Heremans, Dirk; Pacces, Alessio M. --- "Regulation of Banking and Financial Markets" [2012] ELECD 445; in Van den Bergh, J. Roger; Pacces, M. Alessio (eds), "Regulation and Economics" (Edward Elgar Publishing, 2012)

Book Title: Regulation and Economics

Editor(s): Van den Bergh, J. Roger; Pacces, M. Alessio

Publisher: Edward Elgar Publishing

ISBN (hard cover): 9781847203434

Section: Chapter 13

Section Title: Regulation of Banking and Financial Markets

Author(s): Heremans, Dirk; Pacces, Alessio M.

Number of pages: 49

Extract:

13 Regulation of banking and financial markets
Dirk Heremans and Alessio M. Pacces*



1. INTRODUCTION

Financial crises are at the core of the academic and the policy debate on bank-
ing and finance. Traditionally intertwined with macroeconomic policy, finan-
cial instability is increasingly dependent on excessive risk-taking by financial
intermediaries. For a long time, it was believed that as long as central banks
guaranteed price stability through appropriate interest rate policies, the finan-
cial infrastructure would also remain stable. This view is no longer supported.
The regulation of banking and financial markets has become the major chal-
lenge for public authorities. Due to increased competition, the borders
between financial institutions are fading, financial innovations are multiplying
off-balance-sheet activities, and internationalization is rendering control by
national authorities more and more difficult. All of these problems culminated
in the global financial crisis of 2007­09 and, at the time of writing this chap-
ter (April 2011), have not yet been resolved.
Financial crises are not a new phenomenon, but from a historical perspec-
tive, they have become increasingly complex (Gorton, 2010). According to the
International Monetary Fund (IMF), in the period 1980­93 about 133 IMF
member countries experienced significant banking sector problems, of which
36 countries had to face real financial crises (see Lindgren et al., 1996). These
financial problems are not limited to developing countries and emerging finan-
cial markets, but occur also in developed countries and in highly sophisticated
financial markets. The global turmoil that followed ...