Financial regulation

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Financial regulation is a form of regulation or supervision, which subjects financial institutions to certain requirements, restrictions and guidelines, aiming to maintain the integrity of the financial system. This may be handled by either a government or non-government organization. Financial regulation has also influenced the structure of banking sectors by increasing the variety of financial products available. Financial regulation forms one of three legal categories which constitutes the content of financial law, the other two being market practices, case law. [1]

Regulation is an abstract concept of management of complex systems according to a set of rules and trends. In systems theory, these types of rules exist in various fields of biology and society, but the term has slightly different meanings according to context. For example:

Financial institution institution that provides financial services for its clients or members

Financial institutions, otherwise known as banking institutions, are corporations that provide services as intermediaries of financial markets. Broadly speaking, there are three major types of financial institutions:

  1. Depository institutions – deposit-taking institutions that accept and manage deposits and make loans, including banks, building societies, credit unions, trust companies, and mortgage loan companies;
  2. Contractual institutions – insurance companies and pension funds
  3. Investment institutions – investment banks, underwriters, brokerage firms.

A government is the system or group of people governing an organized community, often a state.

Contents

History

In the early modern period, the Dutch were the pioneers in financial regulation. [2] The first recorded ban (regulation) on short selling was enacted by the Dutch authorities as early as 1610.

The early modern period of modern history follows the late Middle Ages of the post-classical era. Although the chronological limits of the period are open to debate, the timeframe spans the period after the late portion of the post-classical age, known as the Middle Ages, through the beginning of the Age of Revolutions and is variously demarcated by historians as beginning with the Fall of Constantinople in 1453, with the Renaissance period, and with the Age of Discovery, and ending around the French Revolution in 1789.

Aims of regulation

The objectives of financial regulators are usually: [3]

Structure of supervision

Acts empower organizations, government or non-government, to monitor activities and enforce actions. [4] There are various setups and combinations in place for the financial regulatory structure around the globe. [5] [6]

Supervision of stock exchanges

Exchange acts ensure that trading on the exchanges is conducted in a proper manner. Most prominent the pricing process, execution and settlement of trades, direct and efficient trade monitoring. [7] [8]

Supervision of listed companies

Financial regulators ensure that listed companies and market participants comply with various regulations under the trading acts. The trading acts demands that listed companies publish regular financial reports, ad hoc notifications or directors' dealings. Whereas market participants are required to publish major shareholder notifications. The objective of monitoring compliance by listed companies with their disclosure requirements is to ensure that investors have access to essential and adequate information for making an informed assessment of listed companies and their securities. [9] [10] [11]

Supervision of investment management

Asset management supervision or investment acts ensures the frictionless operation of those vehicles. [12]

Supervision of banks and financial services providers

Banking acts lay down rules for banks which they have to observe when they are being established and when they are carrying on their business. These rules are designed to prevent unwelcome developments that might disrupt the smooth functioning of the banking system. Thus ensuring a strong and efficient banking system. [13] [14]

Authority by country

Number of countries having a banking crisis in each year since 1800. This is based on This Time is Different: Eight Centuries of Financial Folly which covers only 70 countries. The general upward trend might be attributed to many factors. One of these is a gradual increase in the percent of people who receive money for their labor. The dramatic feature of this graph is the virtual absence of banking crises during the period of the Bretton Woods agreement, 1945 to 1971. This analysis is similar to Figure 10.1 in Reinhart and Rogoff (2009). For more details see the help file for "bankingCrises" in the Ecdat package available from the Comprehensive R Archive Network (CRAN). BankingCrises.svg
Number of countries having a banking crisis in each year since 1800. This is based on This Time is Different: Eight Centuries of Financial Folly which covers only 70 countries. The general upward trend might be attributed to many factors. One of these is a gradual increase in the percent of people who receive money for their labor. The dramatic feature of this graph is the virtual absence of banking crises during the period of the Bretton Woods agreement, 1945 to 1971. This analysis is similar to Figure 10.1 in Reinhart and Rogoff (2009). For more details see the help file for "bankingCrises" in the Ecdat package available from the Comprehensive R Archive Network (CRAN).
U.S. Trade Balance and Trade Policy (1895-2015) U.S. Trade Balance (1895-2015) and Trade Policies.png
U.S. Trade Balance and Trade Policy (1895–2015)

The following is a short listing of regulatory authorities in various jurisdictions, for a more complete listing, please see list of financial regulatory authorities by country.

