Financial Regulation

12 Key excerpts on "Financial Regulation"

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  eBook - PDF

  Economics for Investment Decision Makers

  Micro, Macro, and International Economics

  • Christopher D. Piros, Jerald E. Pinto(Authors)
  • 2013(Publication Date)
  • Wiley

    (Publisher)

  1 In some cases, these behaviors or actions were criminal and violated existing laws. One goal of regulators is to try to detect these activities earlier. 703 A significant challenge on the Financial Regulation front is how to deal with systemic risk (the risk of failure of the financial system) and the consequences of risk taking by financial institutions. On other fronts, such issues as labor regulation, environmental regulation, and electronic privacy are receiving increased attention. Changes in regulatory structure and regu- latory uncertainty can have substantial effects on business decisions. One of the significant challenges facing professionals in the finance industry is to anticipate and understand the consequences of potential changes in the regulatory environment and to specific regulations. Section 2 of this chapter provides an overview of regulation, including classifications of regulations and regulators, roles of regulations, and regulatory tools. Section 3 describes regu- lation of commerce and areas of focus in commercial regulation. Section 4 describes regulation of financial markets, including securities regulation and regulation of financial institutions. Section 5 describes the assessment of costs and benefits of regulation. Section 6 describes and illustrates an analysis of regulation. Section 7 summarizes the key points of the chapter, and practice problems conclude the chapter. 2. OVERVIEW OF REGULATION Regulatory frameworks, among other effects, influence how businesses operate. A regulatory framework develops a set of rules or standards of conduct. Regulations may impose restrictions on and/or mandate how businesses interact with others, including other businesses, con- sumers, workers, and society in general. The regulations may also impose constraints on and/ or mandate how businesses operate internally.

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  A Practical Guide to Financial Services

  Knowledge, Opportunities and Inclusion

  • Lien Luu, Jonquil Lowe, Patrick Ring, Amandeep Sahota, Lien Luu, Jonquil Lowe, Patrick Ring, Amandeep Sahota(Authors)
  • 2021(Publication Date)
  • Routledge

    (Publisher)

  11 Regulation of financial services Patrick John Ring

  DOI: 10.4324/9781003227663-11

  Key points summary

  • There are three objectives of Financial Regulation: systemic stability, the soundness of individual firms and ensuring that markets work effectively (including appropriate consumer protection). The objectives and theory about how they may be achieved influence the structure of regulation.
  • The main front-line tasks for regulators are to authorise appropriate firms to do business, police the perimeter between authorised and unauthorised firms and supervise and enforce compliance with specified rules.
  • Consumer protection can take two forms: ex-ante protection focuses on preventing consumer detriment; ex-post protection provides routes for complaints and redress.
  • Conventional regulatory measures may be supplemented with innovative approaches, such as ‘nudging’ consumer behaviour and trying to change the culture of firms.

  It is fair to say that, in recent years, events in the financial sector have cast a strong light upon the role of national and international regulators of the financial services industry. The Global Financial Crisis (GFC) that started in 2007 – described in Box 1.1 in Chapter 1 – drew attention to the failures of Financial Regulation, and subsequent financial scandals in many different countries have also drawn attention both to the challenges faced by consumers in navigating their way through an increasingly complicated financial landscape, and to the behaviour of certain individuals and the culture of the firms for which they worked.

  In this chapter, we begin by looking at the objectives of Financial Regulation and how that can influence the structure of national regulators. Thereafter, we focus upon the position in the UK, which itself illustrates many of the issues and dilemmas facing regulators around the world. In doing so, we concentrate on three particular issues: the regulatory concerns of front-line regulation, the role of regulators when it comes to the protection of financial services consumers and the regulation concerning the behaviour of individuals and culture of financial firms operating within the financial services sector.

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  Investment and Portfolio Management

  A Practical Introduction

  • Ian Pagdin, Michelle Hardy(Authors)
  • 2017(Publication Date)
  • Kogan Page

    (Publisher)

  Authorization of companies or individuals will involve an element of thorough research into the background and history and may be dependent upon reaching a minimum level of qualifications or prescribed standards of conduct. The precise method and intensity of monitoring will depend upon the level of risk posed by the company or individual, the perceived likelihood of breaching the rules/regulations, the potential consequences of a breach in the rules/regulations and the supervising agency’s resources. Any enforcement procedures may occur for a variety of reasons including the supervisor’s monitoring activities, or a complaint by a customer or another market participant. Enforcement procedures would usually involve some form of investigation to determine exactly what has occurred, the root cause and if further action or sanction is required. The supervising agency may employ the use of enforcement officers with powers to investigate and to gather information. It may be that there is an agency which is appointed with the responsibility for monitoring compliance and the identification of suspected rule breaking, but a separate agency has the responsibility to determine if the suspicion is proven and if so, to apply an appropriate penalty, sanction or impose compensation.

