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date: 28 January 2021

(p. 769) Index

(p. 769) Index

Access see Market access
Accountability
basic characteristic of US regulatory system 193
importance to institutional design 116–18
principles issued by ISSBs 247
UK approach to ‘twin peaks’ supervision (2010-) 237–8
Agency costs
mandatory disclosure 516–18
measurement and specification 82–4
why systems are crisis-prone 76
Agents
evolutionary models of market efficiency 20
rationale for mandatory disclosure 522–3
retail marketing 740
Algorithmic trading
innovative process 662
regulation after 2008, 676
trading practices 619–23
Auditors
failures 55
as gatekeepers 257–8
Australia
conduct of business regulation
client categorization 556
duty of care 557–8
duty of loyalty 558–60
enforcement and effectiveness 561
overview 555–6
remuneration-based risks 560–1
consumer protection
mortgage-lending practices 722
product intervention 721
regulatory perceptions and policies 718
market abuse 651
regulation of retail markets
investor empowerment 743
investor protection 740
product intervention 763
risk-based approaches 242
supervisory model 103–4
typical aspirations for institutional design 124
Bail-ins
bank restructuring 349
private sector rescues 60
reshaping of incentive structures 379
second-generation resolution mechanisms 471–6
simplification 456
Bailouts
distinguishing feature of bank failures 458–60
divergence of interest between creditors and shareholders 56
eruption of financial-market turmoil 145
impact of GFC 1
moral hazard 90, 181, 314
multibillion-dollar IMF bailouts 142
state intervention 360
‘too-big-to’ problems (TBT) 179
Balance-sheet management 339–40
Bankruptcy see Insolvency
Banks and banking see also Institutional regulation
basis of financial system 3
central banks
control of systemic risk within EU 178–83
(p. 770) Ireland 98
as lenders of last resort 90
macro-prudential supervision 326–30
multinational coordination of supervision 471
supervisory role 110, 113–15
distinguishing features
bailouts and bankruptcy 458–60
impact of failure on externalities 456–8
effect of GFC 454–6
European Union (EU)
conceptual framework 158–9
control of systemic risk 178–83
creation of internal market and harmonization 160
first generation distress resolution mechanisms
extension of OLA regime 465
FDIC receivership 460–1
financial collateral and termination provisions 464–5
limitations 466
UK Special Resolution Regime 461–3
waiver of property rights 463–4
funding of distress resolution 479–82
as gatekeepers 257
government-banking sector partnership
creation of moral hazard 60
encouragement of desirable activities 60–1
impact on private banking 60
intended scope 59–60
history and development of market access and licensing 489–90
impact of financial crises
bank capital requirements 87–8
regulators acting as lender of last resort 90–1
key role 54
macro-prudential regulation
governance theory 55–6
impact of GFC 57–8
three-stage process 58–9
micro-prudential regulation
altering incentives 375–9
corporate governance 372–4
impact of GFC 54–5
investment restrictions 380–1
risk management 369–70
tools other than capital 370–4
mobile money 61–3
overview of distress measures 482–3
precondition for development of financial systems 42
role of capital in support of stability
balance-sheet management 339–40
Basel III 349–59
change from micro-to macro-prudential approach 347–9
economic capital management 340–1
importance 336–8
international regulation 342–6
macro-prudential reform of Basel III 359–60
need for more holistic approach 360–1
overview 335–6
regulatory capital management 341–2
relationship with risk 338–9
second-generation distress resolution mechanisms
bail-ins 471–6
ex ante planning 467–9
multinational coordination of supervision 469–71
shadow banking
contagion 675
defined 665
disaggregation of banks 65
effectiveness 399–400
failure of Basel II or III to address 145
indicative list of activities 666
link between 1929 Crash and the 1980s debt crisis 493
liquidity runs 674–5
main function 666
meaning and scope 397–8
objective 666
overview 672
pure risk 674
regulation after 2008, 676
significant systemic threat 317
uncontrolled credit expansion 673
(p. 771) universal call for regulation 398–9
triggering distress resolution process 476–8
UK regulatory approach
risk-based regulation 225
Basel I
capital requirements 343
development of cross-border supervision 498
exception to general trend 141
‘one size fits all’ approach 340
potential sanctions against Japan 150
Basel II
risk management 371–2
stress-testing 396
transition to Basel III 342–6
underestimation of systemic risk 335
underlying prudential regulation 347
Basel III
disclosure 387
new focus on G-SIFIs 500
overview 335–6, 349–51
reform along macro-prudential lines 359–60
three-pillar framework
market discipline (Pillar 3) 358–9
minimum capital (Pillar 1) 351–4
overview 350
supervisory review and governance (Pillar 2) 354–8
transition from Basel II 342–6
Behavioural analysis
consumer biases
framing effects 715
overconfidence 712–13
risk tolerance 713–14
social influences 714
emerging themes 24–5
mandatory disclosure 530–1
‘nudge’ theory 23–4
retail marketing 740
socialized insurance market operations 445–7
systematic errors in decision-making 22–3
why systems are crisis-prone
cognitive error 71–3
moral hazard 73–4
‘Big Bang’
financial-services liberalization and integration in Europe 491
impact on financial services industry 219
subsequent failure of Single European Passport 430
Broker-dealers
conflicts of interest 552–3
defined 547–8
disclosure practices 552–3
duty of care 550–1
examinations 555
financial crisis 561–4
mandatory arbitration clauses, use of 561–2
obligations 551–2
regulatory oversight 555
remuneration-based risks 553–5
suitability duties on 543
US COB obligations of 549
US regulatory regime on 759–60
‘Bubbles’
causes of systemic risk 383
effect of fraud 663–4
effect on interest rates 34
effect on reputation of gatekeepers 269
effects of financial crises 69
financial markets in non-equilibrium state 21
information asymmetry 75
investor euphoria 72
risks of structured credit 339
UK house prices 357
US housing in 2008, 144
Canada
history and development of market access and licensing 489
market abuse 651
risk-based approaches 242
supervisory model 104–6
Capital
bank capital requirements
Basel III’s three-pillar framework 350
impact of financial crises 87–8
basis of financial system 3
(p. 772) EU accommodation of cross-border flows
adoption of collective-investment scheme 160
creation of internal market and harmonization 159–60
impact of MiFID 163–7
mutual recognition 160–1
national product-orientated rules 162
trading practices 163
impact of financial crises
bank capital requirements 87–8
capital controls 88–9
risk-based regulation
economic capital management 340
increase in capital requirements 57, 87, 142, 208, 343
overall utility of the risk-based capital regime 335
role in support of bank stability
balance-sheet management 339–40
Basel III 349–59
change from micro-to macro-prudential approach 347–9
economic capital management 340–1
importance 336–8
international regulation 342–6
macro-prudential reform of Basel III 359–60
need for more holistic approach 360–1
overview 335–6
regulatory capital management 341–2
relationship with risk 338–9
Central banks
control of systemic risk within EU 178–83
Ireland 98
as lenders of last resort 90
macro-prudential supervision 326–30
mandatory central clearing 391
multinational coordination of supervision 471
supervisory role
advantages and disadvantages 113–15
public character of supervision 110
