Regulation has been a recurring theme in business history at industry level as well as in case studies of firms and firm dynamics. Among the rationales for regulation, this literature identifies overcoming market failures such as negative externalities (e.g. pollution), natural monopolies (utilities), and providing public goods. For banking and finance, the added complications of information asymmetry and the systemic importance of banking systems for monetary and economic stability have led to a general consensus that there can be a positive role for some level of regulation and supervision in the banking industry. But there are also important challenges in this area that arise from regulatory competition, moral hazard, and regulatory capture. These challenges can be magnified when raised to the regional, international, or global platform. Despite the apparent need for greater coordination of prudential supervision and regulation to ensure a stable global financial system, there has been only limited progress towards practical implementation of thse principals at a global level.
The global economic crisis of 2007/8 emphasized the importance of developing a longer-term perspective on institutional change in order understand and respond to current and future challenges in the global economic system. This appears to be especially the case with respect to financial regulation, which has developed unevenly from ad hoc foundations established in response to a series of crises during the nineteenth and twentieth centuries. The nature of this process embeds the current policy framework in historically determined norms such as the primacy of national sovereignty over supra-national regulation, micro- rather than macro-prudential supervision, and respect for private market information over transparency (Alexander, Dhumale, and Eatwell, 2006). These norms have been challenged (Brunnermeier et
al., 2009) but the initial response to the crisis did not call for a radical departure from existing structures (G-20 2009, FSA 2009, EU 2009, HMT 2009) and there is still limited practical implementation of agreed policy initiatives despite high profile initiatives such as the EU Banking Union and the Financial Stability Board (FSB 2013a). In many fundamental ways, national regulatory regimes have not converged (Barth, Caprio, and Levine, 2013). This chapter establishes the rationale for regulation of banking and financial activity and then traces the evolution of national banking regulation and supervision in a range of countries. Particular attention is paid to the contrasting models in Europe, the USA and the People’s Republic of China. The next section addresses the particular challenges of prudential regulation in the globalised financial markets that have prevailed since the 1990s.
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