Principles of Financial Regulation

5th July 2016

News

Inadequate regulation of the financial system is widely thought to have contributed to the financial crisis of 2007-9. A new book, co-authored by Wadham Fellow Colin Mayer, sets out a framework within which financial regulation can be analysed, and the financial system can be better protected.

The financial crisis revealed serious failings in the regulation of financial institutions and markets, prompting a fundamental reconsideration of the design of financial regulation that has left the financial system evermore complex and interconnected. It is now clear that regulation must focus on the financial system as a whole. However, this poses significant challenges for regulators and Principles of Financial Regulation seeks to set out how to address those challenges.

Principles of Financial Regulation takes a distinctive, multidisciplinary approach, viewing the subject from a perspective of economics, finance and law, taking a holistic approach, starting from the premise that financial regulation is best understood in the context of an appreciation of the entire financial system.

It describes how the current system of regulation draws a sharp distinction between the regulation of banks and securities markets, said co-author Colin Mayer. This distinction has encouraged financial institutions to exploit differences that exist between the two.  “For example, one of the features of the financial crisis was the emergence of financial institutions that performed similar functions to banks but were not regulated as banks and therefore avoided some of the regulatory implications of being classified as such.  The consequence has been the explosion of what is termed ‘shadow banks’, namely financial institutions that perform banking functions in all but name.  They contributed to the failures that occurred in the financial crisis and could well be the source of future financial crises,” he added.

The volume examines regulation by framing it in terms of what the financial system does, rather than what financial regulation is. International and comparative in nature, Principles of Financial Regulation contrasts approaches, in particular in the EU and US. The book focuses on underlying policies and the objectives of regulation, using specific regulatory measures as examples, thereby providing readers with the opportunity to assess regulatory choices on particular policy issues and encouraging critical reflection on the design of regulation.

The book sets out a series of recommendations for how the regulation of our financial systems should be reformed to make them more robust in the future.  In particular it points to the importance of regulating on the basis of the functions that financial institutions perform rather than their formal institutional designation.  It also discusses the need for regulation to focus more on the macro protection of the financial system as a whole and to be coordinated at an international as well as a national level.  

Published by Oxford University Press, Principles of Financial Regulation is written for a general audience of students, practitioners, policymakers and interested readers as well as academics.

Related links