Regulation of Financial System

11 Key excerpts on "Regulation of Financial System"

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  Financial Developments in National and International Markets

  • Jesús Ferreiro, Felipe Serrano, P. Arestis(Authors)
  • 2005(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  This chapter undertakes an analysis of proposed regulations for the finan- cial system in a globalized world, and seeks to take into consideration the recommendations of the international financial institutions and the impact of international taxation on capital movement. We present a study in four parts, beginning by examining financial regulation – its causes and conse- quences for the stability/instability of the financial system – by calling on the strategic tools provided by game theory. Following this introduction we analyse the corresponding international regulations and then examine the strategic bases of resistance to such regulatory measures. The final section presents the conclusion that can be drawn from our study. Regulating the financial system The regulation of the financial system seeks a desired level of system stability within a context of continuous fluctuation. In other words, regulation is a preventive measure, but it seeks to have a neutral impact on market and financial behaviour. Thus national and international regulations – the result of various decisions, including Basel II, agreements concerning taxation on capital transfers, ‘permitted’ fluctuation bands, measures to uncover fraudulent practices and so on, seek to prevent, or at least to minimize, the economic and social prob- lems that stem from losses of stability and credibility in the financial system. As the cost of controlling the financial system is high, and because interna- tional co-ordination gives rise to many difficulties, we consider the financial aim of such regulation to be a reduction in the frequency and magnitude of financial crises. Through the supervision of information and risk manage- ment, and the control over market security, regulation seeks above all to limit the contagious effects produced by globalization and information dis- tortion, such as rumours, accounting reliability and so on, and by destabilizing fluctuations.

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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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  Systemic Risk

  A Practitioner's Guide to Measurement, Management and Analysis

  • Malcolm H.D. Kemp(Author)
  • 2017(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  The evolving nature of the threat means that strong governance at the most senior levels of banks is required to build this capability in defensive resilience and recovery across technology and personnel.’ 3.2 Financial Sector Regulation 3.2.1 Introduction Financial contracts can be quite complicated for those not expert in finance to understand (and even at times for experts!). It can be difficult to identify in advance the ‘quality’ of a financial service or product. They can be quite long-term in nature and it is generally only possible to test whether you have actually got what you expected in arrears. Economists describe such a situa- tion as involving information asymmetry between the firm and its customers. The firm usually knows much more about whether the contract it is entering into is appropriate and likely to be honoured than the customer does. Regulation in the financial services industry is designed to tackle this asymmetry. By imposing requirements on how firms behave and on how well capitalised they need to be, societies seek to level the otherwise uneven playing field between firm and customer and to limit the likelihood of firms taking ‘unfair’ advantage of their customers. In broad terms, there are four main generic ways of regulating markets: (a) Voluntary codes of conduct. For example, providers in a specific industry could group together to agree their own rules about how markets in the industry should function. These voluntary codes might for example cover how they will behave, what will be sold and how these products will be marketed. 3.2 Financial Sector Regulation 51 (b) Self-regulation. This operates in a similar manner to voluntary codes of conduct except that the rules are not voluntary; everyone covered by the regulation will need to comply with them.

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  Economics for Investment Decision Makers

  Micro, Macro, and International Economics

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

    (Publisher)

