Policy issues in financial regulation

The author summarizes the findings of a forthcoming book on financial regulation that examines the policy issues of financial regulation and reviews the experiences of both developed and developing countries. He stresses the following ten points: 1) the 1980s were not a decade of deregulation, but a period of extensive regulatory reform; 2) there is a widespread consensus on the need for market mechanisms for monetary and credit control for allocating scarce financial resources; 3) the best speed and sequence of financial reform remains an open question. The contrasting experiences of Japan and Chile support a cautious, gradual approach; Indonesia's experience suggests that several reform paths may work; 4) there is strong consensus on the importance of prudential, organizational, and protective controls and on the need for capital adequacy and for strong banking supervision; 5) there is ample recognition of the importance of speedy and decisive intervention to prevent involvent institutions from magnifying losses and infecting the rest of the financial system; 6) the role of deposit insurance is still unclear; 7) the regulatory issues of nonbank financial intermediaries are similar to those of banks. For life insurance companies, price and product controls (which inhibit competition) are being replaced by solvency controls; 8) the most controversial type of control is still structural controls that impose geographic or functional limits on the activities of financial institutions; 9) universal institutions pose a serious challenge to regulators and supervisors. Countries with weak supervisory agencies would be well advised to promote simpler and more transparent structures; and 10) there is considerable controversy about the desirability and benefits of universal banking. Many analysts emphasize the difficulties of regulation by function and of relying on rules of conduct for overcoming excessive risk taking, conflicts of interest, and the abuse of privileged information. These analysts favor structural controls that limit the scope for fraud and mismanagement. But other analysts argue that the threat of regulation, considerations of reputation, and provisions for legal redress against offending institutions would be effective in policing universal institutions.