Regulatory structure for financial stability and development

Ashima Goyal

Indira Gandhi Institute of Development Research, Mumbai Working Papers from Indira Gandhi Institute of Development Research, Mumbai, India

Abstract: 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.

Keywords: market failures; incentives; procyclicality; coordination; rules versus principles; development (search for similar items in EconPapers)
JEL-codes: D73 G18 G28 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2010-02
New Economics Papers: this item is included in nep-reg
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Citations: View citations in EconPapers (4)

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Related works:
Working Paper: Regulatory Structure for Financial Stability and Development (2010)
Working Paper: Regulatory Structure for Financial Stability and Development (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:ind:igiwpp:2010-002

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