   The focus of regulators in financial markets includes prudential supervision, financial stability, market integrity, and economic growth, among others.  Regulators—in assessing regulation and regulatory outcomes—should conduct ongoing cost-benefit analyses, develop techniques to enhance the measurement of these analyses, and use economic principles for guidance.  Net regulatory burden to the entity of interest is an important consideration for an analyst. PRACTICE PROBLEMS The following information relates to Questions 1 through 6. 32 Tiu Asset Management (TAM) recently hired Jonna Yun. Yun is a member of TAM’s Global Equity portfolio team and is assigned the task of analyzing the effects of regulation on the U.S. financial services sector. In her first report to the team, Yun makes the following statements: Statement 1: “The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), enacted on 21 July 2010 by the U.S. Congress, will have a significant effect on U.S. banks and other financial services firms.” Statement 2: “The U.S. Securities and Exchange Commission (SEC) allocates certain regulatory responsibilities to the Financial Industry Regulatory Authority (FINRA), with the goal of ensuring that the securities industry operates fairly and honestly.” Statement 3: “The Dodd-Frank Act called for derivatives reforms, including shifting from bilateral to centralized derivatives settlement, by July 2011. The G-20 called for action by its members on derivatives reform by year-end 2012. The accelerated time line of the Dodd-Frank Act concerned some U.S. firms.” Statement 4: “Regulators use various tools to intervene in the financial services sector.” Statement 5: “Regulations may bring benefits to the U.S. economy, but they may also have unanticipated costly effects.” Statement 6: “Regulation Q imposed a ceiling on interest rates paid by banks for certain bank deposits.” 32 These practice problems were developed by E.

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  The Financial System, Financial Regulation and Central Bank Policy

  • Thomas F. Cargill(Author)
  • 2017(Publication Date)
  • Cambridge University Press

    (Publisher)

  204 Chapter 9. Regulation and Supervision of the Financial System holding companies and foreign banks and for enforcing a wide range of regulations designed to protect consumers in the financial system. Whatever the arguments against such a role, the institutional design of the Federal Reserve is not likely to change toward less regulatory authority. In fact, the Federal Reserve’s role as a prudential regulatory authority was significantly increased as a result of the Great Recession and the 2010 Dodd–Frank Act. Prudential regulation and supervision for decades focused on individual institu-tions and markets designed to limit financial crisis and maintain public confidence in deposit money. This type of regulation was intended to apply a set of rules and principles that did not vary over time; that is, they were not to be used as an eco-nomic stabilization tool. Their goal instead was to maintain stability in the inverted pyramid of the monetary system by limiting risk taking by individual institutions and ensuring transparent financial markets. As a result of the housing bubble and burst of the bubble, the financial crisis of 2008/2009 and the Great Recession, central banks, including the Federal Reserve, have advocated an expanded approach to regulation and supervision now referred to as macroprudential regulation and supervision, in contrast to the traditional micro-prudential regulation and supervision focus. Macroprudential regulation is a policy to be implemented not only by central banks but by all major government regula-tory and supervisory agencies working together. The objective of macroprudential regulation is twofold: first, to identify asset bubbles, speculative excesses and over-heated financial markets; and then, second, to employ regulations over capital–asset ratios, liquidity and margins on trading securities and place restrictions on credit underwriting.

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  Trade and Development Report 2011

  Post-crisis Policy Challenges in the World Economy

  • (Author)
  • 2012(Publication Date)
  • United Nations Publications

    (Publisher)

  However, despite initial ambi- tious intentions for reform, official pronouncements have so far focused only on re-regulation aimed at strengthening some of the existing rules or incor- porating some missing elements. Unlike proposals following the crisis of the 1930s, the recent proposals have paid little attention to a basic restructuring of the financial system. This section discusses the limitations of the re-regulation efforts, and argues for a stronger re-structuring of the financial system to cope with its inherent proneness to crises. In this context, it proposes diversifying the institutional framework, giving a larger role to public, regional and community banks, and separating the activities of investment and commercial banks. 1. Re-regulation and endogenous risk Financial regulations based on the Basel I and Basel II frameworks were focused on microprudential regulation. They failed to recognize the risks arising from the shadow banking system and the regulatory arbitrage pursued under that system, and completely overlooked endogenous and systemic risks. The global crisis highlighted the need for multinational and national regulatory authorities to examine these issues. The crisis showed that the volume of transac- tions conducted under the shadow banking system exceeded that of the regular banking sector, that parts of this system (e.g. money market funds) were playing the same role as that of banks but without being subjected to virtually any of their regulations, and yet at the worst point of the crisis they had to be supported by central banks. Thus, in their case, the “contract” between financial intermediaries and the lender of last resort became one-sided. Proposals to fix this anomaly have varied, including bringing various parts of the shadow system into the “social contract”.

