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The consolidation of financial market regulation : pros, cons, and implications for the United States

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  • Sabrina R. Pellerin
  • John R. Walter
  • Patricia E. Wescott

Abstract

The U.S. financial system has changed significantly over the last several decades without any major structural changes to the decentralized financial regulatory system, despite numerous proposals. In the past decade, many countries have chosen to consolidate their regulators into a newly formed "single regulator" or have significantly reduced the number of existing regulators in order to form a regulatory structure that more closely mirrors the current financial system — one that is increasingly dominated by large financial conglomerates. This paper reviews the advantages and disadvantages of regulatory consolidation, explores the effects of consolidation on regulators' incentives, and evaluates which entity is best suited for this role – whether it be a newly created entity or an existing one, such as a central bank. Additionally, this paper reviews the transitions to consolidated regulation that took place in the U.K., Germany, Japan and Australia and finds that despite significant consolidation, complex systems with multiple entities remain. These countries removed most regulatory authority from their central banks, yet there may be reasons not to make such a change.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 09-08.

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Date of creation: 2009
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Handle: RePEc:fip:fedrwp:09-08

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Related research

Keywords: Financial services industry;

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  1. Charles Goodhart, 2000. "The Organisational Structure of Banking Supervision," FMG Special Papers sp127, Financial Markets Group.
  2. Milo, Melanie S., 2007. "Integrated Financial Supervision: an Institutional Perspective for the Philippines," Discussion Papers DP 2007-17, Philippine Institute for Development Studies.
  3. International Monetary Fund, 2003. "Japan," IMF Staff Country Reports 03/287, International Monetary Fund.
  4. de Luna Martinez, Jose & Rose, Thomas A., 2003. "International survey of integrated financial sector supervision," Policy Research Working Paper Series 3096, The World Bank.
  5. Garicano, Luis & Posner, Richard A., 2005. "Intelligence Failures: An Organizational Economics Perspective," CEPR Discussion Papers 5186, C.E.P.R. Discussion Papers.
  6. Carmine Di Noia & Giorgio Di Giorgio, 1999. "Should banking supervision and monetary policy tasks be given to different agencies?," Economics Working Papers 411, Department of Economics and Business, Universitat Pompeu Fabra.
  7. Mathias Dewatripont & Jean Tirole, 1994. "The prudential regulation of banks," ULB Institutional Repository 2013/9539, ULB -- Universite Libre de Bruxelles.
  8. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  9. John R. Walter, 1995. "The fair lending laws and their enforcement," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 61-77.
  10. Taylor, Michael & Fleming, Alex, 1999. "Integrated financial supervision : lessons of Northern European experience," Policy Research Working Paper Series 2223, The World Bank.
  11. Robert Litan & William Isaac & William Taylor, 1994. "Financial Regulation," NBER Chapters, in: American Economic Policy in the 1980s, pages 519-572 National Bureau of Economic Research, Inc.
  12. Melanie S. Milo, 2007. "Integrated Financial Supervision : An Institutional Perspective for the Philippines," Finance Working Papers 22667, East Asian Bureau of Economic Research.
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