China
equity market 63–4
history and development of market access and licensing 489
investor protection 63–4
market abuse 651
Citizenship see Financial citizenship
Cognitive error 71–3
Cognitive heuristics
anchoring and adjustment 712
availability 710–11
defined 710
representativeness 711
Collateralized debt obligations (CDOs)
flawed uses of innovation 669
new processes 664
reform of wholesale and retail distinction 724–5
Competition
market fragmentation 577–8
US regulatory strategy 195–8
Compliance strategies 285–6, 303
Conduct of business regulation
impact of GFC 561–4
international comparisons
client categorization 556
duty of care 557–8
duty of loyalty 558–60
enforcement and effectiveness 561
overview 555–6
remuneration-based risks 560–1
meaning and scope 538–9
regulatory backdrop
coexisting general law obligations 539–41
complex frameworks 544–6
economic and other justifications 541–3
modal regulatory strategies 543–4
trading practices 615
Treasury Blueprint for a modernized structure 207–9
UK approach 224
United States
bifurcated regime 547–9
disclosure practices 552–3
divergent conduct rules 549–52
effectiveness of oversight 555
remuneration-based risks 533–5
Conflicts of interest
EU financial regulation 163
gatekeepers
regulatory responses in EU and US 264–7
underlying problem 261–3
Germany 52
information asymmetry 191
monetary policy and supervisory functions 114
objectives-based Australian financial supervisory/architecture 115
post-GFC consumer reforms 723–4
shareholders and managers 82
Consolidated supervision see Integrated supervision
Consumer protection
behavioural biases
framing effects 715
overconfidence 712–13
risk tolerance 713–14
social influences 714
cognitive heuristics
anchoring and adjustment 712
availability 710–11
defined 710
representativeness 711
concerns for long-term interests 726–8
ex ante planning 428
‘financial citizens’ 665
capabilities 707–10
decision-making 710–15
financialization 700
investors and consumers for everyday life 699–700
limitations 702–7
origins in social citizenship 701–2
post-GFC reform 720–6
regulatory perceptions and policies 715–20
state intervention 701
underlying concept 698–9
G20 246, 720, 750
objective of prudential regulation 367–8
post-GFC reform
conflicts of interest 723–4
institutional restructuring 725–6
mortgage-lending practices 722
product intervention 721
restructuring of authorities 720–1
simplified product disclosure 723
wholesale and retail distinction 724–5
regulation of retail markets
alternative strategies 746
cognate scholarship 744–6
design challenge 747–50
distinctive challenges 765
information asymmetry 764
investor empowerment 742–4
investor protection 739–42
origins 738–9
overview 736–7
regulatory tools 754–64
rulemaking governance 750–4
retention of investment risk 696–8
UK approach to ‘twin peaks’ supervision (2010-) 240–1
US reform White Paper 211
Contagion
causes 371
cross-border effects of Great Crash 489
direct exposures between financial institutions 675
distinguishing feature of bank failures 457–8
effects of sudden re-capitalization 475
fire-sale contagion 461
prevention by macro-prudential policy 320, 383
shadow banking 675
stress-testing 396
Costs
agency costs
mandatory disclosure 516–18
measurement and specification 82–4
why systems are crisis-prone 76
bank bailouts 459
compliance strategies 285
financial innovation
financialization and capital allocation efficiency 671
flawed uses of innovation 668–71
importance to institutional design 122–3
mandatory disclosure 512–13, 529–30
retail marketing 740
‘too-big-to’ institutions 375
(p. 774) transaction costs
market efficiency 600
reform of FMIs 571
role of legal rules 28
welfare costs 4–5
Credit default swaps (CDSs)
financialization and capital allocation efficiency 671
flawed uses of innovation 670–1
regulation after 2008, 676
Credit ratings agencies (CRAs)
conflicts of interest
comments on regulatory responses 274–7
disclosure 263–4
reform of regulatory mechanisms 268–9
regulatory responses in EU and US 264–7
underlying problem 261–3
as gatekeepers 258–9
litigation risk 273
moral hazard 274
reputation
effect of lack of competition 269–70
‘hard-wiring’ of into regulatory system 270–1
Credit risk transfer (CRT) 393–5
Cross-border regulation
crisis management and resolution 502–4
deglobalization of finance 502–3
enforcement cooperation 302–3
history and development of market access and licensing 488–92
market abuse 653
models of cross-border supervision 492–7
overview 488
regulatory approaches and standards 497–502
Dark pools
defined 681
market fragmentation 629
post-trade transparency requirements 572
regulation after 2008, 679–81
regulatory challenges 597
Deposit insurance
macro-regulation of banks 58–9
origins in US 139
risk-based pricing 391
risk reduction tool 390–1
Disclosure
see also Transparency
Basel III 358–9
conduct of business regulation
modal regulatory strategies 543
United States 552–3
conflicts of interest 263–4
constraints on negative information 85
firm and product risk 386–7
harmonization within EU 160
importance 512
importance to institutional design 119–21
mandatory disclosure
core function 512–13
expansive tendency 533–5
goals 513–20
limits and drawbacks 525–33
rationales 520–5
retail markets 754–61
simplified product disclosure 723
Discretionary enforcement 283–5
Dispute resolution
alternative approaches compared 147–50
importance in international finance 131–2
overview 130
WTO mechanisms
availability 132–3
delegation under Havana Charter 134
GATT system 134–7
launch of new system 137
origins 133–4
unique characteristics 133
Distribution regulation 757–61
Economic growth and development
conduct of business regulation 541–3
precondition for development of financial systems 42–3
Efficient capital market hypothesis (ECMH)
default view of financial economics 14
development of original hypothesis 19–20
early work by Fama 18–19
regulatory overview 70–1
susceptibility to empirical testing 15
why systems are crisis-prone 76–8
Enforcement
see also Sanctions
aftermath of the 1929 crash 85–6
alternative strategies
from deterrence to compliance 282–3
link with compliance strategies 285–6
role of discretion 283–5
conduct of business regulation
international comparisons 561
United States 555
expense 27
GATT system 136–7
globalization
cross-border cooperation 302–3
jurisdictional and extraterritorial enforcement 301–2
role of ‘soft law’ 300–1
impact of different outcomes 292–2
importance 303
importance of mandates 116
market abuse 651–4
measuring enforcement 288–91
outcomes-focused regulation 245
overview 281–2
powers 286–8
private enforcement Germany and the UK 50
public and private enforcement compared 292–4
right of challenge 117
shareholder rights 82
structural prudential regulation 389–90
trading practices 618–19
under-regulation 195
US model 201, 205
Equilibria
evolutionary models 20–2
financial markets in non-equilibrium state 21
general focus from middle of twentieth century 18
Walras’ models of equilibria 16–18
Equity markets
China 63–4
EU 538
history and development
Germany 50–2
Japan 52–4
United Kingdom 46–9
importance of investor protection 45–6
Korea 63–4
precondition for development of financial systems 42
European Union (EU)
bank capital
importance 336
inadequacy at time of GFC 344–5
complex factors shaping regulation 5
conceptual framework 158–9
conduct of business regulation
client categorization 556
complex frameworks 545–6
duty of care 557–8
duty of loyalty 558–60
enforcement and effectiveness 561
impact of GFC 561–4
modal regulatory strategies 543
overview 555–6
remuneration-based risks 560–1
conflicts of interest
