In the past decade, deregulation and household risk management
In the past decade, deregulations have directly impacted the decision-making process of various households regarding asset allocations and estimate of optimal levels of the life cycle when it comes to retirement. Those households that have limited funds will always have the urge to save, and this forces them to look for insurance coverage that protects them from financial risks. Household risk management tends to be precautionary, and this means that they increase when uncertainty is high. In this paper, an assessment is conducted on the deregulations in households and the complex micro financial decisions that stakeholders in the sector have been forced to make.
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Household deregulation
The 2007-2009 financial crises had a significant impact on various institutions and households. Some companies were forced to close down their operations while others suspended their operations. Since then, households have experienced deep and wide range deregulations, and these have had a direct impact on their performance. Most of them have been left with the option of making complex micro-financial decisions that dwell on the allocation of assets and saving for retirements (Van Hemert 2010, p.470). Other households have been forced to cut down on costs and expenses with the aim of enjoying sustainability. Deregulation has also provided them with the freedom to adopt measures that are focused on ensuring that they improve their income stream.
Impacts of household deregulations
There are various impacts that have come along with household disaggregation. One of these effects is an increase in financial risks. Weakened regulations have contributed to the increased exposure of households on increased borrowings from financial organizations. Most individuals that have low income and would like to lead a certain lifestyle are forced to borrow from banks and shylocks, and this exposes them to various risks, especially when they default on the payments. Household risks have also increased as a result of the existing economic inequality that is widely experienced around the globe (Rampini and Viswanathan 2014, p.16). Usually, the poor are faced with the challenge of applying for insurance cover, and this means that they may be at risk of losing their property as compared to the rich. According to the neoclassical theory, one of the vital concerns is to maximize his or her satisfaction. In this case, in as much as a household may take advantage of deregulation and entirely depend on debts, it may end up being faced with financial risks.
An increase in the household risk management has also been observed with an increase in deregulation in the sector. With the precautionary nature of various households, most of them have ended up applying for various types of insurance cover including health, retirement and lifetime. One of the primary goals of these policies is to ensure that households are protected from financial risk and losses. Most households have also increased their saving culture, especially with the existing financial uncertainties (Gerardi, Rosen and Willen 2010, p.330). High-income realization in the household has a negative effect on the marginal value of net worth, and this is attributed to two factors. Firstly, current net worth is increased by high current income, and this in return contributes to lowering of marginal value. Secondly, higher current income contributes to higher expected future income, thus the need for proper risk management. With this information in mind, it is evident that richer households are more insured.
Complex decisions and investment strategies
Most households have been forced to make complex decisions as a result of deregulations that have been witnessed in the recent past. Over the years, households have been faced with challenges of property management due to the tight regulations that were in place. However, with the disaggregation, families have the freedom to manage and allocate their assets. Confidence levels of financial organizations when it comes to the provision of mortgages to clients have since improved after the global financial crisis. Households have come up with various investment strategies that are streamlined to asset allocation (Campbell and Cocco 2003, p.1450). Some households prefer investing in bonds with the aim of earning returns after a given period. Maturity rates of bonds vary depending on the platform where they are purchased and interest rates. An individual, for instance, may channel his or her funds in a given bond with the goal of earning high returns within a given period (Campbell and Cocco 2003, p.1450). The earnings will be used in the purchase of assets such as houses or a car. Such decisions have been made possible as a result of wide range and deep deregulation in the households.
Influence on consuming habits and asset allocation
Deregulations have also influenced the consuming habits of most households. In the recent past, households have been advised to put into consideration age-based asset allocations, and this is attributed to the positive benefits that come along with it. Household portfolios need to vary with age. Stocks are the most recommended forms of investments that need to be embraced by a household over a short duration of fewer than five years. Individuals need to purchase the stocks when they are trading at low prices, hold onto them and sell when the prices escalate. As individuals age, it is recommended that they look for an organization that enjoys stability and purchase their stocks (Green, Harper and Smirl 2009, p.344). Deregulation in households has simplified the age-based allocation, and this has further enhanced the protection of assets that are already accumulated by a given household. Financial analysts also argue that with an increase in disaggregation, households have also improved their income streams by relying on bonds with maturities of less than ten years (Green, Harper and Smirl 2009, p.344). However, bonds have not been effective as age-based asset allocations investment due to their vulnerability to changes in interest rates.
Optimal level of life-saving and financial risks
Disaggregation of households has provided them with estimates on the optimal level of life-saving for retirement. With the financial uncertainties, most families have over the years come up with saving platforms and insurance covers that aim at protecting them from financial challenges. Increased deregulations in the households have opened up a platform where asset allocation is attained through lifecycle funds. The mutual funds are structured in such a way that they try to provide investors with a range of portfolios that directly addresses their age, needs and proper apportionment of asset classes (Gerardi, Rosen and Willen 2010, p.332). Households may also apply life insurance cover, and this is vital in that it protects the remaining member of the family when the breadwinner dies. Most critics, however, argue that wide-ranging deregulations, in as much as they have simplified attaining of asset allocations via lifecycle funds, it has exposed households to financial risks.
Bibliography
Campbell, J. and Cocco, J. (2003). Household Risk Management and Optimal Mortgage Choice. The Quarterly Journal of Economics, 118(4), pp.1449-1494.
Gerardi, K., Rosen, H. And Willen, P. (2010). The Impact of Deregulation and Financial Innovation on Consumers: The Case of the Mortgage Market. The Journal of Finance, 65(1), pp.333-360.
Green, H., Harper, I. and Smirl, L. (2009). Financial Deregulation and Household Debt: The Australian Experience. Australian Economic Review, 42(3), pp.340-346.
Rampini, A. and Viswanathan, S. (2014). Household Risk Management. SSRN Electronic Journal.
Van Hemert, O. (2010). Household Interest Rate Risk Management. Real Estate Economics, 38(3), pp.467-505.