Unique jurisdictions

In most cases, financial regulatory authorities regulate all financial activities. But in some cases, there are specific authorities to regulate each sector of the finance industry, mainly banking, securities, insurance and pensions markets, but in some cases also commodities, futures, forwards, etc. For example, in Australia, the Australian Prudential Regulation Authority (APRA) supervises banks and insurers, while the Australian Securities and Investments Commission (ASIC) is responsible for enforcing financial services and corporations laws.

Sometimes more than one institution regulates and supervises the banking market, normally because, apart from regulatory authorities, central banks also regulate the banking industry. For example, in the USA banking is regulated by a lot of regulators, such as the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the National Credit Union Administration, the Office of Thrift Supervision, as well as regulators at the state level. [16]

In the European Union, the European System of Financial Supervision consists of the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA) and the European Insurance and Occupational Pensions Authority (EIOPA) as well as the European Systemic Risk Board. The Eurozone countries are forming a Single Supervisory Mechanism under the European Central Bank as a prelude to Banking union.

There are also associations of financial regulatory authorities. At the international level, there is the International Organization of Securities Commissions (IOSCO), the International Association of Insurance Supervisors, the Basel Committee on Banking Supervision, the Joint Forum, and the Financial Stability Board, where national authorities set standards through consensus-based decision-making processes. [17]

The structure of financial regulation has changed significantly in the past two decades,[ when? ] as the legal and geographic boundaries between markets in banking, securities, and insurance have become increasingly "blurred" and globalized.[ citation needed ]

Regulatory reliance on credit rating agencies

Think-tanks such as the World Pensions Council (WPC) have argued that most European governments pushed dogmatically for the adoption of the Basel II recommendations, adopted in 2005, transposed in European Union law through the Capital Requirements Directive (CRD), effective since 2008. In essence, they forced European banks, and, more importantly, the European Central Bank itself e.g. when gauging the solvency of EU-based financial institutions, to rely more than ever on the standardized assessments of credit risk marketed by two private US agencies- Moody's and S&P, thus using public policy and ultimately taxpayers’ money to strengthen an anti-competitive duopolistic industry.

Financial regulation's limit and future

The problem of psychology and more specifically Apophenia in Finance has been recently exposed in academic journals [18] with however little adjustment to the FCA and SEC regulations such as the "Misleading Statement and Actions" and "Client Best Interest" rules.

See also

Related Research Articles

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China Securities Regulatory Commission government agency

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Bank regulation is a form of government regulation which subjects banks to certain requirements, restrictions and guidelines, designed to create market transparency between banking institutions and the individuals and corporations with whom they conduct business, among other things. As regulation focusing on key actors in the financial markets, it forms one of the three components of financial law, the other two being case law and self-regulating market practices.

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International Organization of Securities Commissions organization

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The Office of the Superintendent of Financial Institutions is an independent agency of the Government of Canada reporting to the Minister of Finance created "to contribute to public confidence in the Canadian financial system". It is the sole regulator of banks, and the primary regulator of insurance companies, trust companies, loan companies and pension plans in Canada.

Federal Financial Supervisory Authority German federal agency

The Federal Financial Supervisory Authority better known by its abbreviation BaFin is the financial regulatory authority for Germany. It is an independent federal institution with headquarters in Bonn and Frankfurt and falls under the supervision of the Federal Ministry of Finance (Germany). BaFin supervises about 2,700 banks, 800 financial services institutions and over 700 insurance undertakings.

Financial Supervisory Commission (Taiwan)

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European Insurance and Occupational Pensions Authority

The European Insurance and Occupational Pensions Authority (EIOPA) is a European Union financial regulatory institution that replaced the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS). It is established under EU Regulation 1094/2010.

