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European financial regulation: a framework for policy analysis

Author: Neven, Damien J. INSEAD Area: Economics and Political Science In: European financial integration - Giovannini, Alberto;Colin, Mayer - 1992 - Book Language: EnglishDescription: p. 112-132.Type of document: INSEAD ChapterNote: Please ask the Library for this chapter.Abstract: In this chapter, the design and implementation of financial regulation where market failures are created by asymmetric information between investors and firms is investigated. It is argued that reputation, while providing some correction for imperfect information, should be supplemented by financial regulation. Two regulatory tools are focused on: direct penalties and capital requirements (where capital includes all assets that can be appropriated by the regulators and those whose value is extinguished in case of revealed misconduct). It is found that capital requirements have an advantage over penalties when there is a relation between firms' quality and their capital. Capital requirements will, however, be more onerous where there is a close relation between capital and quality and when there is less precision in imposing penalties. Next, an analysis is made of whether self-regulatory organizations have adequate incentives to implement regulation
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In this chapter, the design and implementation of financial regulation where market failures are created by asymmetric information between investors and firms is investigated. It is argued that reputation, while providing some correction for imperfect information, should be supplemented by financial regulation. Two regulatory tools are focused on: direct penalties and capital requirements (where capital includes all assets that can be appropriated by the regulators and those whose value is extinguished in case of revealed misconduct). It is found that capital requirements have an advantage over penalties when there is a relation between firms' quality and their capital. Capital requirements will, however, be more onerous where there is a close relation between capital and quality and when there is less precision in imposing penalties. Next, an analysis is made of whether self-regulatory organizations have adequate incentives to implement regulation

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