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  New Regulation of the Financial Industry

  • D. Chorafas(Author)
  • 2000(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  Increasingly, banks come to appreciate that new products are necessary for survival. But innovation cannot be enacted, let alone sustained, without a technological leap forward. Networks, and most particularly Internet-type any-to-any connectivity have created a new level of competitiveness. Among other things, this has meant that not only banking but also other dynamic branches of industry have become global. Globality presents new business opportunities but also poses complex regulatory problems. It is therefore to be expected that legislators and regu- lators will push for revamping existing laws and rules conditioning the banking industry, albeit at a slower pace than new events evolve. This leaves some gaping holes in the prudential supervision of the banking industry. The capital market’s role in the world economy has expanded sharply in the 1990s. Traditionally, the capital market functioned mostly as a vehicle for raising capital for investment, but today it performs a multiple duty by financing: • capital investments; • domestic consumption; • trade deficits; and • new, leveraged financial instruments. What is global regulation all about? Webster’s defines regulation as: ‘The act of reducing to order; disposing in accordance with rule or established cus- tom.’ A new regulatory environment implies changes in existing relations 24 The Regulation of Financial Institutions regarding future and forward interest rates; OTC trades on currency exchange rates; lines of business such as the securitisation of all types of loans; the development and marketing of new banking products; and trad- ing in derivatives.

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  International Regulatory Rivalry in Open Economies: The Impact of Deregulation on the US and UK Financial Markets

  The Impact of Deregulation on the US and UK Financial Markets

  • Doha M. Abdelhamid(Author)
  • 2017(Publication Date)
  • Routledge

    (Publisher)

  It is granted that formal regulation and supervision of banks in the UK was not developed until the 1970s. The delay, compared to other countries, particularly the US, was a reflection of the early centralist evolution of the banking system and, until the late 1960s, the small number of banks involved. The intimacy of the system largely removed the requirement for formal regulation. In addition a combination of credit controls and, until 1971, the presence of a clearing bank cartel meant that banks were not aggressively competitive but were nevertheless profitable oligarchies. This had its effects on risk-containment. Through the years, the financial system became more complex and more competitive, and the range and number of institutions increased substantially. This was accompanied by a major influx of foreign institutions who were unacquainted with the City’s traditions, frequently came from countries where regulation is highly legalistic and are concerned about benefiting from the City’s geo-economic location.1 In this environment the traditional approach has become less viable, which is one reason why the regulatory and supervisory regime in finance has The UK Financial Markets' Regulatory Framework 107 become more formal and focused on achieving the goals of investor protection and curbing systemic risk (see Chapters 3 and 9). III. The (De)regulatory Framework The UK (de)regulatory system is a recent creature. It was mostly instituted during the second half of the 1980s and designed on the main cultural traditions of UK self-regulation, albeit within a statutory framework. Though it was welcomed by investors and foreign institutions who sought an understanding and a penetration to British markets on a more formal basis, domestic institutions initially accepted the change, yet reacted aggressively upon recognizing the regulatory compliance burdens that entailed its implementation.

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  Dalhuisen on Transnational Comparative, Commercial, Financial and Trade Law Volume 3

  Financial Products, Financial Services and Financial Regulation

  • Jan H Dalhuisen(Author)
  • 2016(Publication Date)
  • Hart Publishing

    (Publisher)

