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Regulatory structure for financial stability and development

  • Ashima Goyal

    ()

    (Indira Gandhi Institute of Development Research)

To understand the appropriate regulatory response to the crisis, we start from the basic market failures that justify regulation in financial markets. Neglecting these first principles contributed to the market and regulatory failures. Regulation that induces better outcomes through creating correct incentives for market participants is the key to reform. A combination of micro and macro prudential regulation can moderate procyclicality, information failure and market power. Better national and global coordination of regulators is also required. Global prudential standards can push financial firms to choose safe over risky strategies, by removing the moral hazard from bailouts, and assuring that a competitor is not adopting risky strategies either. Universal application of basic standards prevents regulatory arbitrage. A pure principles-based regulatory approach maybe too flexible, but principle-based rules retain sufficient operational flexibility and universality. This analysis is applied to regulation in emerging market economies (EMEs), where development of financial markets is a major regulatory goal along with stability.

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File URL: http://www.igidr.ac.in/pdf/publication/WP-2010-002.pdf
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Paper provided by Indira Gandhi Institute of Development Research, Mumbai, India in its series Indira Gandhi Institute of Development Research, Mumbai Working Papers with number 2010-002.

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Length: 23 pages
Date of creation: Feb 2010
Date of revision:
Handle: RePEc:ind:igiwpp:2010-002
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  1. Goyal, Ashima, 2002. "Reform proposals from developing Asia: finding a win-win strategy," MPRA Paper 30527, University Library of Munich, Germany.
  2. Rafael LaPorta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, . "Law and Finance," Working Paper 19451, Harvard University OpenScholar.
  3. Richard A. Posner, 1974. "Theories of Economic Regulation," Bell Journal of Economics, The RAND Corporation, vol. 5(2), pages 335-358, Autumn.
  4. Edward L. Glaeser & Andrei Shleifer, 2001. "The Rise of the Regulatory State," NBER Working Papers 8650, National Bureau of Economic Research, Inc.
  5. Ashima Goyal, 2006. "Regulation and Deregulation of the Stock Market in India," Chapters, in: Deregulation and its Discontents, chapter 9 Edward Elgar.
  6. M. Ramesh & Michael Howlett (ed.), 2006. "Deregulation and its Discontents," Books, Edward Elgar, number 4210.
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