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Financial regulation : changing the rules of the game

Author

Listed:
  • Long, Millard
  • Vittas, Dimitri

Abstract

This paper is a brief history of financial regulation. The removal and relaxation of controls on credit and interest rates in the 1980s and the growing emphasis on prudential controls is highlighted. Three criteria for evaluating financial regulation and structure are discussed: (1) stability, (2) efficiency, and (3) fairness. As a result of massive losses suffered by financial institutions, stability is a significant concern. It can be enhanced by increasing capital requirements and strengthening financial supervision. In developing countries there is growing concentration and a spread of universal banking, suggesting economies of both scale and scope. Available evidence suggests that concentrated banking systems tend to have lower margins and operating costs as well as higher profits. However, large banks tend to be inefficient. Their size is the result of controls and restrictions on competition and entry rather than superior efficiency. Protecting users of financial systems from abusive behavior by the financial institutions, creating equality in the competition between banking institutions, and tackling the problems caused by potential conflicts of interest is the"fairness"issue. There are tradeoffs between these three criteria for evaluating financial regulation and structure. The answers must be sought on a country-by-country basis.

Suggested Citation

  • Long, Millard & Vittas, Dimitri, 1991. "Financial regulation : changing the rules of the game," Policy Research Working Paper Series 803, The World Bank.
  • Handle: RePEc:wbk:wbrwps:803
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    Citations

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    Cited by:

    1. Akhand Akhtar Hossain, 2009. "Central Banking and Monetary Policy in the Asia-Pacific," Books, Edward Elgar Publishing, number 12777.
    2. Vittas, Dimitri, 1992. "Contractual savings and emerging securities markets," Policy Research Working Paper Series 858, The World Bank.
    3. Monika Marcinkowska, 2013. "Regulation and self-regulation in banking: in search of optimum," Bank i Kredyt, Narodowy Bank Polski, vol. 44(2), pages 119-158.

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