comments on responses 274–7
regulatory response 264–7
consumer protection
mortgage-lending practices 722
product intervention 721
reform of wholesale and retail distinction 725
regulatory perceptions and policies 717
control of systemic risk
banks and banking 178–83
impact of GFC 174
macro-prudential supervision 177–8
micro-prudential supervision 175–7
(p. 776) creation of internal market and harmonization 159–60
crisis management and resolution 503
deglobalization of finance 502–3
development of internal financial market 183
distressed financial institutions
funding of resolution 481–2
multinational coordination of supervision 470–1
triggering resolution process 478
waiver of property rights 463–4
enforcement
cross-border cooperation 302–3
jurisdictional and extraterritorial enforcement 301
equity market 538
financial innovation
high-frequency trading (HFT) and dark pools 679–81
new product governance 681–2
financial market infrastructures (FMIs)
derivatives markets 580–1
regulation of CCPs and TRs 584–8
regulation of CSDs 588
securities markets 579–80
trading venues 575, 577
history and development of market access and licensing 491–2
impact of MiFID 163–7
institutional regulation
Lamfalussy process 171–4
need for orchestration 170–1
insurance
current approach to regulation 412
effect of single market 423–4
first-generation integration 425
illustration of integration failure 424
judicial activism 428–30
liberalization tensions 430–2
preparing for Solvency II 433–8
supervision within ESFS 438–44
macro-prudential supervision 327–8
market abuse 643–8
models of cross-border supervision 494–6
mutual recognition 160–1
national product-orientated rules 162
regulation of financial innovation 676–8
risk-based approaches 242
structural prudential regulation 388–9
trading practices 163
regulators, supervisors and self-regulatory organizations 608–9
rules, norms and standards 606–8
Ex ante planning
agency theory of disclosure 523
banks and banking
efficiency and efficacy concerns 442
second-generation resolution mechanisms 467–9
consumer protection 428
focus of modern regulation 80
importance 87
macro-prudential regulation 360
mandatory disclosure 532–3
prevention of systemic risk 281
product intervention 761, 763
risk-taking 459
Extraterritoriality 301–2, 455, 462, 501
‘Fat tails’ 21
‘Financial citizens’
behavioural biases
framing effects 715
overconfidence 712–13
risk tolerance 713–14
social influences 714
capabilities
financial literacy 708–10
overview 707–8
cognitive heuristics
anchoring and adjustment 712
availability 710–11
defined 710
representativeness 711
concerns for long-term interests 726–8
decision-making
behavioural biases 712–15
cognitive heuristics 710–12
financialization 700–1
investors and consumers for everyday life 699–700
(p. 777) limitations
absence of institutions and voice 705–7
exclusion and non-citizenship 702–4
mass markets and choice 704–5
origins in social citizenship 701–2
post-GFC reform
conflicts of interest 723–4
institutional restructuring 725–6
mortgage-lending practices 722
product intervention 721
restructuring of authorities 720–1
simplified product disclosure 723
wholesale and retail distinction 724–5
regulatory perceptions and policies
bi-partisan approach 718–20
as protected investors 716
reflection of changing ideas 715
as well-informed investors or consumers 716–18
underlying concept 698–9
Financial collateral and termination arrangements 464–5
Financial crises
development of international regulation
fall-out from Asian crisis of 1997, 142–4
Global Financial Crisis (GFC) 144–7
impact of cross-border crisis in 1970s, 139–42
effect of financial innovation 663
first generation distress resolution mechanisms
extension of OLA regime 465
FDIC receivership 460–1
financial collateral and termination provisions 464–5
limitations 466
UK Special Resolution Regime 461–3
waiver of property rights 463–4
funding of distress resolution 479–82
impact on policy
bank capital requirements 87–8
capital controls 88–9
governance theory 85–7
overview 84
regulators acting as lender of last resort 90–1
Minsky’s theory of financial instability 33–5
overview of distress measures 482–3
policy 34–5
primary topics of focus 91
roadmap for optimal regulation
measurement and specification of agency costs 82–4
overview 79
promotion of trust 80–2
timing and source of legal rules 79–80
second-generation distress resolution mechanisms
bail-ins 471–6
ex ante planning 467–9
multinational coordination of supervision 469–71
triggering distress resolution process 476–8
why systems are crisis-prone
agency costs 76
cognitive error 71–3
efficient capital market hypothesis (ECMH) 76–8
information asymmetry 75–6
moral hazard 73–4
overview 69
Financial innovation
approach to risk 145
benefits 667–8
causes of the GFC 4
defined 660–1
effectiveness of reforms 684–7
gains and losses resulting 662–4
illustrative examples 661–2
impact on financial stability 687–8
key part of financial system 3
lessons from GFC 709
market stability 224
new product governance 681–2
new source of systemic risk 318, 354
overview 667
regulation after 2008
centralization of derivatives trading 679
high frequency trading 679–81
(p. 778) impact of general financial reforms 675–8
new margin requirements for OTC 679
OTC trading 679
relationship to risk 661–2
rise and fall in popularity 664–6
risk of ‘perverse incentives’ 683
risks and costs
financialization and capital allocation efficiency 671
flawed uses of innovation 668–71
shadow banking
contagion 675
liquidity runs 674–5
overview 672
pure risk 674
uncontrolled credit expansion 673
Solvency II regulatory methodologies 443
specialized shadow-bank entities 397
Financial literacy 708–10
Financial market infrastructures (FMIs)
cornerstone of regulatory reform 592–3
crisis-era reforms 571
European Union (EU)
derivatives markets 580–1
regulation of CCPs and TRs 584–8
regulation of CSDs 588
securities markets 579–80
market fragmentation
dark pools 629
effect of competition 577–8
international principles 578–9
opportunities for abuse 636
trading practices 626–8
overview 569–70
policy approaches 570–1
post-trading infrastructures
international regulation 583–4
systemic impact 582–3
‘private’ and ‘public’ markets distinguished 572
reduction of systemic risk 368, 370
role 573–4
trading venues
defined 574–5
governance 576–7
United States
current trends 581
regulation of CCPs and CSDs 589–91
regulation of TRs 591–2
trading venues 575
Financial markets
efficient capital market hypothesis (ECMH)
default view of financial economics 14
development of original hypothesis 19–20
early work by Fama 18–19
susceptibility to empirical testing 15
why systems are crisis-prone 76–8
European Union (EU)
creation of internal market and harmonization 159–60
impact of MiFID 163–7
mutual recognition 160–1
general focus on equilibria from middle of twentieth century 18
mobile money 61–3
regulatory overview 70–1
US objectives 192
Walras’ models of equilibria 16–18
Financial stability
see also Systemic risk
bank capital
balance-sheet management 339–40
Basel III 349–59
change from micro-to macro-prudential approach 347–9
economic capital management 340–1
importance 336–8
international regulation 342–6
macro-prudential reform of Basel III 359–60
need for more holistic approach 360–1
overview 335–6
regulatory capital management 341–2
relationship with risk 338–9
as global public good 313–14
impact of financial innovation 687–8
macro-prudential supervision
institutional arrangements 324–30
meaning and scope 315–17
(p. 779) multilateral coordination 329–30
objectives 318–23
policy toolkit 317–18