  Regulation in financial markets

  It is generally accepted that the operations of the financial markets are pivotal in the development of any economy and the financial sector is the mechanism which facilitates the exchange of goods and services in the economy and to transfer the savings of an economy into investments. A sound, efficient and well-managed financial sector will accomplish this process, encouraging more savings and therefore more investment in the process. This should result in faster economic growth, improved levels of income and therefore the end result should be the improvement of well-being domestically, within the economy. Strong and efficient domestic financial markets may also be of significant benefit to global growth in the form of investment capital movement from wealthier, more developed economies, to emerging and developing economies.

  It has been mentioned earlier in the chapter that one of the reasons for robust regulatory regimes being so important is the issue that information asymmetry exists, within the finance sector, between the sellers of financial products and the buyers. Generally, most markets work well when there is a high frequency of repeat purchases of a given product, because in these market circumstances, it is quite straightforward for an individual to determine the inherent quality of the product. It is also easy for the individual to switch away from a poor quality product to a product of better quality and not to make the same error in the future.

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  Achieving Financial Stability and Growth in Africa

  • Stephany Griffith-Jones, Ricardo Gottschalk, Stephany Griffith-Jones, Ricardo Gottschalk(Authors)
  • 2016(Publication Date)
  • Taylor & Francis

    (Publisher)

  2    Financial Regulation, stability and growth in low-income countries A review of the evidence and agenda for research Stephen Spratt Introduction

  For many low income countries, especially in Africa, Financial Regulation policies constitute the foundation basis for the mechanisms through which financial development exerts a positive impact on economic growth and poverty reduction.

  (Murinde, 2012)

  Without effective regulation, financial systems become unstable, potentially triggering crises with devastating effects on the real economy. The continuing impacts of the global financial crisis of 2007–8 show how large these can become. While the avoidance of crises is a necessary condition for productive economic activity to flourish, it is not sufficient. Another more positive side to regulation is one which shapes the evolution of financial structures and influences the ways in which financial actors serve the real economy. The purpose of regulation is thus twofold: to maintain financial stability and to promote inclusive economic growth. Achieving the right balance between these objectives is a delicate, but crucial task. Too great a focus on stability stifles growth, while a headlong dash for growth is very likely to sow the seeds of future crises.

  The structures of low-income countries’ (LICs) real and financial sectors are different to those in developed countries. Institutional capacity to implement certain kinds of Financial Regulation is also generally lower. Therefore, the set of regulatory instruments best able to maximise growth, while maintaining stability, should also be different.

  While this has always been broadly accepted in principle – if rarely in practice – the global financial crisis highlighted a more fundamental issue. Given what we learnt about ‘sophisticated’ finance, it is simply no longer tenable to view the regulatory practices that evolved in the world’s major financial centres as a model to which developing countries should aspire. As regulatory options continue to be re-assessed in developed economies, the time is ripe to do the same in developing countries in general, and LICs in particular.

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  Global Financial Development Report 2013

  Rethinking the Role of the State in Finance

  • World Bank(Author)
  • 2012(Publication Date)
  • World Bank

    (Publisher)

  2 The State as Regulator and Supervisor G L O B A L F I N A N C I A L D E V E L O P M E N T R E P O R T 2 0 1 3 45 • Financial sector regulation and supervision are areas where the role of the state is not in dispute; the debate is about how to ensure that the role is carried out well. • A key challenge of regulation is to better align private incentives with public interest, without taxing or subsidizing private risk taking. Supervision is meant to ensure the implementation of rules and regulations. It needs to harness the power of market dis -cipline and address its limitations. • The financial crisis underscored limitations in supervisory enforcement and market dis-cipline. It emphasized the importance of combining strong, timely, anticipatory super -visory enforcement with better use of market discipline. It also highlighted the impor -tance of basics—solid and transparent legal and institutional frameworks to promote financial stability. In many developing economies that means that building supervisory capacity needs to be a priority. • Useful lessons can be learned by analyzing regulation and supervision in economies that were at the epicenter of the global financial crisis and those that were not. A new World Bank global survey, presented in this chapter, suggests that economies that suf-fered from the crisis had weaker regulation and supervision practices as well as less scope for market incentives than the rest. • This chapter reviews progress on regulatory reforms at the global and national levels, and identifies advances made so far. Tracking changes during the crisis reveals that countries have stepped up efforts in the area of macroprudential policy, as well as on issues such as resolution regimes and consumer protection. However, the survey sug-gests that there is further scope for improving market discipline, namely disclosures and monitoring incentives.

