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.
|Date of creation:||20 Dec 2001|
|Date of revision:|
|Contact details of provider:|| Postal: The Economic Research Institute, Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden|
Phone: +46-(0)8-736 90 00
Fax: +46-(0)8-31 01 57
Web page: http://www.hhs.se/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Lawrence R. Glosten & Paul R. Milgrom, 1983.
"Bid, Ask and Transaction Prices in a Specialist Market with Heterogeneously Informed Traders,"
570, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- 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.
- La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert W., 1998.
"Law and Finance,"
3451310, Harvard University Department of Economics.
- Rafael LaPorta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, . "Law and Finance," Working Paper 19451, Harvard University OpenScholar.
- Rafael La Porta & Florencio Lopez-de-Silane & Andrei Shleifer & Robert W. Vishny, 1996. "Law and Finance," NBER Working Papers 5661, National Bureau of Economic Research, Inc.
- Rafael LaPorta & Florencio Lopez de-Silanes & Andrei Shleifer & Robert W. Vishny, 1996. "Law and Finance," Harvard Institute of Economic Research Working Papers 1768, Harvard - Institute of Economic Research.
- Lakonishok, Josef & Lee, Inmoo, 2001. "Are Insider Trades Informative?," Review of Financial Studies, Society for Financial Studies, vol. 14(1), pages 79-111.
- 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.
- Davis, E. Philip, 1995. "Debt, Financial Fragility, and Systemic Risk," OUP Catalogue, Oxford University Press, number 9780198233312, May.
- Robert C. Merton, 1995. "A Functional Perspective of Financial Intermediation," Financial Management, Financial Management Association, vol. 24(2), Summer.
- Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer, 1998.
"Corporate Ownership Around the World,"
Harvard Institute of Economic Research Working Papers
1840, Harvard - Institute of Economic Research.
- Roberta Romano, 1998. "Empowering Investors: A Market Approach to Securities Regulation," Yale School of Management Working Papers ysm74, Yale School of Management.
- 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.
- 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.
- 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 217-47, April.
When requesting a correction, please mention this item's handle: RePEc:hhs:hastef:0482. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Helena Lundin)
If references are entirely missing, you can add them using this form.