Frankel, Tamar --- "Regulating the Financial Markets by Examinations" [2010] ELECD 698; in Mitchell, E. Lawrence; Wilmarth, Jr, E. Arthur (eds), "The Panic of 2008" (Edward Elgar Publishing, 2010)

Book Title: The Panic of 2008

Editor(s): Mitchell, E. Lawrence; Wilmarth, Jr, E. Arthur

Publisher: Edward Elgar Publishing

ISBN (hard cover): 9781849802611

Section: Chapter 9

Section Title: Regulating the Financial Markets by Examinations

Author(s): Frankel, Tamar

Number of pages: 37

Extract:

9. Regulating the financial markets by
examinations
Tamar Frankel

SUMMARY

This chapter proposes changing future government examinations of
market intermediaries and focusing on bubbles and crashes as the main
dangers to the financial system and the economy. Prior substantive regula-
tion has an undesirable effect on innovations and freedom of the markets.
Regulating after a crash (when the `horse has left the barn') is undesir-
able and ineffective. Therefore the chapter proposes tighter and closer
examinations somewhat different from the current ones: (1) Examine
more frequently when market prices rise (not when they have fallen). (2)
Examine entities that are too large to fail; those that are highly leveraged;
those whose shares-prices rise steadily with little or no fluctuation; and
entities that have obtained exemptions from regulation. (3) Examiners
should search for violations of the law (and the spirit of the law), but not
economic or financial rationalizations. (4) Examiners should be experts,
highly paid and incentivized to remain in government employ. Expert
information about the markets will hopefully reduce the impact of bubbles
and inevitable crashes and the loss of investors trust that decimates the
financial system.


INTRODUCTION

It is time to reevaluate the regulation of the financial markets. This
reevaluation should include the fundamental regulatory philosophy and
its implementation. For the past 60 years two principles guided market
regulation. One principle was disclosure by securities issuers to investors.
The second principle underlying market regulation was self-regulation by
the financial intermediaries, subject to the supervision of the ...