Rules governing financial institutions and markets.
Financial regulation encompasses the laws, rules, and standards that govern financial institutions, products, and markets. It aims to maintain financial stability, protect consumers, and ensure the integrity and efficiency of the financial system.
The main goals include ensuring financial stability, protecting consumers and investors, preventing systemic risks, promoting market integrity, and facilitating efficient capital allocation.
Financial regulation is typically implemented by central banks, dedicated financial regulators, and international bodies such as the Basel Committee on Banking Supervision.
Regulation covers various aspects of the financial system, including banking, securities markets, insurance, and increasingly, fintech and digital currencies.
Financial regulation has evolved in response to crises and changing market conditions, with major reforms often following significant financial disruptions.
Financial regulation draws on financial economics, risk management theory, and macroprudential analysis. It incorporates insights from behavioral finance and the study of financial crises and systemic risks.
If regulators adopt comprehensive macroprudential policies, then they can better identify and address systemic risks before they lead to crises. The Bank of England's Financial Policy Committee, established in 2013, has used tools like countercyclical capital buffers and loan-to-value limits to enhance financial stability.
If financial regulators strengthen international cooperation and harmonization of standards, then they can more effectively address global financial risks and reduce regulatory arbitrage. The Basel III accord, developed by the Basel Committee on Banking Supervision, has led to more consistent capital and liquidity standards for banks across countries.
If countries implement effective resolution mechanisms for failing financial institutions, then they can reduce the need for taxpayer-funded bailouts and mitigate moral hazard. The EU's Bank Recovery and Resolution Directive, introduced in 2014, provides a framework for resolving failing banks while minimizing public financial support.
If regulators adopt a risk-based approach to supervision, focusing more resources on higher-risk institutions and activities, then they can improve the efficiency and effectiveness of oversight. Australia's 'PAIRS' (Probability and Impact Rating System) framework has helped its prudential regulator allocate supervisory resources more effectively.
If regulators and policymakers invest in financial education programs, then consumers can make more informed financial decisions, reducing the risk of predatory practices. Singapore's MoneySense national financial education program has been credited with improving financial literacy and promoting more responsible financial behavior among citizens.