Minsky’s theory of financial instability 33–5
prudential-related regulation
impact of GFC 365–6
objectives 368–9
purpose of regulation 6
regulatory overview 70
systemic risk
changes in way subject tackled 311–13
impact of GFC 310–11
institutional arrangements 324–9
macro-prudential supervision 315–30
moral hazard 314–15
‘too-big-to’ problems (TBT) 314–15
trading practices 603–4
UK equity market 47
United States
objectives 191–2
reform White Paper 210
Treasury Blueprint for a modernized structure 206
Financial systems
see also Systemic risk
association with innovation 3
banks and banking
key role 54
macro-regulation 57–9
micro-regulation 54–6
basic characteristics of US regulatory system
accountability 193
competency 193–4
efficiency 192–3
legitimacy 194–5
transparency 195
difficult and evolving concept 2–3
emerging markets 63–4
equity markets
Germany 50–2
importance of investor protection 45–6
Japan 52–4
United Kingdom 46–9
government-banking sector partnership
creation of moral hazard 60
encouragement of desirable activities 60–1
impact on private banking 60
intended scope 59–60
importance of risk 3–4
macro-prudential approach 44
mobile money 61–3
preconditions for development 42–3
questioning of conventional wisdoms 64–5
regulatory overview 69–71
roadmap for optimal regulation
measurement and specification of agency costs 82–4
overview 79
promotion of trust 80–2
timing and source of legal rules 79–80
social purpose and welfare costs 4–5
UK regulatory approach
integrated regulation (1983-2013) 221–33
self-regulation with statutory mandate (1986-1998) 219–20
‘twin peaks’ supervision (2010-) 219–20
why systems are crisis-prone
agency costs 76
cognitive error 71–3
efficient capital market hypothesis (ECMH) 76–8
information asymmetry 75–6
moral hazard 73–4
overview 69
Financialization
consumer protection 700–1, 718, 726–7
defined 3, 665
effects 3
financial innovation 671
retail markets 743
Fragmentation, see Market fragmentation
France
market abuse 651
shareholder protection 33
structural prudential regulation 389
supervisory model 106–7
(p. 780) Functional supervision
coming under strain 101
defining characteristics 100
U.S. regulatory system 99
Funding
bank insolvencies 479–82
design challenge for retail regulation 748
importance to institutional design 123–4
‘too-big-to’ institutions 375
G10
beginnings of change 498
crisis management 502
development of cross-border supervision 498
G20
commitment to close regulatory gaps 6
countries represented 569
Financial Stability Board 314
High-Level Principles on Financial Consumer Protection 246, 720, 750
market integrity 635
named as world’s premier economic forum 145
need for international coordination 455
purpose of regulation 6
reform agenda 131
‘too-big-to’ problems (TBT) 314–15
trading on standardized OTC derivatives 580
trading practices 605
Gatekeepers
conflicts of interest
disclosure 263–4
reform of regulatory mechanisms 268–9
regulatory responses in EU and US 264–7
underlying problem 261–3
distortion of markets 79
Germany 51
importance 277–8
intensification of concerns 260–1
litigation risk 272–4
moral hazard 274
overview 254–5
reputation
effect of lack of competition 269–70
‘hard-wiring’ of CRAs into regulatory system 270–1
importance 269
role
auditors 257–8
banks 257
credit ratings agencies (CRAs) 258–9
information asymmetry 255
investor protection 255–6
securities analysts 258
systemic risk 255
spreading of risk 323
terminology 256–7
Germany
bailouts 145
equity market
history and development 50–1
‘insider system’ of ownership 51
investor protection 52
exposure of gaps in international regulation 145
impact of cross-border crisis in 1970s, 139–40
insurance
first-generation integration 426
illustration of integration failure 424
judicial activism 427–30
shareholder protection 33
structural prudential regulation 389
supervisory model 107
trading practices 608
Global Financial Crisis (GFC)
causes 4
challenge to pre-existing conceptions 310–11
exposure of gaps in international regulation 144–7
failure of accountability 117
fatal blow to transatlantic financial system 365–6
financial innovation
causes of 4
lessons learnt 709
impact on bank governance
macro-regulation 57–8
micro-regulation 54–5
overview 454–6
(p. 781) impact on consumer protection
conflicts of interest 723–4
institutional restructuring 725–6
mortgage-lending practices 722
product intervention 721
restructuring of authorities 720–1
simplified product disclosure 723
wholesale and retail distinction 724–5
inadequacy of bank capital 344–5
key signal for panic 73
moral hazard problems 74
pressure on efficient capital market hypothesis 14–15
reform of conduct of business regulation 561–4
review of institutional structures 98
seismic effect on financial regulation 1–2
shaping of practices and policy 36–7
US response 189–90
Globalization
challenges facing regulators 247–8
cross-border regulation
history and development of market access and licensing 488–92
models of cross-border supervision 492–7
deglobalization of finance 502–3
enforcement
cross-border cooperation 302–3
jurisdictional and extraterritorial enforcement 301–2
role of ‘soft law’ 300–1
financial stability as global public good 313–14
principles-based approaches 246–7
regulation of market abuse 653
regulation of trading practices 598
risk-based approaches 243–4
Governance
banks and banking 55–6
Basel III 354–8
financial innovation
centralization of derivatives trading 679
high-frequency trading 679–81
new margin requirements for OTC 679
impact of financial crises 85–7
institutional design 118–19
insurance and preparations for Solvency II 436–8
micro-prudential regulation of banks 372–4
new product governance 681–2
post-trading infrastructures 583–4
retail markets
alternative regulatory strategies 746
rulemaking governance 750–4
theory 7
trading venues 576–7
Heuristics (shortcuts)
behavioural analysis 23–5
disclosure in financial markets 718
‘financial citizens’
anchoring and adjustment 712
availability 710–11
representativeness 711
numerical measures 83
role of law 37
shaping of human agency 36
simplified monitoring processes 685
High-frequency trading (HFT)
flawed uses of innovation 668–9
new processes 662
post-trade transparency requirements 572
regulation after 2008, 679–81
regulatory challenges 597
Hong Kong
cross-border regulation 489
diffusion of TCF 245–6
enforcement trends 651
risk-based approaches 242, 245
Human rights 463–4
India
G20 representation 569
mobile money 63
risk-based approach 244
shareholder protection 33
Information asymmetry
conflicts of interest 191
insurance 411
retail markets 764
(p. 782) role of gatekeepers 255
Solvency II regulatory methodologies 443
why systems are crisis-prone 75–6
Innovation see Financial innovation
Insider trading
rationales for regulation of abuse 639–42
United States 648–51
Insolvency
banks and banking
bank bailouts 458–60
causes of market failure 320
extension of OLA regime 465
FDIC receivership 460–1
financial collateral and termination provisions 464–5
funding of resolution 479–82
limitations 466
triggering resolution process 476–8
UK Special Resolution Regime 461–3
waiver of property rights 463–4
FMI default management strategies 584
insurers
preparing for Solvency II 433–8
US regulation 204
macro-prudential tools 384
merger of institutions 74
shareholder or financial consumer action groups 706
state intervention 35
Institutions
accountability 116–18
consumer protection
‘financial citizenship’ 705–7
institutional restructuring 725–6
restructuring of authorities 720–1
costs and funding 122–4
defining characteristics of institutional supervision 100
development policy 43
