Abstract and Keywords
This Chapter examines why financial markets are prone to crisis and the relationship between financial crisis and regulation. It first provides an overview of financial crises generally before assessing the historical role of regulation in financial crises and its potential in averting future crises. It then considers various theories that have been put forward to explain why financial crises arise, with particular reference to theories that invoke cognitive error, moral hazard, information asymmetry, and agency costs. It also looks at arguments concerning market efficiency vs market failure, the potential positive and deleterious aspects of financial regulation and financial crises, and policy instruments that are available to regulators. More specifically, the Chapter analyses governance mechanisms, bank capital requirements, capital controls, and lender of the last resort.
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