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GFDR 2013: The State as Regulator and Supervisor

GFDR 2013 Report

Chapter 2. The State as Regulator and Supervisor

Chapter Highlights

  • Financial sector regulation and supervision are areas where the role of the state is not in dispute; the debate is about how to ensure that the role is carried out well.
  • A key challenge of regulation is to better align private incentives with public interest, without taxing or subsidizing private risk taking. Supervision is meant to ensure the implementation of rules and regulations. It needs to harness the power of market discipline and address its limitations.
  • The financial crisis underscored limitations in supervisory enforcement and market discipline. It emphasized the importance of combining strong, timely, anticipatory supervisory enforcement with better use of market discipline. It also highlighted the importance of basics—solid and transparent legal and institutional frameworks to promote financial stability. In many developing economies that means that building supervisory capacity needs to be a priority.
  • Useful lessons can be learned by analyzing regulation and supervision in economies that were at the epicenter of the global financial crisis and those that were not. A new World Bank global survey, presented in this chapter, suggests that economies that suffered from the crisis had weaker regulation and supervision practices as well as less scope for market incentives than the rest.
  • This chapter reviews progress on regulatory reforms at the global and national levels, and identifies advances made so far. Tracking changes during the crisis reveals that countries have stepped up efforts in the area of macroprudential policy, as well as on issues such as resolution regimes and consumer protection. However, the survey suggests that there is further scope for improving market discipline, namely disclosures and monitoring incentives.
  • The financial crisis has triggered a healthy debate on approaches to regulation and supervision among regulators, policy makers, and academics, leading to multiple proposals for further reforms. These proposals aim to limit regulatory arbitrage and make better use of regulatory resources. Common themes of these proposals are calls for more transparency and simpler regulation to enhance accountability, as well as for more proactive efforts to identify and address incentive problems.

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