dispute resolution
alternative approaches compared 147–50
importance in international finance 131–2
overview 130
WTO mechanisms 132–7
effect of trust-building diplomacy 151–2
European Union (EU)
Lamfalussy process 171–4
need for orchestration 170–1
examples of models in use
Australia 103–4
Canada 104–6
France 106–7
Germany 107
United Kingdom 107–8
United States 108–9
insurance and preparations for Solvency II 439–42
internal governance arrangements 118–19
international regulatory systems
effect of trust-building diplomacy 151–2
fall-out from Asian crisis of 1997, 142–4
Global Financial Crisis (GFC) 144–7
impact of cross-border crisis in 1970s, 139–42
origins and development 138–9
leximetrics 29
macro-prudential supervision
IMF initiatives 324–5
need for strong framework 324
regional and domestic perspectives 325–9
main supervisory models
fuzziness in practice 100–1
integrated supervision 101–2
overview 99–100
‘twin peaks’ supervision 102–3
need for clear and unambiguous mandate 115–16
public character of supervision 109–10
regulatory approaches
integrated regulation (1983-2013) 221–33
retail markets 750
role of central bank 113–15
self-regulation
advantages 110–11
disadvantages 111
‘enrolment’ within public system 111–12
(p. 783) significance of design 98–9
trading practice regulation 613–14
transparency 119–21
UK approaches
self-regulation with statutory mandate (1986-1998) 219–20
‘twin peaks’ supervision (2010-) 234–41
US regulatory systems
activity-based approach 199
lead regulator model 201–2
overview 198–9
single regulator model 199–201
‘twin peaks’ supervision 199–201
Insurance
current approach to regulation 412–14
distinctive features 410
economic and social purpose 410–11
information asymmetry 411
irresistible impetus for regulation 415–18
liberalization tensions
effect of single market 423–4
first-generation integration 425–7
illustrations of integration failure 424
judicial activism 427–30
Single European Insurance Passport 430–2
micro-prudential regulation
investment restrictions 381
tools other than capital 374–5
policy development as private contract 415
post-crisis EU supervision regime
overview 432–3
preparing for Solvency II 433–8
supervision within ESFS 438–44
preparing for Solvency II
core prudential requirements 434–6
governance requirements 436–8
overview 433–4
socialized market operations
effect of fractured regulatory enterprise 448–50
emergence of behavioural economics 445–7
risk above uncertainty 447–8
sense of public ownership 445
supervision within ESFS
efficiency and efficacy concerns 442–4
institutional uncertainty 439–42
overview 438–9
three supervisory challenges of modernization 418–23
US reform White Paper 211
Integrated supervision
defining characteristics 100
Germany 107
popularity in 1990s and 2000s, 101–2
International Monetary Fund (IMF)
Asian bail-outs 142
coercion behind the new system 143
history and development of market access and licensing 489
information disclosure 119–20
involvement in regulatory role 143
macro-prudential supervision
need for strong framework 324–5
objectives 322
regional and domestic perspectives 325–9
measuring enforcement 288–9
risk-based approaches 243–4
surveillance mechanisms 144
International regulation
challenges facing regulators 247–8
deglobalization of finance 502–3
dispute resolution
alternative approaches compared 147–50
importance in international finance 131–2
overview 130
WTO mechanisms 132–7
enforcement
cross-border cooperation 302–3
jurisdictional and extraterritorial enforcement 301–2
role of ‘soft law’ 300–1
history and development of market access and licensing 488–92
impact of various crises
cross-border crisis in 1970s, 139–42
(p. 784) fall-out from Asian crisis of 1997, 142–4
Global Financial Crisis (GFC) 144–7
macro-prudential supervision 324–5
origins and development 138–9
post-trading infrastructures 583–4
regulatory approaches and standards 497–502
Investment advisers
conflicts of interest 552–3
duty of care 551
examinations 555
fee structure 723–4
financial crisis 561–4
mandatory arbitration clauses, use of 561–2
regulatory oversight 555
regulatory regime 547–9
UK market 758–9
US COB obligations versus broker-dealers 549–550
US regulatory regime on 759–60
Investment bank
capital requirements directive (CRD) IV 372
gatekeepers 256–7
investment restrictions on banks 380–1
regulatory dividend 230–1
systemic risks 311
Investment firms
advice to client 563–4
algorithmic trading 645
capital requirements directive (CRD) IV 372
duty of loyalty 558
EU harmonized rule book 759
MiFID I 165–6
public disclosure 533
suitability duty on 557–8
US retail investment market 740
Investment services
MiFID I governing trade execution services 163–4
provision regulated by EU Member States 545–6
UK retail core services 388–9
Investor protection
China 63–4
deposit insurance
macro-regulation of banks 58–9
equity markets
Germany 52
Japan 52–3
United Kingdom 48
European Union (EU) 164, 166
importance 43, 45–6
Korea 63–4
mandatory disclosure 514–16
moral hazard problems 74
regulation of retail markets 739–42
trading practices 604
Ireland
banking system 59, 98
principles-based regulation 245
risk-based approaches 242
Italy
market abuse 651
shareholder protection 33
Japan
consensus-based system 136
equity market
absence of relation between regulation and development 53–4
dispersal of share ownership 53
history and development 52
investor protection 52–3
role of business coordinators 53
high growth era 63
informal public enforcement 294
shareholder protection 33
Judgment-based regulation
Judicial activism 427–30
Kenya
enforcement trends 651
mobile money 61–3
Korea
emergence as major force 44
equity market 63–4
investor protection 63–4
(p. 785) move away from functional and institutional models 101
Lamfalussy process
insurance regulation 413, 432, 438, 441
orchestration of EU institutional regulation 163, 169, 171–4
Law
conceptual framework of EU 158
enforcement 283
international enforcement 300–1
leximetrics
early studies 29
quantification of legal rules (leximetrics)
influence on policy 29–30
role of institutions 29
role of legal rules
‘cognitive resource’ 25–6
domain-specific nature 26
effect of public sanctions 27
interaction with emerging financial markets 27–8
mutability and variability 26–7
on transaction costs 28
rulemaking for retail markets 750–4
timing and source of legal rules 79–80
Legal origin hypothesis 28–33
Lenders of last resort 90
Leximetrics
early studies 29
influence on policy 29–30
role of institutions 29
Liability risk see Litigation risk
Licensing 488–92
Literacy see Financial literacy
Litigation risk
gatekeepers 272–4
mandatory disclosure 531–2
Macro-prudential regulation
bank capital 347–9
conflict with micro-regulatory objectives 400–1
institutional arrangements 324–9
management of systemic risk
mechanisms and tools 383–5
structural and cyclical tools distinguished 385–6
meaning and scope 315–17
multilateral coordination 329–30
objectives 318–23, 367–8
policy issues
hierarchy or co-existence 392–3
shadow banking 397–400
tensions between micro-and macro-prudential regulation 393–6
policy toolkit 317–18
reform of Basel III 359–60
reform of FMIs 571
risk reduction tools
deposit insurance 390–1
disclosure 386–7
mandatory central clearing 391
structural prudential regulation 387–90
tensions with micro-prudential regulation
credit risk transfer (CRT) 393–5
highly liquid assets 395
stress-testing 396
uniformity 395–6
Management-based regulation
‘new governance’ 111
relationship between states and markets 218
UK approach
key aspect of FSA approach 226–8
‘regulatory dividend’ 230–1
‘twin peaks’ supervision (2010-) 237–8