The Committee of European Banking Supervisors (CEBS) was an independent advisory group on banking supervision in the European Union (EU). Established by the European Commission in 2004 by Decision 2004/5/EC, and its charter revised on 23 January 2009, it was composed of senior representatives of bank supervisory authorities and central banks of the European Union. On 1 January 2011, this committee was succeeded by the European Banking Authority (EBA), which took over all existing and ongoing tasks and responsibilities of the Committee of European Banking Supervisors (CEBS). The European Banking Authority was established by Regulation (EC) No. 1093/2010 of the European Parliament and of the Council of 24 November 2010.

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Swiss Financial Market Supervisory Authority Government watchdog

The Swiss Financial Market Supervisory Authority (FINMA) is the Swiss government body responsible for financial regulation. This includes the supervision of banks, insurance companies, stock exchanges and securities dealers, as well as other financial intermediaries in Switzerland.

Comisión Nacional del Mercado de Valores

The National Securities Market Commission is the Spanish government agency responsible for the financial regulation of the securities markets in Spain. It is an independent agency that falls under the Ministry of Economy.

Financial Services Board (South Africa) financial regulatory authority

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Financial Supervision Authority (Poland) organization in Poland

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Financial Conduct Authority quasi-governmental agency in the United Kingdom

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The European System of Financial Supervision (ESFS) is the framework for financial supervision in the European Union in operation since 2011. The system consists of the European Supervisory Authorities, the European Systemic Risk Board, the Joint Committee of the European Supervisory Authorities, and the national supervisory authorities of EU member states. It was proposed by the European Commission in 2009 in response to the financial crisis of 2007–08.

European Banking Authority agency of the European Union

The European Banking Authority (EBA) is a regulatory agency of the European Union headquartered in London. Its activities include conducting stress tests on European banks to increase transparency in the European financial system and identifying weaknesses in banks' capital structures. The EBA was established on 1 January 2011, upon which date it inherited all of the tasks and responsibilities of the Committee of European Banking Supervisors (CEBS). After the United Kingdom withdrawal from the European Union referendum the agency is preparing to relocate to Paris.

The Finnish Financial Supervisory Authority is the financial regulatory authority of the Finnish government, responsible for the regulation of financial markets in Finland.

References

  1. Joanna Benjamin 'Financial Law' Oxford University Press
  2. Clement, Piet; James, Harold; Van der Wee, Herman (eds.): Financial Innovation, Regulation and Crises in History. (Routledge, 2014. xiii + 176 pp. ISBN   9781848935044)
  3. UK FSA statutory objectives
  4. What is Financial Regulation Trying to Achieve?, Riccardo De Caria, SSRN   1994472
  5. Luxembourg CSSF structure and organisation
  6. German BAFin supervision organisation, archived from the original on 2012-08-04
  7. Suisse finma stock exchange supervision
  8. German BAFin stock exchange supervision, archived from the original on 2012-07-22
  9. Finland FSA supervion of listed companies
  10. Saudi Arabia market supervision, archived from the original on 2013-05-18, retrieved 2012-08-05
  11. Borsa Italiana listed stock supervision [ permanent dead link ]
  12. US SEC Division of Investment Management
  13. Reserve Bank of India, Department of Banking Supervision
  14. Luxembourg CSSF Supervision of Banks
  15. Works, Anchor Media. "This Time is Different - A Book by Carmen M. Reinhart and Kenneth S. Rogoff". reinhartandrogoff.com.
  16. "list of state banking authorities". State Banking Authorities. Consumer Action Website. Retrieved August 5, 2011.
  17. Prabhakar, Rahul (1 June 2013). "Varieties of Regulation: How States Pursue and Set International Financial Standards". Oxford University GEG. SSRN   2383445 .Missing or empty |url= (help); |access-date= requires |url= (help)
  18. Mahdavi Damghani B. (2012). "UTOPE-ia". Wilmott Magazine. 2012 (60): 28–37. doi:10.1002/wilm.10128.

Further reading