable. Governments also have a role in monitoring banks and other financial institutions. They how banks and other financial institutions relate with each other and the government. Besides, it is important to note that different types of governments also play a crucial role in the banking sector. More free and open governments positively contribute to the development and expansion of the financial sector. Governments that are authoritarian affect the growth of the banking sector in many different ways. The role and importance of governments in the financial sector should not be ignored, and efforts must be put in to ensure that there is increased corporation between banks and governments.
References
Ping, H. W. (2013). Regulatory capture in China's banking sector. Journal of Banking Regulation, 14 (1), 80-90. doi:http://dx.doi.org/10.1057/jbr.2012.9
Seccareccia, M. (2014). Banking sector viability and fiscal austerity: From rhetoric to the reality of bank behavior. Journal of Economic Issues, 48 (2), 567-574.
Tsaurai, K. (2018). An empirical study of the determinants of banking sector development in SADC countries. The Journal of Developing Areas, 52 (1), 71-84.