  There is an obvious public concern with markets being clean and operating properly, which is also in the interest of these mar-kets themselves, their legitimacy and confidence in them. Modern securities regulation will also remain concerned with market integrity from other perspectives and may as a consequence continue to cover certain specific market aspects, especially pre- and post-trade price transparency and proper settlement of transactions. However, in other respects, markets should be free, especially in price formation, and not be interfered with by regulators so that false markets result. This also affects the issue of short selling, as to which see further section 3.7.7 below. 1.1.7 The Basic Structure of Modern Financial Regulation. The Type of Recourse It has already been said that micro-prudential financial regulation proper implies some supervisory function or authority while aiming at (a) greater financial stability, (b) bet-ter protection of depositors, investors and perhaps also bank borrowers, and (c) a better functioning of the financial markets (including the payment and settlement systems) especially avoiding abuse. It has also been said in this connection that at least in com-mercial banking, the search for greater stability and minimising systemic risk has taken over from other concerns while depositors and investment protection schemes guard against the immediate effects of insolvency on clients. However, it now often leaves other aspects of regulation, especially conduct of business issues, undervalued. Con-flicting policy objectives and concerns in micro-prudential supervision of this nature will be discussed further in section 1.1.10 below. Financial regulation of this nature, at its best, should be seen as reinforcing internal procedures and practices which banks and other financial intermediaries already have PART I FINANCIAL SERVICES, FINANCIAL SERVICE PROVIDERS, FINANCIAL RISK 483 in place to adequately manage their risks and conduct.

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  Transitional Economies

  Banking, Finance, Institutions

  • Y. Kalyuzhnova, M. Taylor, Y. Kalyuzhnova, M. Taylor(Authors)
  • 2001(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  The regulation of the non-bank financial sector, including securities markets and insurance companies, raises similar issues but the prominence that will be given to banking regula- tion in this chapter reflects its importance for the transition economies. The role and functions of the regulatory state Under the pre-transition economic model the state dominated eco- nomic life. In particular, the entire banking system was state-owned. Although on the surface it appeared to comprise a number of different institutions (a central bank, an investment bank, a foreign trade bank, and a savings bank for the general public) in practice all these different institutions were regulated by instructions from the central bank (Kor- nai, 1992). Hence many observers have referred to this as a `monobank' system. Pricing and allocation decisions were determined entirely by the state, the entire short-term and most of the long-term (with the excep- tion of limited foreign currency borrowings) supply of credit to the real economy was handled through this system, and the investing public had only one potential repository for their savings ± deposits with the savings bank arm of the monobank system. The transition process involves dismantling the monobank system and encouraging competition in the provision of finance to the real sector. At the same time, non-bank financial institutions and markets also need to be developed. The assumption underlying many of the early efforts at reform in the transition economies was that the devel- opment of the financial system could be entrusted almost exclusively to competitive forces. This was simply a special case of the more general assumption that the competitive market was a largely `natural' product, and that the free play of individual self-interest could be entrusted to produce outcomes which maximized social utility.

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  Financial Regulation

  A Transatlantic Perspective

  • Ester Faia, Andreas Hackethal, Michael Haliassos, Katja Langenbucher(Authors)
  • 2015(Publication Date)
  • Cambridge University Press

    (Publisher)

  In order to achieve these goals, various regulatory instruments can be linked to the described systemic risk measures, including capital and liquidity requirements or bank taxes. In order to achieve the desired incentive effects, it is crucial to link regulation to a bank’s contribution to systemic risk rather than burdening all institutions to a similar degree. This suggests, for example, that banks’ contribution to the Single Resolution Fund should be cali- brated to banks’ systemic risk. In addition, changes in the financial infrastructure can help to reduce contagion effects and remove distorted incentives from implicit govern- ment guarantees. Important examples are the introduction of central counterparties (CCPs) for derivatives trading and the implementation of bank resolution procedures, as envisaged in the Single Resolution Mechanism (SRM) of the European Banking Union. Disclosure require- ments can also be useful – for example, concerning the interconnected- ness in interbank markets. The time series dimension of macro-prudential regulation The time series dimension of macro-prudential regulation focuses on two objectives: dampening the financial cycle, and preventing the emergence of bubbles in certain market segments. In order to dampen the financial cycle, macro-prudential regulation should be adjusted over time to the evolution of macroeconomic 10 micro- and macro-prudential regulation aggregates such as total credit. The main goal is to mitigate financial accelerators inherent in the financial system (Bernanke and Gertler 1989) as well as the pro-cyclicality of traditional capital regulation, and thereby reduce the macroeconomic feedback effects from banks’ deleveraging. The underlying dilemma of capital regulation is that regulatory capital is not a buffer for the bank itself because it must not be used to absorb losses if the bank wants to continue its operations.

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