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  The Financial Crisis

  Origins and Implications

  • P. Arestis, R. Sobreira, José Luis Oreiro, P. Arestis, R. Sobreira, José Luis Oreiro(Authors)
  • 2010(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  These committees supervised competition within the financial system, while also overseeing the interaction between finance and the rest of the economy. 142 The Financial Crisis It is apparent that the rent-like aspect of financial returns when finance is regulated as a system could become a source of corruption. Protected and secure returns could generate unusual rewards for the managers of finance and also for the state bureaucrats involved in regu- lating the financial system. By the same token, direction of credit and regulation of financial prices could invite political favouritism and pub- lic corruption. Such phenomena were commonly observed throughout the developing world, but also in developed countries with entrenched bank-based systems. It should be noted, however, that they are far from an exclusive privilege of bank-based finance, or of regulating finance as a system. Market-based finance and regulating financial institutions are also prone to phenomena of corruption, which however acquire a different form for reasons discussed below. Finally, regulated bank-based systems in and of themselves offer no guar- antees of successfully attaining growth and development aims. At the very least they also require a well-educated and efficient bureaucracy, a prevalent spirit of public service – including in running financial institutions – regular renewal of the personnel that operate the levers of control, transparency and public accountability, and so on. These are difficult and complex mechanisms to put in place that also depend on the historical, institu- tional, customary, and even cultural practices in each country. Above all, they depend on the balance of social forces and the ability of broad layers of working people to exercise democratic control over the complex skein of relations between industry, finance, and the state.

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  The Evolution of US Finance: v. 2: Restructuring Institutions and Markets

  • Jane W. D'Arista(Author)
  • 2015(Publication Date)
  • Routledge

    (Publisher)

  Henry Kaufman: 154 THE GOALS OF REGULATION The drive over nearly two decades in support of financial deregulation still has substantial momentum. On the other hand, a new and not-yet-coherent effort to reregulate has surfaced. At the heart of the debate about deregula-tion versus reregulation are fundamental issues that concem the roles of financial institutions in our society. On the one side is the view that finan-cial institutions should be subject to the discipline of the marketplace, to its risk and to its rewards, and thus to prosper or perish. Others, like myself, believe that financial institutions playa unique role as intermediaries be-tween suppliers and demanders of credit. They are holders of savings and temporary funds. Through intermediation, they finance many activities. In this function, they must always balance their entrepreneurial drive with their broader fiduciary responsibilities. They have both a public and a pri-vate obligation. 3 Soundness Regulation and Competitive Restraints Soundness regulation is concerned with preventing finandal crises by preventing conditions that lead to a mass rush to liquidity. It reflects the concern that liquidity vanishes with a sud den preference by all eco-nomic units to liquidate their finandal assets at a particular point in time. It is an acknowledgment that the susceptibility of the financial sector to such upheavals, its fragility, is one of the externalities that justi-fies some form of government intervention.,,4 The basic elements of soundness regulation are applicable to almost all sectors of the finandal services industry in varying degrees. They in-clude: • prohibitions on self-dealing; • restrictions or requirements relating to the nature and quality of as-sets; • regulation of the liability structure of intermediaries including capital, reserves, and liquidity requirements; and • controls on engaging in other kinds of businesses.

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  The Foundations and Future of Financial Regulation

  Governance for Responsibility

  • Mads Andenas, Iris H-Y Chiu(Authors)
  • 2013(Publication Date)
  • Routledge

    (Publisher)

  139 This potential trajectory in Financial Regulation could be pertinent to states desperately managing their levels of sovereign debt, which have become a source of financial instability in a number of euro area countries. For example, micro-prudential regulation that ties capital adequacy and liquidity regulation to holdings of sovereign debt regarded as ‘safe’ or ‘liquid’ may be a tool for maintaining the market in sovereign debt. The perceived safety of euro area banks bolstered by regulation may also contribute to a friendlier climate for sovereign debt auctions. The next section turns to whether the financial stability objective may be coupled with monetary policy and central bank functions in the UK and the EU.

