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Regulatory Structure for Financial Stability and Development

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  • Ashima Goyal

    (Indira Gandhi Institute of Development Research)

Abstract

To understand the appropriate regulatory response to the crisis, we start from the basic market failures that justify regulation in financial markets. Neglecting these first principles contributed to the market and regulatory failures. Regulation that induces better outcomes through creating correct incentives for market participants is the key to reform. A combination of micro and macro prudential regulation can moderate procyclicality, information failure and market power. Better national and global coordination of regulators is also required. Global prudential standards can push financial firms to choose safe over risky strategies, by removing the moral hazard from bailouts, and assuring that a competitor is not adopting risky strategies either. Universal application of basic standards prevents regulatory arbitrage. A pure principles-based regulatory approach maybe too flexible, but principle-based rules retain sufficient operational flexibility and universality. This analysis is applied to regulation in emerging market economies (EMEs), where development of financial markets is a major regulatory goal along with stability.

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Bibliographic Info

Paper provided by East Asian Bureau of Economic Research in its series Finance Working Papers with number 22778.

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Date of creation: Jan 2010
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Handle: RePEc:eab:financ:22778

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Postal: JG Crawford Building #13, Asia Pacific School of Economics and Government, Australian National University, ACT 0200
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Keywords: market failures; incentives; procyclicality; coordination; rules versus principles; development;

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  1. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1998. "Law and Finance," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 106(6), pages 1113-1155, December.
  2. Goyal, Ashima, 2002. "Reform proposals from developing Asia: finding a win-win strategy," MPRA Paper 30527, University Library of Munich, Germany.
  3. Edward L. Glaeser & Andrei Shleifer, 2003. "The Rise of the Regulatory State," Journal of Economic Literature, American Economic Association, vol. 41(2), pages 401-425, June.
  4. Richard A. Posner, 1974. "Theories of Economic Regulation," Bell Journal of Economics, The RAND Corporation, vol. 5(2), pages 335-358, Autumn.
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Cited by:
  1. Ashima Goyal, 2012. "The Future Of Financial Liberalization In South Asia," Asia-Pacific Development Journal, United Nations Economic and Social Commission for Asia and the Pacific (ESCAP), vol. 19(1), pages 63-96, June.

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