Mandates
key part of accountability framework 117
need for clear and unambiguous mandate 115–16
Mandatory disclosure
core function 512–13
expansive tendency 533–5
goals
agency costs 516–18
importance 513
investor protection 514–16
price formation 519–20
(p. 786) limits and drawbacks
behavioural analysis 530–1
ex ante planning 532–3
fixed costs 529–30
litigation risk 531–2
overview 525–6
policy 526–7
users 528
rationales
agency problems 522–3
externalities 521–2
information as public good 521
standardization 524–5
Market abuse
conduct which raises market concerns 634–6
enforcement 651–4
European Union (EU) 167–9
evolving regulatory landscape
European Union (EU) 643–8
overview 642–3
United States 648–51
extent of problem 636–8
rationales for regulation
insider trading 639–42
market manipulation 638–9
Market access
absence of a formal mechanism in finance 130
EU harmonization 160, 166
first generation EU integration 425
history and development of cross-border regulation 488–92
intermediaries 615
pressure on other jurisdictions 498
professional traders 601
Single European Insurance Passport 430
Market efficiency
basic characteristic of US regulatory system 192–3
design challenge for retail regulation 749–50
efficient capital market hypothesis (ECMH)
default view of financial economics 14
development of original hypothesis 19–20
early work by Fama 18–19
regulatory overview 70–1
susceptibility to empirical testing 15
why systems are crisis-prone 76–8
European Union (EU) 167
evolutionary models 20
financial innovation 671
insurance
liberalization tensions 424
supervision within ESFS 442–4
purpose of regulation 6
trading practices 599–603
Market fragmentation
dark pools 629
effect of competition 577–8
international principles 578–9
opportunities for abuse 636
trading practices 626–8
Market integrity
adverse effects of fragmentation 578
Australia 718
enforcement 651–4
EU transparency rules 164, 169
evolving regulatory landscape
European Union (EU) 643–8
overview 642–3
United States 648–51
investor protection 514
market abuse
conduct which raises market concerns 634–6
extent of problem 636–8
rationales for regulation 638–42
overview 632–4
rationales for regulation of abuse
insider trading 639–42
market manipulation 638–9
renewed interest since GFC 654–5
role of self-regulation 113
trading practices 599, 600
US Blueprint 209
Market transparency see Transparency
Methodology
see also Theories
(p. 787) emergence of new methods post financial crisis 15–16
leximetrics
early studies 29
influence on policy 29–30
role of institutions 29
macro-prudential supervision 317–18
measurement and specification of agency costs 82–4
Solvency II regulatory methodologies 443
time-series econometrics
cointegrated vector autoregression (CVAR) 31–2
data-coding 30–1
shareholder protection 33
Micro-prudential regulation
altering incentives
banks 375–9
non-bank institutions 379
bank capital 347–9
banks and banking 54–6
conflict with macro-regulatory objectives 400–1
control within EU 175–7
impact of GFC 54–5
objectives 367–8
policy issues
hierarchy or co-existence 392–3
shadow banking 397–400
tensions between micro-and macro-prudential regulation 393–6
reduction of individual risk 369–70
reform of FMIs 571
strong paternalistic interventions
investment restrictions 380–1
making financial institutions more sophisticated 379–80
tensions with macro-prudential regulation
credit risk transfer (CRT) 393–5
highly liquid assets 395
stress-testing 396
uniformity 395–6
tools other than capital
corporate governance (banks) 372–4
non-bank institutions 374–5
risk culture 374
risk management (banks) 370–2
Mobile money 61–3
Moral hazard
bailouts 181
bank bailouts 458–9
gatekeepers 274
government-banking sector partnership 60
regulators acting as lender of last resort 90
systemic risk 314–15
why systems are crisis-prone 73–4
Mortgage-lending practices 722–3
Netherlands
regulation of retail markets 756
risk-based approaches 242–3
‘Nudge’ theory 23–4
Objectives supervision see ‘Twin peaks’ supervision
OTC trading
cause of systemic risk 386
conflicts in clearing and settlement requirements 493
crisis-era imposition of infrastructures 6
EU regulation 681
international regulation 121
link between 1929 Crash and the 1980s debt crisis 493
mandatory central clearing 391
new margin requirements 679
post-trade transparency requirements 572
regulation after 2008, 679
risk to stability 339
transparency requirements 577
US approach 210
Outcomes-focused regulation
compliance with the TCF requirements 232
measurement of impact of different outcomes 292–2
(p. 788) relationship between states and markets 218
required supervisory approach 247
shift in rhetoric 238
terminology 245
UK approach 230
Policy
ascendancy of objectives supervision 102–3
complex factors shaping regulation 5
consumer protection
as protected investors 716
as well-informed investors or consumers 716–18
cyclical movement 33–4
development of institutions 43
endogenous to financial cycle 34–5
financial market infrastructures (FMIs) 570–1
impact of financial crises
bank capital requirements 87–8
capital controls 88–9
governance theory 85–7
overview 84
regulators acting as lender of last resort 90–1
impact of GFC 36
insurance as private contract 415
macro-prudential supervision 317–18
mandatory disclosure 526–7
market fragmentation 578–9
prudential-related regulation
hierarchy or co-existence 392–3
shadow banking 397–400
tensions between micro-and macro-prudential regulation 393–6
quantification of legal rules (leximetrics) 29–30
transparency and disclosure 120–1
US housing as cause of GFC 78
Post-trading infrastructures
international regulation 583–4
systemic impact 582–3
Price formation
efficient capital market hypothesis (ECMH) 18–19
evolutionary models of market efficiency 20–1
general focus on equilibria from middle of twentieth century 18
macro-prudential supervision 323
mandatory disclosure 519–20
market efficiency within EU 167
market manipulation 638–9
moral hazard problems 74
trading practices
algorithmic trading 622–3
appropriate level of regulation 611–13
market efficiency 599–603
market fragmentation 626–8
short selling 624–6
Walras’ models of equilibria 16–18
Principles-based regulation
abandonment of ‘light-touch’ approach 247
basis of the CFTC’s regulatory approach 209
diffusion of TCF 245–6
enforcement tools 619
globalization 246–7
relationship between states and markets 218
terminology 245
trading rules 629
UK approach
key aspect of FSA approach 228–9
‘regulatory dividend’ 230–1
‘schizophrenic’ development 233
Treating Customers Fairly initiative compared 231–3
‘twin peaks’ supervision (2010-) 238–40
Product intervention
design challenge for retail regulation 749
post-GFC reform 721
regulatory tool 761–4
Prudential-related regulation
conflict between micro-and macro-regulatory objectives 400–1
impact of GFC 365–6
insurance and preparations for Solvency II 434–6
(p. 789) macro-prudential regulation
bank capital 347–9
conflict with micro-regulatory objectives 400–1
institutional arrangements 324–9
management of systemic risk 383–6
meaning and scope 315–17
multilateral coordination 329–30
objectives 318–23, 367–8
policy issues 392–400
policy toolkit 317–18
reform of Basel III 359–60
reform of FMIs 571
risk reduction tools 386–91
tensions with micro-prudential regulation 393–6
micro-prudential regulation
altering incentives 375–9
bank capital 347–9
banks and banking 54–6
conflict with macro-regulatory objectives 393–401
control within EU 175–7
impact of GFC 54–5
objectives 367–8
policy issues 392–400
reduction of individual risk 369–70
reform of FMIs 571
