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Where to Go after the Lamfalussy Report? - An Economic Analysis of Securities Market Regulation and Supervision




Financial securities market regulation is subject to increasingly rapid reforms. Despite the political interest in different forms of reforms, economic analyses of the rationales for specific securities market regulation are primarily focused on specific issues such as insider trading. An overall analysis of securities markets regulation is rare. The purpose of this paper is to fill this gap. 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.

Suggested Citation

  • Niemeyer, Jonas, 2001. "Where to Go after the Lamfalussy Report? - An Economic Analysis of Securities Market Regulation and Supervision," SSE/EFI Working Paper Series in Economics and Finance 482, Stockholm School of Economics.
  • Handle: RePEc:hhs:hastef:0482

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    References listed on IDEAS

    1. Richard J. Herring & Anthony M. Santomero, 2000. "What Is Optimal Financial Regulation?," Center for Financial Institutions Working Papers 00-34, Wharton School Center for Financial Institutions, University of Pennsylvania.
    2. Robert C. Merton, 1995. "A Functional Perspective of Financial Intermediation," Financial Management, Financial Management Association, vol. 24(2), Summer.
    3. John, Kose & Narayanan, Ranga, 1997. "Market Manipulation and the Role of Insider Trading Regulations," The Journal of Business, University of Chicago Press, vol. 70(2), pages 217-247, April.
    4. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1998. "Law and Finance," Journal of Political Economy, University of Chicago Press, vol. 106(6), pages 1113-1155, December.
    5. Glosten, Lawrence R. & Milgrom, Paul R., 1985. "Bid, ask and transaction prices in a specialist market with heterogeneously informed traders," Journal of Financial Economics, Elsevier, vol. 14(1), pages 71-100, March.
    6. Rafael La Porta & Florencio Lopez-De-Silanes & Andrei Shleifer, 1999. "Corporate Ownership Around the World," Journal of Finance, American Finance Association, vol. 54(2), pages 471-517, April.
    7. Lakonishok, Josef & Lee, Inmoo, 2001. "Are Insider Trades Informative?," Review of Financial Studies, Society for Financial Studies, vol. 14(1), pages 79-111.
    8. Davis, E. Philip, 1995. "Debt, Financial Fragility, and Systemic Risk," OUP Catalogue, Oxford University Press, number 9780198233312.
    9. repec:hrv:faseco:30747162 is not listed on IDEAS
    10. Giorgio Di Giorgio & Carmine Di Noia, 2001. "Financial Regulation and Supervision in the Euro Area: A Four-Peak Proposal," Center for Financial Institutions Working Papers 01-02, Wharton School Center for Financial Institutions, University of Pennsylvania.
    11. Roberta Romano, 1998. "Empowering Investors: A Market Approach to Securities Regulation," Yale School of Management Working Papers ysm74, Yale School of Management.
    12. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, Oxford University Press, vol. 84(3), pages 488-500.
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    Cited by:

    1. Buklemishev, O. & Danilov, Yu., 2013. "Effective Financial Regulation and Creation of the Mega-Regulator in Russia," Journal of the New Economic Association, New Economic Association, vol. 19(3), pages 82-98.

    More about this item


    Securities markets; regulation; self-regulation; supervision;

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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