Financial regulation: changing the rules of the game

Millard Long and Dimitri Vittas

No 803, Policy Research Working Paper Series from The World Bank

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.

Keywords: Environmental Economics&Policies; Insurance&Risk Mitigation; Financial Crisis Management&Restructuring; Banks&Banking Reform; Financial Intermediation (search for similar items in EconPapers)
Date: 1991-11-30
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Citations: View citations in EconPapers (3)

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