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Principles of Financial Regulation$
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John Armour, Dan Awrey, Paul Davies, Luca Enriques, Jeffrey N. Gordon, Colin Mayer, and Jennifer Payne

Print publication date: 2016

Print ISBN-13: 9780198786474

Published to Oxford Scholarship Online: October 2016

DOI: 10.1093/acprof:oso/9780198786474.001.0001

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The Limits of Financial Regulation

The Limits of Financial Regulation

(p.80) 4 The Limits of Financial Regulation
Principles of Financial Regulation

John Armour

Dan Awrey

Paul Davies

Luca Enriques

Jeffrey N. Gordon

Colin Mayer

Jennifer Payne

Oxford University Press

chapter explores a range of limitations on what we might realistically expect financial regulation to achieve. The financial system is very complex, and changes rapidly. Regulators must distinguish between valuable innovations and those that merely reflect regulatory arbitrage by firms. Unfortunately, large financial firms have far greater resources to understand the financial system than do regulators. The political economy of regulation is also problematic. Politicians pursuing policies popular with voters are at best disinterested and sometimes even opposed to regulation where it would slow short-term economic growth. When things go wrong, voters care about financial regulation, and politicians become energized, but the resulting legislation may be wide of the target. Nevertheless, these limitations do not preclude beneficial changes in financial regulation. The chapter concludes by considering two examples in the post-crisis milieu, namely the shift to macroprudential oversight, and the inauguration, at the international level, of the FSB.

Keywords:   financial regulation, political economy, regulatory arbitrage

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