  139 Sofía Perez and Jonathan Westrup, ‘Finance and the Macro-economy: The Politics of Regulatory Reform in Europe’ (2008) CES Working Paper No 156 http://aei.pitt.edu/9005/ accessed 14 December 2012.

  2.4 Financial Regulation as a tool for domestic economic policy and its relationship to monetary policy

  Loose monetary policy in the United States in the decades leading up to the global financial crisis has been argued to be relevant to excessive levels of risk-taking by banks, contributing to the scale of the crisis in 2008–9.140 Although it has been the trend to separate banking/Financial Regulation from central banking, the connections between Financial Regulation and monetary policy are being revisited in order to ascertain how they may work together to deliver financial stability. In the UK, Financial Regulation has been separate from central banking since 1997, when banking supervision moved from the Bank of England to the FSA. In the EU, the European Central Bank (ECB) has been established as an independent body with a distinct mandate and this has not included Financial Regulation. However, important synergies have been lost in the removal of Financial Regulation from central banking and, in both the UK and EU, there are now reforms to re-establish the central bank’s role in preserving financial stability alongside its role in monetary policy.141 Both the Bank of England and the ECB will assume responsibility in micro-prudential supervision. The Prudential Regulation Authority (PRA), a subsidiary of the Bank of England, has been created to carry out micro-prudential oversight in the UK from mid-2013. The ECB will assume the role of micro-prudential supervisor for euro area banks and banks in non-euro area countries that are willing to subject themselves to its oversight (the Single Supervisory Mechanism, to be in force from 2014). The role of macroprudential supervision (discussed in detail in Part 4

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  Contemporary Challenges in Regulating Global Crises

  • M. Findlay(Author)
  • 2013(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  Following the recent global financial collapses and facing the imminence of further economic crises in the world of the future, new life is breathed into the debate surrounding financial sector reform. The aspects of reform which have become increasingly less problematic include:

  •  improving the governance of Financial Regulation; •  ensuring the independence of critical regulatory elements and agencies; •  broadening the regulator’s intellectual perspective; •  developing a more pluralistic and inclusive regulatory mix; •  being ever vigilant against regulatory capture; •  introducing extra-financial considerations such as social responsibility into the intended regulatory outcomes; •  avoiding an overreliance on the extremes of ungoverned self-regulation, or overbearing state intervention

  At a functional level, the impact of regulatory reform requires effective monitoring (see Chapter 9 ). As the later discussion of regulatory accountability reiterates, this is best achieved within a framework of mutuality and regulatory community. Representation of key interests is not denied where sociability is preferred, and the accountability framework compatible with collaborative regulation may include proxy advocates, technical experts, agency monitors, designated consumer representatives and even ombudsmen.

  Institutional competitiveness

  One of the reasons why financial markets have been prone to collapse in cycles is the paucity of genuine institutional competitiveness between financial institutions. As the age of financial deregulation dawned in the 1980s, one of the arguments in its favour, opening up financial markets to competitive efficiencies, was swiftly snuffed out as banks in particular consolidated and globalised. Financial industries moved rapidly beyond their national origins and obligations and at a time when fiscal policy was burgeoning as the referred economic technology of developed nations, the mechanisms through which that policy was to be exercised were increasingly beyond state control.

  Banking consolidation was accompanied by the colonisation by banks of a vast range of financial products and services previously not considered the province of banking. This further undermined competition in the financial services market, narrowing supply diversity and demand choice.

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  Globalization, Marginalization and Development

  • Mansoob Murshed(Author)
  • 2002(Publication Date)
  • Taylor & Francis

    (Publisher)

  2 Financial sector regulation in a globalized context

  S. Mansoob Murshed and Djono Subagjo

  In his presidential address to the American Economics Association, Milton Friedman gave us the authoritative version of the monetarist creed:

  …monetary policy can prevent money itself from being a major source of economic disturbance… A second thing monetary policy can do is to provide a stable background for the economy. Milton Friedman (1968: 12–13)

