7. Foreign Exchange MarketOf the financial markets the area of concern for me is regulation of commercial banks these banks are regulated by ‘CENTRAL BANK’ in this term paper we have to concentrate on the regulation of these commercial banks by the central bank.
8. Introduction In the recent past the failure of financial system and of well known banks as Polonia Bank of Huntingdon Valley, Earthstar Bank ,Paramount Bank , One Bank ,First Banking Center ,First Michigan Bank ,Allegiance Bank of North America. Gulf State Bank. In last 2 years in UNITED STATES only over 150 banks have faced failure. In my view the failure of banks is due to inappropriate regulatory policies adopted by government institutions as central banks. Working on this term paper is the main reason of failure of financial institutions here we will examine the procedure followed to control financial system and lags in this system which should be recovered. If Summarized we come to a conclusion that if the crises are tackled at an early time then solutions may be possible and government should control financial sector strictly and in case of free banking, also other solutions are further discussed in the context.
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10. That competing, private issuers of paper currency will deliberately aim to stabilize the purchasing power of their monies;
11. That the quantity of money will automatically be limited if banks restrict themselves to discounting ``real bills.'' these propositions support laissez fair Fait money Bordo and Schwartz argue that all three propositions are false, and that the possibility of bank self-regulation is therefore “doubtful”. Free banking is an arrangement in which unregulated private banks issue notes and deposits that are generally redeemable on demand for some ``outside'' base money. A tendency exists for all banks to redeem their notes in a common base money,
12. Literature Review such as gold coin; and in the absence of restrictions on branching like-denomination notes issued by different banks all tend to circulate at par; in other words, various ``brands'' of bank currency trade at fixed rather than floating exchange rates. After declaring arguments and evidence for the stability of free banking insufficient, Bordo and Schwartz suggest an alternative scheme for bank self-regulation. Underlying the scheme are three claims concerning requirements for stability: 1. Price stability (meaning a stable index of consumer prices) is essential to stable banking; 2. Any bank that exhausts its capital and reserves should be immediately closed or reorganized; and 3. All risk of loss should be borne by bank owners and managers rather than by bank depositors, note holders, and other creditors.
13. Literature Review To satisfy the first requirement, Bordo and Schwartz favor a monetary-base rule. To satisfy the second, they recommend market-value accounting, and the elimination of subsidies to failed banks. To satisfy the third, they recommend that banks be subjected to statutory capital requirements and double liability, among other things. Summarized in this article we discussed the problems of free banking and presented hypothesis for free regulation of banks free banking is helpful in controlling different variables under control as forex rates , inflation , price level , payment of subsidies to failed banks and RRR etc because reserve is fixed by the paid up capital in form of fixed or base money