strong paternalistic interventions 379–81
tensions with macro-prudential regulation 393–401
tools other than capital 370–5
objectives
consumer protection 367–8
financial stability 368–9
policy issues
hierarchy or co-existence 392–3
shadow banking 397–400
tensions between micro-and macro-prudential regulation 393–6
reform of FMIs 571
risk reduction tools
deposit insurance 390–1
disclosure 386–7
mandatory central clearing 391
structural prudential regulation 387–90
shadow banking
effectiveness 399–400
meaning and scope 397–8
universal call for regulation 398–9
structural prudential regulation
current separation models 388–9
effectiveness 389–90
permissible scope of business activities 387–8
UK approach 224
United States
objectives 191
Treasury Blueprint for a modernized structure 206–7
Public good
financial stability 70, 313–14
mandatory disclosure 521
Reputations
auditors 257
‘financial citizens’ 703
gatekeepers
effect of lack of competition 269–70
‘hard-wiring’ of CRAs into regulatory system 270–1
importance 269
inadequate constraining factor 85
Retail markets
alternative regulatory strategies 746
design challenges 747–50, 765
information asymmetry 764
investor empowerment 742–4
investor protection 739–42
origins of regulation 738–9
overview 736–7
regulation of
alternative strategies 746
cognate scholarship 744–6
design challenge 747–50
disclosure regulation 754–7
distinctive challenges 765
distribution regulation 757–61
information asymmetry 764
investor empowerment 742–4
(p. 790) investor protection 739–42
origins 738–9
overview 736–7
product-related intervention 761–4
regulatory tools 754–64
rulemaking governance 750–4
regulatory tools
disclosure 754–7
distribution 757–61
product intervention 761–4
rulemaking governance 750–4
Risk
see also Moral hazard
agency cost theories 76
cause of bank bailouts 459
compliance strategies 285–6
conduct of business regulation
international comparisons 560–1
United States 533–5
consumer biases 713–14
culture 374
financial innovation
approach to risk 145
financialization and capital allocation efficiency 671
flawed uses of innovation 668–71
‘perverse incentives’ 683
relationship to 661–2
shadow banking 674
insurance
irresistible impetus for regulation 415–18
socialized market operations 447–8
supervisory challenges of modernization 422–3
key part of financial system 3–4
litigation risk
gatekeepers 272–4
mandatory disclosure 531–2
OTC trading 339
retail marketing 740
retention of investment risk 696–8
systemic risk
causes 382–3
changes in way subject tackled 311–13
control within EU 174–83
ex ante planning 281
impact of GFC 310–11
importance of bank capital 335, 338–9
macro-prudential regulation 315–30, 383–6
meaning and scope 381
moral hazard 314–15
objective of prudential regulation 368–9
post-trading infrastructures 582–3
reform of FMIs 571
role of gatekeepers 255
‘too-big-to’ problems (TBT) 314–15, 383
Risk-based regulation
Basel II 499
BCBS enhancement 315
challenges facing regulators 247–8
economic capital management 340
globalization 243–5
increase in capital requirements 57, 87, 142, 208, 343
international perspectives 241–3
overall utility of the risk-based capital regime 335
preparing for Solvency II 433
pricing of deposit insurance 391
UK approach
banks and banking 225
complex and self-contradictory strategy 223
development of ARROW 223–4
focus on conduct issues 224
FSA initiative 222–3
low priority to prudential issues 224
OECD Recommendation 221–2
significant development over time 226
‘twin peaks’ supervision (2010-) 235–7
Sanctions
see also Enforcement
binding force of legal rules 27, 37
discounts 299–300
Dispute Settlement Body (DSB) 133, 137
importance 303–4
market abuse 168
(p. 791) prudential-related regulation 191
range of sanctions 296–9
responsibility for regulatory contraventions 295–6
sanctions 191
settlements 299–300
US treaty enforcement 148
Self-regulation
advantages 90
disadvantages 111
‘enrolment’ within public system 111–13
trading practices 597–8, 609–11
UK approaches
self-regulation with statutory mandate (1986-1998) 219–20
US regulatory strategy 198
Settlements 299–300
Shadow banking
contagion 675
defined 665
disaggregation of banks 65
effectiveness of regulation 399–400
failure of Basel II or III to address 145
indicative list of activities 666
link between 1929 Crash and the 1980s debt crisis 493
liquidity runs 674–5
main function 666
meaning and scope 397–8
objective 666
overview 672
pure risk 674
regulation after 2008, 676
significant systemic threat 317
uncontrolled credit expansion 673
universal call for regulation 398–9
Single European Insurance Passport 424, 430–2
Stability see Financial stability
Standardization
rationale for mandatory disclosure 524–5
trading practices 578
State intervention
bailouts 360
consumer protection 701
government-banking sector partnership
creation of moral hazard 60
encouragement of desirable activities 60–1
impact on private banking 60
intended scope 59–60
insolvency 35
trading practices
market efficiency 603
underlying rationale 598
Structural prudential regulation
current separation models 388–9
effectiveness 389–90
permissible scope of business activities 387–8
Systemic risk
causes 382–3
changes in way subject tackled 311–13
control within EU
banks and banking 178–83
impact of GFC 174
macro-prudential supervision 177–8
micro-prudential supervision 175–7
ex ante planning 281
impact of GFC 310–11
importance of bank capital
cause of 2007 credit crunch 338–9
underestimate by Basel II 335
macro-prudential regulation
institutional arrangements 324–9
meaning and scope 315–17
mechanisms and tools 383–5
objectives 318–23
policy toolkit 317–18
structural and cyclical tools distinguished 385–6
macro-prudential supervision
multilateral coordination 329–30
meaning and scope 381
moral hazard 314–15
objective of prudential regulation 368–9
post-trading infrastructures 582–3
reform of FMIs 571
risk reduction tools
deposit insurance 390–1
disclosure 386–7
mandatory central clearing 391
structural prudential regulation 387–90
(p. 792) role of gatekeepers 255
‘too-big-to’ problems (TBT) 314–15, 383
US reform White Paper 211
Systems see Financial systems
Take-overs
consequence of insolvency 74
inadequate disciplinary role 85
UK equity market 48
Taxation
insurance funding 417
prudential-related regulation 384
trading practices 618
types of regulatory intervention 613
Theories
see also Methods
behavioural analysis
emerging themes 24–5
experience-based shortcuts to decision-making 23
‘nudge’ theory 23–4
systematic errors in decision-making 22–3
common ‘evolutionary’ perspective 36–7
efficient capital market hypothesis (ECMH)
default view of financial economics 14
development of original hypothesis 19–20
early work by Fama 18–19
regulatory overview 70–1
susceptibility to empirical testing 15
emergence of new theories post financial crisis 15–16
evolutionary models 20–2
evolutionary models of market efficiency 20
general focus on equilibria from middle of twentieth century 18
governance 7
Minsky’s theory of financial instability 33–5
regulation of retail markets 744–6
roadmap for optimal regulation
measurement and specification of agency costs 82–4
promotion of trust 80–2
timing and source of legal rules 79–80
role of legal rules
‘cognitive resource’ 25–6
domain-specific nature 26
effect of public sanctions 27
interaction with emerging financial markets 27–8
mutability and variability 26–7
on transaction costs 28
Walras’ models of equilibria 16–18
why systems are crisis-prone
agency costs 76
efficient capital market hypothesis (ECMH) 76–8
information asymmetry 75–6
moral hazard 73–4
overview 69
