This is a complete summary of all lectures of the course Financial Sector Regulation, taught at the VU Amsterdam. I passed the exam with a 9.3 by learning my summary from heart.
• Analyse the rationale, main contents and (un)intended incentive effects of key parts of
financial regulation.
• Navigate the EU single rulebook/analyse specific topics in different areas of financial sector
regulation
The setup of all lectures in the course is shown below:
In essence there is an interplay between technology and regulation. Technological developments and
innovations spur new financial regulation and vice versa.
The single rulebook is a reaction to the observation that there was a lot of fragmentation in
regulation and that regulation generally lags behind other developments. It was implemented to
alleviate these aforementioned aspects and develop a faster and more effective regulatory process.
The idea is to put the main regulation, generally EU regulation and directive in basic acts at level 1
(see below) and more technical regulation in the implementing acts/technical standards at level 2.
Additionally, three EU supervisory authorities were tasked with drafting guidelines and
recommendations on the legal acts in level 3. These three levels comprise the ‘single rulebook’.
,The paper by Enria (2015) functions as a comment on the functioning of the single rulebook and
some of the conclusions drawn in the paper are shown below:
Often there are standard setting bodies whose actions/discussions precede the incorporation into EU
law. Think of: the Financial Stability Board (FSB), Basel Committee on Banking Supervision (BCBS),
International Association of Insurance Supervisors (IAIS), International Organization of Securities
Commissions (IOSCO) and Financial Action Task Force (FATF).
In general all financial market regulation can be traced back to a market failure. In this event, the
market does not function optimally and regulation is required to make it function optimally. Some
examples of market failures are shown below:
, The representation hypothesis builds on the fact that, in general deposit holders are not incentivized
to monitor their banks, due to for example deposit guarantee schemes. This is also caused by the fact
that monitoring financial institutions is complex, expensive and time consuming. Therefore there is a
need for private or public representatives of depositors. This also explains why it is often the case
that retail investors are subject to financial regulation (since they have less capacity/incentives to
monitor the financial institutions).
Externalities consider the externals costs that come from certain actions that are not carried by the
agent carrying these actions out. Think of a financial institution whose failure might affect the
stability of the entire financial system. This could lead to several types of externalities, such as:
informational contagion, loss of access to future funding for the failed bank’s customers,
interconnectedness between banks, fire sales and restricting credit.
Asymmetric information issues are generally tackled with micro prudential supervision (on each
individual financial institution) and externalities are generally tackled with macroprudential
supervision (on the entire financial system and its interconnectedness). The objectives per type of
regulation are shown below:
Lecture 2: Banking Regulation
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