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• Jonas Niemeyer

I identify three reasons – based on market failures – for specific securities market regulations, systemic risk, investor protection and efficiency problems. The systemic risks first emanate from the clearing and settlement systems and second stem from the financial intermediaries’ substantial dependence on securities markets for funding and risk management. Regulation may also be warranted, for efficiency reasons, due to externalities in the markets. The investor protection arguments are more problematic. The most persuading argument is based on a combination of a) the principal agent problem, b) the free riding problems resulting in monitoring difficulties, c) the long-term aspect of many investment services, and d) an assumption that the public sector has a responsibility for some minimum living standards. I also analyze why securities markets should not be regulated based on a) an analysis of the motives of the regulator, b) the potential of creating negative side effects, c) moral hazard, d) enforceability, and e) the risk of consumer over-protection. The paper further discusses the pros and cons of self-regulation, as well as some trends affecting the regulatory process presently.

Finally, the paper concludes with some policy recommendations. First, there is a risk that the new EU-wide securities regulation in practice will lead to a government re-regulation, at the expense of well-functioning self-regulations. Second, even though the EU regulatory harmonization has the objective of increasing competition by creating a single market for investment services, there is a clear risk that it will hamper a necessary regulatory com-petition. Third, there is a clear trend of motivating new regulations using consumer protection arguments, without a serious discussion of the market failures involved. A larger focus on such an analysis is necessary.

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Paper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 482.

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Length: 77 pages
Date of creation: 20 Dec 2001
Date of revision:
Handle: RePEc:hhs:hastef:0482

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Related research

Keywords: Securities markets; regulation; self-regulation; supervision;

Find related papers by JEL classification:
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

This paper has been announced in the following NEP Reports:

• NEP-ALL-2002-01-22 (All new papers)

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