Time-series econometrics
cointegrated vector autoregression (CVAR) 31–2
data-coding 30–1
shareholder protection 33
‘Too-big-to’ problems (TBT)
bailouts 179
distortion of funding costs 375
structural prudential regulation 390
systemic risk 314–15, 383
Trading practices
algorithmic trading
innovative process 662
regulation after 2008, 676
trading practices 619–23
alternative approaches to regulation
regulators, supervisors and self-regulatory organizations 608–11
rules, norms and standards 605–8
techniques, strategies and methods 611–19
efficient capital market hypothesis (ECMH) 19–20
European Union (EU) 163, 164
financial innovation
new processes 661–3
high-frequency trading (HFT)
flawed uses of innovation 668–9
new processes 662
(p. 793) post-trade transparency requirements 572
regulation after 2008, 679–81
regulatory challenges 597
key distinguishing features 628–9
key objectives of regulation
financial stability 603–4
investor protection 604
market efficiency 599–603
OTC trading
cause of systemic risk 386
conflicts in clearing and settlement requirements 493
crisis-era imposition of infrastructures 6
EU regulation 681
international regulation 121
link between 1929 Crash and the 1980s debt crisis 493
mandatory central clearing 391
new margin requirements 679
post-trade transparency requirements 572
regulation after 2008, 679
risk to stability 339
transparency requirements 577
US approach 210
regulatory challenges
algorithmic trading 619–23
market fragmentation 626–8
short selling 624–6
techniques, strategies and methods of regulation
appropriate level of detail 611–13
business conduct rules 615
enforcement 618–19
institutionalization 613–14
taxation 618
transparency 615–17
underlying rationale for regulation 597–9
venues
defined 574–5
governance 576–7
Transaction costs
market efficiency 600
reform of FMIs 571
role of legal rules 28
Transparency
see also Disclosure
basic characteristic of US regulatory system 195
European Union (EU) 164–5
high-frequency trading (HFT) 572
importance to institutional design 119–21
purpose of regulation 6
trading practices 615–17
Trust
association with banks 51
effect of trust-building diplomacy for international regulation 151–2
functional substitute for the separate corporate personality 27
importance 80–2
‘Twin peaks’ supervision
ascendancy in policy circles 102–3
Australia 103–4
defining characteristics 100
France 106–7
UK approach
consumer protection 240–1
examples of models in use 107–8
origins 234–5
principles-based regulation 238–40
risk-based regulation 235–7
senior-management accountability 237–8
United States 199–1
United Kingdom
bank capital
importance 336
inadequacy at time of GFC 344–5
supervisory review 358–9
conduct of business regulation
coexisting general law obligations 539
complex frameworks 545–6
consumer protection
fair treatment 719
mortgage-lending practices 722
product intervention 721
as well-informed investors or consumers 717–18
crisis management and resolution 503
distressed financial institutions
(p. 794) financial collateral and termination provisions 464–5
funding of resolution 479–80
triggering resolution process 477–8
UK Special Resolution Regime 461–3
enforcement
measuring enforcement 289–91
powers 287–8
public and private enforcement compared 292–4
role of discretion 284
equity market
dispersal of share ownership 47
financial stability 47
history and development 46, 48–9
investor protection 48
main purpose 46
take-overs 48
exposure of gaps in international regulation 145
financial market infrastructures (FMIs)
trading venues 576–7
history and development of market access and licensing 489
insurance
current approach to regulation 412
first-generation integration 425–7
illustration of integration failure 424
supervisory challenges of modernization 422–3
integrated regulation (1983-2013)
bold new approach 221
management-based regulation 226–8
principles-based regulation 228–33
risk-based regulation 221–6
macro-prudential supervision 326
market abuse 653
regulatory approaches
integrated regulation (1983-2013) 221–33
overview 218
self-regulation with statutory mandate (1986-1998) 219–20
sanctions
range of sanctions 296–9
responsibility for regulatory contraventions 295–6
settlements and discounts 299–300
shareholder protection 33
structural prudential regulation 388–9
supervisory model 107–8
trading practices
rules, norms and standards 606
UK approaches
‘twin peaks’ supervision (2010-) 221–33
United States
ascendancy of objectives supervision 102–3
banks and banking
extension of OLA regime 465
FDIC receivership 460–1
multinational coordination of supervision 469–70
supervisory review of capital 358
triggering resolution process 478
basic characteristics of regulatory system
accountability 193
competency 193–4
efficiency 192–3
legitimacy 194–5
transparency 195
complex factors shaping regulation 5
conduct of business regulation
bifurcated regime 547–9
coexisting general law obligations 539
complex frameworks 544–5
disclosure practices 552–3
divergent conduct rules 549–52
effectiveness of oversight 555
impact of GFC 561–4
modal regulatory strategies 543
remuneration-based risks 533–5
conflicts of interest
comments on responses 274–7
regulatory response 264–7
consumer protection
mortgage-lending practices 722
as protected investors 716
reform of wholesale and retail distinction 725
restructuring of authorities 721
(p. 795) as well-informed investors or consumers 716–18
crisis management and resolution 503
distressed financial institutions
funding of resolution 480–1
Dodd-Frank Act
calls for reform 205–6
current trends 581, 588-92
prior multiple federal approach 202–4
reform White Paper 210–11
regulation of CCPs and CSDs 589–91
regulation of TRs 591–2
effect of structural reform 212
enforcement
jurisdictional and extraterritorial enforcement 301–2
measuring enforcement 289–91
powers 287–8
public and private enforcement compared 292–4
role of discretion 284
‘enrolment’ of self-regulation within public system 112–13
exposure of gaps in international regulation 144–5
history and development of market access and licensing 489
housing policy as cause of GFC 78
impact of cross-border crisis in 1970s, 139–40
impact of financial crises on policy 86–7
inadequacy of bank capital 346
insurance
first-generation integration 425
supervisory challenges of modernization 422–3
market abuse
enforcement 652
insider trading 648–51
organization of regulatory system
activity-based approach 199
lead regulator model 201–2
overview 198–9
single regulator model 199–201
‘twin peaks’ supervision 199201
origins of deposit insurance 139
regulation of shadow banking 676–8
regulatory objectives 190–2
regulatory strategies 195–8
response to GFC 189–90
sanctions
range of sanctions 298
responsibility for regulatory contraventions 296
settlements and discounts 299–300
shareholder protection 33
structural prudential regulation 388
supervisory model 109
trading practices
regulators, supervisors and self-regulatory organizations 609
rules, norms and standards 606
Treasury Blueprint for a modernized structure
business conduct regulation 207–9
financial stability 206
prudential-related regulation 206–7
Whistleblowing
civil litigation 85
enforcement role 287–8
World Bank
coercion behind the new system 143
involvement in regulatory role 143
risk-based approaches 243–4
surveillance mechanisms 144
World Trade Organization (WTO)
dispute resolution
availability 132–3
delegation under Havana Charter 134
GATT system 134–7
launch of new system 137
origins 133–4
unique characteristics 133
history and development of market access and licensing 491
international enforcement 300