Financial Regulation – The Way Forward

Abstract

Economic development is the mandate of a State and there are different useful models which the State can consider for development of the financial sector. Some of the models which the State could consider are Institution based Model or Market based Model, Wall Street or Main Street, Functional Perspective and Institutional Perspective. The State should select the most appropriate model which would enable and aid in the economic development. Having zeroed on the appropriate model for the economic development the State has to take a call on how much of regulation and how much of deregulation is needed. Economic Theory of Regulation by George J.Stigler, “efficient market” hypothesis propogated byEugene F. Fama and Robert J. Shiller who held exactly an opposite view on ‘asset prices movement’ are some of the theories which have profound influence on the State policy on regulations. The financial sector regulators on their part could be usefully guided by certain principles/norms/theories which would enable them to attain the mandate of the State. Rule based approach Vs Principle based approach, shareholders control Vs other stakeholders control enable the regulators to arrive at appropriate decisions. With increased financialisation, innovations in finance and financial engineering has led State to take another call on whether a sole monetary authority is to be  entrusted with the task of formulating the monetary policy and be the regulator formulating the macro prudential policy and also the micro prudential policy. Alternatively, should there be three different authorities? The article examines some of the issues involved in this regard.