is a form of regulation
or supervision, which subjects financial institutions
to certain requirements, restrictions and guidelines, aiming to maintain the stability and integrity of the financial system
. This may be handled by either a government
or non-government organization. Financial regulation has also influenced the structure of banking sectors by increasing the variety of financial products available. Financial regulation forms one of three legal categories which constitutes the content of financial law
, the other two being market practices and case law
In the early modern period
, the Dutch were the pioneers in financial regulation.
The first recorded ban (regulation) on short selling
was enacted by the Dutch authorities as early as 1610.
Aims of regulation
The objectives of financial regulators are usually:
- market confidence – to maintain confidence in the financial system
- financial stability – contributing to the protection and enhancement of stability of the financial system
- consumer protection – securing the appropriate degree of protection for consumers.
Structure of supervision
Acts empower organizations, government or non-government, to monitor activities and enforce actions.
There are various setups and combinations in place for the financial regulatory structure around the globe.
Supervision of stock exchanges
Exchange acts ensure that trading on the exchanges is conducted in a proper manner. Most prominent the pricing process, execution and settlement of trades, direct and efficient trade monitoring.
Supervision of listed companies
Financial regulators ensure that listed companies and market participants comply with various regulations under the trading acts. The trading acts demands that listed companies publish regular financial reports, ad hoc notifications or directors' dealings. Whereas market participants are required to publish major shareholder notifications. The objective of monitoring compliance by listed companies with their disclosure requirements is to ensure that investors have access to essential and adequate information for making an informed assessment of listed companies and their securities.
Supervision of investment management
Asset management supervision or investment acts ensures the frictionless operation of those vehicles.
Supervision of banks and financial services providers
Banking acts lay down rules for banks which they have to observe when they are being established and when they are carrying on their business. These rules are designed to prevent unwelcome developments that might disrupt the smooth functioning of the banking system. Thus ensuring a strong and efficient banking system.
Authority by country
Number of countries having a banking crisis in each year since 1800. This is based on This Time is Different: Eight Centuries of Financial Folly 
which covers only 70 countries. The general upward trend might be attributed to many factors. One of these is a gradual increase in the percent of people who receive money for their labor. The dramatic feature of this graph is the virtual absence of banking crises during the period of the Bretton Woods agreement
, 1945 to 1971. This analysis is similar to Figure 10.1 in Reinhart and Rogoff (2009). For more details see the help file for "bankingCrises" in the Ecdat package available from the Comprehensive R Archive Network (CRAN).
U.S. Trade Balance and Trade Policy (1895–2015)
In most cases, financial regulatory authorities regulate all financial activities. But in some cases, there are specific authorities to regulate each sector of the finance industry, mainly banking
markets, but in some cases also commodities, futures, forwards, etc. For example, in Australia
, the Australian Prudential Regulation Authority
(APRA) supervises banks and insurers, while the Australian Securities and Investments Commission
(ASIC) is responsible for enforcing financial services and corporations laws.
Sometimes more than one institution regulates and supervises the banking market, normally because, apart from regulatory authorities, central banks also regulate the banking industry. For example, in the USA banking is regulated by a lot of regulators, such as the Federal Reserve System
, the Federal Deposit Insurance Corporation
, the Office of the Comptroller of the Currency
, the National Credit Union Administration
, the Office of Thrift Supervision
, as well as regulators at the state level.
The structure of financial regulation has changed significantly in the past two decades,[when?]
as the legal and geographic boundaries between markets in banking, securities, and insurance have become increasingly "blurred" and globalized
Regulatory reliance on credit rating agencies
Think-tanks such as the World Pensions Council (WPC)
have argued that most European governments pushed dogmatically for the adoption of the Basel II
recommendations, adopted in 2005, transposed in European Union law
through the Capital Requirements Directive
(CRD), effective since 2008. In essence, they forced European banks, and, more importantly, the European Central Bank
itself e.g. when gauging the solvency
of EU-based financial institutions, to rely more than ever on the standardized assessments of credit risk
marketed by two private US agencies- Moody's and S&P, thus using public policy
and ultimately taxpayers’ money to strengthen an anti-competitive duopolistic industry.
Financial regulation's limit and future The problem of psychology and more specifically Apophenia
in Finance has been recently exposed in academic journals
with however little adjustment to the FCA
regulations such as the "Misleading Statement and Actions" and "Client Best Interest" rules.
- ^ Joanna Benjamin 'Financial Law' Oxford University Press
- ^ Clement, Piet; James, Harold; Van der Wee, Herman (eds.): Financial Innovation, Regulation and Crises in History. (Routledge, 2014. xiii + 176 pp. ISBN 9781848935044)
- ^ UK FSA statutory objectives, 2016-04-20
- ^ De Caria, Riccardo (2011-09-23), What is Financial Regulation Trying to Achieve?, Riccardo De Caria, SSRN 1994472
- ^ Luxembourg CSSF structure and organisation
- ^ German BAFin supervision organisation, archived from the original on 2012-08-04
- ^ Suisse finma stock exchange supervision
- ^ German BAFin stock exchange supervision, archived from the original on 2012-07-22
- ^ Finland FSA supervion of listed companies, archived from the original on 2012-10-12, retrieved 2012-08-05
- ^ Saudi Arabia market supervision, archived from the original on 2013-05-18, retrieved 2012-08-05
- ^ Borsa Italiana listed stock supervision[permanent dead link]
- ^ US SEC Division of Investment Management
- ^ Reserve Bank of India, Department of Banking Supervision
- ^ Luxembourg CSSF Supervision of Banks
- ^ Works, Anchor Media. "This Time is Different - A Book by Carmen M. Reinhart and Kenneth S. Rogoff". reinhartandrogoff.com.
- ^ "list of state banking authorities". State Banking Authorities. Consumer Action Website. Retrieved August 5, 2011.
- ^ Prabhakar, Rahul (1 June 2013). "Varieties of Regulation: How States Pursue and Set International Financial Standards". Oxford University GEG. SSRN 2383445.
- ^ Mahdavi Damghani B. (2012). "UTOPE-ia". Wilmott Magazine. 2012 (60): 28–37. doi:10.1002/wilm.10128.
- Labonte, Marc. (2017). Who Regulates Whom? An Overview of the U.S. Financial Regulatory Framework. Washington, D.C.: Congressional Research Service.
- Reinhart, Carmen; Rogoff, Rogoff (2009), This Time is Different: Eight Centuries of Financial Folly, Princeton U. Pr., ISBN 978-0-691-15264-6
- Simpson, D., Meeks, G., Klumpes, P., & Andrews, P. (2000). Some cost-benefit issues in financial regulation. London: Financial Services Authority.
Last edited on 13 May 2021, at 06:00
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