Regulatory Structure for Financial Stability and Development
AbstractTo 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 InfoPaper provided by East Asian Bureau of Economic Research in its series Finance Working Papers with number 22778.
Date of creation: Jan 2010
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market failures; incentives; procyclicality; coordination; rules versus principles; development;
Other versions of this item:
- Ashima Goyal, 2010. "Regulatory Structure for Financial Stability and Development," Working Papers id:2458, eSocialSciences.
- Ashima Goyal, 2010. "Regulatory structure for financial stability and development," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2010-002, Indira Gandhi Institute of Development Research, Mumbai, India.
- G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
- D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
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