Professional Documents
Culture Documents
Study Points
Private-sector financial services Governments role in regulating private-sector financial services Overview of financial services regulation Structure of regulatory authorities Governmental actions affecting financial services regulation
Theories of Regulation
Public interest theory
Regulation exists to serve the public interest by protecting consumers from abuse. To maximize economic efficiency, including preventing or making right significant societal or consumer harm that results from market imperfections
Theories of Regulation
Private interest theories
Peltzman (1976) Self-interested regulators engage in regulatory activities consistent with maximizing their political support. Meier (1988) Regulation will be shaped by a type of bargaining that occurs between private interest groups within the existing political and administrative structure. Stigler (1971) Regulation is captured by and operated for the benefit of the regulated industry. Regulation unduly influenced by special interests could result in: Restrictions on entry of new domestic and foreign entrants Suppression of price and product competition Control of inter-industry competition from those selling similar or complementary products
10
Government Imperfections!
If financial markets were perfectly competitive, regulation would be unnecessary. When is intervention justified only if the three conditions are met:
Actual or potential market imperfections exist. The market imperfections do or could lead to meaningful economic inefficiency or inequity. Government action can ameliorate the inefficiency or inequity
11
Government Imperfections!
Government failures
Difficulty in identification and formulation of goals Principal-agent problems where government employees are agents for the public Rent-seeking behavior engaged by the regulated The problem of capture (related to the rent-seeking behavior)
12
Regulatory Interventions
Prudential regulation
Concerned with the financial condition of the financial intermediary Evolved primarily because of information problems and negative externalities (especially for banking)
14
15
Securities Regulation
Focuses on both the new and secondary issues markets, mandating certain disclosures to prospective purchasers about the securities To rectify buyers information asymmetry problems The Sarbanes-Oxley (SOX) Act International Organization of Securities Commissions (IOSCO)
Objectives and Principles of Securities Regulation (IOSCO Principles) ISOCO Assessment Methodologies
17
Insurance Regulation
Focused chiefly on monitoring and preventing insolvencies
Aimed more at protecting policyholders from losses occasioned by insurer insolvency
18
19
20
21
22
Governmental Actions
After the Asian and other financial crises of the late 1990s
Financial services regulation has become less diverse The major intergovernmental organizations involved in financial services regulation playing more active and constructive roles
The trend toward allowing mutual insurers and banks to convert to shareholder-owned firms Privatization of banks and insurance firms in several countries Significant combinations of banks and insurance firms
23
Future Prospects
Risk-based prudential regulation
New disclosure-based financial regulatory model evolving internationally Integrated international approaches to accounting standards, securities regulation and financial institution regulation
Interest in common international financial regulation in areas for which such would be feasible
24
Discussion Questions
Discussion Question 1
Explain carefully why government regulation of private-sector financial service firms is considered necessary.
26
Discussion Question 2
Debate the following proposition: government regulation of insurance premium rates is justified.
27
Discussion Question 3
What are the essential differences between government supervision of banks and of insurers? Why do these differences exist?
28
Discussion Question
Examine the structure of financial regulation in your home country and compare it with the structure in another economy. Do you find any significant differences in the structures or in the accompanying regulatory objectives? Elaborate your findings.
29
Discussion Question 5
Offer your answers to the questions posed in Note 2 of this chapter.
Could there be a chicken and egg problem here? Could regulation that shields consumers from the consequences of their mistakes or from failing to become better informed about the quality of financial intermediaries result in their expecting government protection? Is it possible that the market might devise its own means of minimizing the effects of mistakes and providing consumers with adequate information were government intervention at a lesser level?
30