Financial Regulations
The Policy Goals of Regulation
It is commonly understood that financial regulation should be designed to achieve certain key policy goals, including: (a)safety and soundness of financial institutions,(b) mitigation of systemic risk, (c) fairness and efficiency of markets, and (d) the protection of customers and investors. These broad goals, while clearly important, do not take into account an additional factor that has come to be regarded as critical in any well-functioning regulatory system; namely, minimum regulatory burden through efficiency and cost-effectiveness. It is fair to say that each of the four models of financial supervision is designed to achieve the policy goals of regulation, albeit in different ways. The differences in the models may be more acute when viewed through the prism of regulatory burden, that is, efficiency and cost-effectiveness. Each of the four policy goals is described in greater detail below. A. Safety and Soundness of Financial Institutions Effective regulation should be designed to promote the safety and soundness of individual financial institutions. Regulatory oversight that focuses on the solvency of institutions and the protection of customer assets is critical to a well-functioning financial system. Traditionally, banks and insurance companies have been regulated through a combination of rules and prudential examinations and supervision. Protection of an institution and its capital base was of paramount concern. For securities firms, at least in jurisdictions such as the United States, the regulatory approach has involved more rules-based enforcement, with prescriptive rules relating to capital firms, at least in jurisdictions such as the United States, the regulatory approach has involved more rules-based enforcement, with prescriptive rules relating to capital requirements, customer protection, and business conduct. The primary focus of securities regulators traditionally has been on customer protection, with the safety
It is commonly understood that financial regulation should be designed to achieve certain key policy goals, including: (a)safety and soundness of financial institutions,(b) mitigation of systemic risk, (c) fairness and efficiency of markets, and (d) the protection of customers and investors. These broad goals, while clearly important, do not take into account an additional factor that has come to be regarded as critical in any well-functioning regulatory system; namely, minimum regulatory burden through efficiency and cost-effectiveness. It is fair to say that each of the four models of financial supervision is designed to achieve the policy goals of regulation, albeit in different ways. The differences in the models may be more acute when viewed through the prism of regulatory burden, that is, efficiency and cost-effectiveness. Each of the four policy goals is described in greater detail below. A. Safety and Soundness of Financial Institutions Effective regulation should be designed to promote the safety and soundness of individual financial institutions. Regulatory oversight that focuses on the solvency of institutions and the protection of customer assets is critical to a well-functioning financial system. Traditionally, banks and insurance companies have been regulated through a combination of rules and prudential examinations and supervision. Protection of an institution and its capital base was of paramount concern. For securities firms, at least in jurisdictions such as the United States, the regulatory approach has involved more rules-based enforcement, with prescriptive rules relating to capital firms, at least in jurisdictions such as the United States, the regulatory approach has involved more rules-based enforcement, with prescriptive rules relating to capital requirements, customer protection, and business conduct. The primary focus of securities regulators traditionally has been on customer protection, with the safety