  This statement has become the cornerstone of macroeconomic policy advice dispensed to all developing and transitional economies. It also constitutes the raison d’être for the primacy of inflation control, as well as the stabilization and structural adjustment programmes of the 1980s, and the associated liberalization of financial markets. But as we all know, with hindsight, this view (generally described as the Washington consensus) ignored the need for prudential regulation of the financial sector as a prerequisite for sound monetary policy. The converse is equally true: stable monetary policies are needed if an efficient financial sector is to flourish. Simple (or simple-minded) capital account liberalization, as part of a strategy of integration into the global economy, has become discredited in the wake of the Asian crisis of 1997 (see Rodrik 1998). In addition, it is recognized that monetary policy reform geared to controlling inflation will not benefit the economy fully unless and until the private financial sector is well functioning. Also in the presence of many other distortions in the economy, financial liberalization may be undesirable, due to second-best considerations. The over-arching problem lies in the weak nature of institutions and the type of strategic interaction between the state and various groups in developing countries (LDCs).

  This chapter aims to make a policy-oriented contribution to the literature on prudential bank regulation for LDCs. It does three things: first, it argues that there is a need to place banking sector regulation high on the policy agenda. Second, it provides some theoretical insights, emphasizing the difficulties of the regulation process. Finally, it critically analyses policy advice in a taxonomic style with regard to prudential regulation, paying close attention to the capabilities of lowincome and small LDCs. The first section examines the need to pay attention to banking regulation, the second section is devoted to the theoretical and policy analysis on bank regulation, and, finally, the third section concludes with policy recommendations.

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  The Governance of Macroprudential Policy

  How to Build Regulatory Legitimacy Through a Social Justice Approach

  • Tracy C Maguze(Author)
  • 2024(Publication Date)
  • Hart Publishing

    (Publisher)

  This chapter has attempted to demonstrate that the nature and magnitude of financial market failures necessitates government intervention in financial markets. However, before intervening, it is critical to identify and calibrate appropriate regulatory solutions because badly designed regulations are likely to cause just as much harm as financial market participants.

  The way the financial system generates risk, the speed at which this risk migrates across the system (between banks and non-banks alike), and the inadequacy of pursuing financial stability via the safety and soundness of individual institutions suggest that regulations for financial stability should have a different objective, specifically the maintenance of the safety and soundness of the whole system, and ultimately avoid costs to the broader economy.

  A regulator with a bird’s-eye view of the financial system would require tools that can be calibrated at macro level. Moreover, the tools should be able to tackle the cross-sectional and time dimensions of financial instability. In other words, they should work to reduce interconnections and common exposures to macro risk, while at the same time operating in a countercyclical manner to dampen exuberance during an upswing, but still provide a cushion that allows banks to continue operating should a downswing occur. This is not to say that policy makers should reinvent the wheel and devise completely new tools, current tools in the prudential armoury may suffice if appropriately calibrated and deployed.

  After the GFC, the world turned to macroprudential policy to fill the gap left by microprudential regulation. Macroprudential policy, as already stated in Chapter 1

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  The Economic Dynamics of Law

  • David M. Driesen(Author)
  • 2012(Publication Date)
  • Cambridge University Press

    (Publisher)

  5 Financial Regulation The economic dynamic approach provides useful guidance for reforming Financial Regulation and has informed the work of some of the most perceptive scholars studying financial markets and their regulation. Economic dynamic considerations, we shall see, suggest that policymakers should consider struc- tural reforms much more seriously than they have so far. This book uses the term Financial Regulation broadly to include the regula- tion of financial institutions, such as banks, and securities regulation. Although historically these areas of regulation have been distinct, in light of the inter- mingling of traditional banking and underwriting securities a broad definition of Financial Regulation has become appropriate. This chapter first examines economic dynamic analysis’ role in predicting the financial crisis. It turns out that several scholars employing either economic dynamic analysis or some of its constituents predicted the crisis. The fact that some analysts employing economic dynamic analysis anticipated the financial crisis does not prove that this approach will always succeed at predicting the future. It does suggest, however, for reasons I will explain, that economic dynamic analysis increases policymakers’ ability to recognize signs of potential future trouble, thereby increasing the odds of adopting wise policy avoiding systemic risk. This chapter then discusses a model of Financial Regulation based on infor- mation disclosure. It explains that some of the most cogent criticism of the disclosure model implicitly employs economic dynamic analysis. The chapter’s third part argues that an economic dynamic approach tends to favor structural reform, which has a long history in Financial Regulation but has fallen into disfavor with the ascendancy of neoclassical law and economics. This chapter closes by showing how economic dynamic analysis can help evaluate several structural reforms that might help us avoid a future financial crisis. 79

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