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Regulatory choices in global financial markets – restoring the role of aggregate utility in the shaping of market supervision

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  • Granlund, Peik

    ()
    (FSA/Bank of Finland)

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    Abstract

    In financial market studies, public supervision has rarely been found to have any effects on financial market development. This is true, even though the primary objective of supervisory legislation is the limitation of market failures and externalities. Studies conducted by eg the World Bank and La Porta & al imply that whereas private enforcement contributes to financial market development, there is limited evidence that public supervision does the same. The objective of the paper is to empirically investigate the relation between public supervision and financial market development. This is done by focusing on major legislative features directing the supervisor and hence affecting market participant activities. The markets investigated comprise banks, investment firms, investment fund companies and listed companies in the United States, United Kingdom, Sweden, Finland, Poland and Estonia for the years 1996 to 2005. The results suggest that certain features of public supervision correlate with financial market development. Strong legal obligations for the supervisor to develop legislation correlate significantly with higher company market values. Emphasizing economic aspects in the formulation of supervisory objectives corresponds with higher market profitability. Furthermore, severe monetary sanctions applicable to company directors correlate negatively with market growth. Unexpectedly, the same is true for a high degree of supervisory independence. The results imply links between public supervision and financial market development in a manner not always in line with previous research. Why this is the case, requires further investigation. One possible explanation may be methodological, based on the fact that in the present study legislative features are perceived in a conceptual rather than a technical manner.

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    File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/0801netti.pdf
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    Bibliographic Info

    Paper provided by Bank of Finland in its series Research Discussion Papers with number 1/2008.

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    Length: 36 pages
    Date of creation: 01 Jan 2008
    Date of revision:
    Handle: RePEc:hhs:bofrdp:2008_001

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    Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
    Web page: http://www.suomenpankki.fi/en/
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    Keywords: financial institution; regulation; supervision; utility;

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    1. Wendy Carlin & Colin Mayer, 1999. "Finance, Investment and Growth," OFRC Working Papers Series 1999fe09, Oxford Financial Research Centre.
    2. Marco Pagano & Paolo Volpin, 2001. "The Political Economy of Finance," Oxford Review of Economic Policy, Oxford University Press, vol. 17(4), pages 502-519.
    3. Barth, James R. & Caprio Jr., Gerard & Levine, Ross, 2001. "Bank regulation and supervision : what works best?," Policy Research Working Paper Series 2725, The World Bank.
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    13. Rajan, Raghuram G. & Zingales, Luigi, 2003. "The great reversals: the politics of financial development in the twentieth century," Journal of Financial Economics, Elsevier, vol. 69(1), pages 5-50, July.
    14. Richard A. Posner, 1974. "Theories of Economic Regulation," NBER Working Papers 0041, National Bureau of Economic Research, Inc.
    15. Michael Taylor & Marc Quintyn, 2002. "Regulatory and Supervisory Independence and Financial Stability," IMF Working Papers 02/46, International Monetary Fund.
    16. Katharina Pistor & Martin Raiser & Stanislaw Gelfer, 2000. "Law and Finance in Transition Economies," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 8(2), pages 325-368, July.
    17. Barth, James R. & Caprio Jr, Gerard & Levine, Ross, 2001. "The regulation and supervision of banks around the world - a new database," Policy Research Working Paper Series 2588, The World Bank.
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