Financial Market Regulation and Reforms in Emerging Markets

Financial Market Regulation and Reforms in Emerging Markets

MASAHIRO KAWAI
ESWAR S. PRASAD
Copyright Date: 2011
Pages: 423
https://www.jstor.org/stable/10.7864/j.ctt127wz3
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  • Book Info
    Financial Market Regulation and Reforms in Emerging Markets
    Book Description:

    The rapid spread and far-reaching impact of the global financial crisis have highlighted the need for strengthening financial systems in advanced economies and emerging markets. Emerging markets face particular challenges in developing their nascent financial systems and making them resilient to domestic and external shocks. Financial reforms are critical to these economies as they pursue programs of high and sustainable growth.

    In this timely volume Masahiro Kawai, Eswar Prasad, and their contributors offer a systematic overview of recent developments in -and the latest thinking about -regulatory frameworks in both advanced countries and emerging markets. Their analyses and observations clearly point out the challenges to improving regulation, efficiency of markets, and access to the fi nancial system. Policymakers and financial managers in emerging markets are struggling to learn from the crisis and will need to grapple with some key questions as they restructure and reform their financial markets:

    • What lessons does the global financial crisis of 2007-09 offer for the establishment of efficient and flexible regulatory structures?

    • How can policymakers develop broader financial markets while managing the associated risks?

    • How -or should -they make the formal financial system more accessible to more people?

    • How might they best contend with multinational financial institutions?

    This book is an important step in getting a better grasp of these issues and making progress toward solutions that strike a balance between promoting financial market development and efficiency on the one hand, and ensuring financial stability on the other.

    eISBN: 978-0-8157-0490-4
    Subjects: Business, Economics

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. Introduction
    (pp. vii-xiv)
    MASAHIRO KAWAI and ESWAR S. PRASAD

    The global financial crisis has necessitated the reconsideration of even basic principles of financial regulation. Meanwhile, the imperative of financial development remains as strong as ever in emerging markets, although the focus is more on basic elements such as strengthening of banking systems and widening the scope of the formal financial system, rather than sophisticated instruments and innovations. Remarkably, emerging market financial systems have in general proved to be more robust and less affected by the global turmoil compared to their advanced economy counterparts—it will be important to carefully filter out the right lessons from this outcome.

    The crisis...

  4. Part I. Overview
    • 1 Financial Sector Regulation and Reforms in Emerging Markets: An Overview
      (pp. 3-24)
      ESWAR S. PRASAD

      The speed and breadth of contagion from the U.S. financial crisis have dramatically demonstrated the degree to which national economies, developed and developing alike, are intertwined. Initially a problem confined to the U.S. housing market, the rapid spillover of the crisis to the rest of the U.S. financial system and then to the global economy left financial institutions in other advanced economies reeling. The crisis has highlighted the need for substantive regulatory reforms geared toward ensuring the integrity and resilience of financial systems in the advanced economies.

      The macroeconomic consequences of the crisis have also affected emerging markets and other...

  5. Part II. New Perspectives on Financial Regulation
    • 2 Market Failures and Regulatory Failures: Lessons from Past and Present Financial Crises
      (pp. 27-74)
      VIRAL V. ACHARYA, THOMAS COOLEY, MATTHEW RICHARDSON and INGO WALTER

      The severity of the financial crisis of 2007–09 has forced academics, regulators, and policymakers to rethink the contours of the current financial system. Calls for the greatest regulatory overhaul since the Great Depression have become common. Indeed, many observers, including ourselves, view the crisis first and foremost as a regulatory failure and are convinced that the current regulatory architecture—the product of many ad hoc responses to prior crises, and antiquated in the face of the evolving structure and role of financial institutions—is in need of repair. But regulation is a tricky business; the law of unintended consequences...

    • 3 Evaluating the U.S. Plans for Financial Regulatory Reform
      (pp. 75-102)
      DOUGLAS J. ELLIOTT

      The administration has proposed a series of major changes to U.S. financial regulation to respond to the issues raised by the financial crisis. This chapter describes and evaluates those proposals with a particular eye toward their implications for the regulation of finance in emerging market economies. Before going into the specifics of the reform proposals, I start by reviewing the major explanations of the financial crisis, since they affect the choice of remedies, and then discuss the underlying principles of U.S. financial regulation for which there is broad agreement and therefore little pressure for change. In fact, the consensus on...

  6. Part III. Regulatory Frameworks for Emerging Markets
    • 4 Emerging Contours of Financial Regulation: Challenges and Dynamics
      (pp. 105-137)
      RAKESH MOHAN

      In 2008–09 the world experienced the most severe financial and economic crisis since the Great Depression. Although the crisis originated in the subprime mortgage market in the United States, it spread to Europe and later to the rest of the world. The speed of the contagion that spread across the world was perhaps unprecedented. What started off as a relatively limited crisis in the U.S. housing mortgage sector turned successively into a widespread banking crisis in the United States and Europe, the breakdown of both domestic and international financial markets, and then later into a full-blown global economic crisis....

    • 5 What Regulatory Policies Work for Emerging Markets?
      (pp. 138-157)
      LUO PING

      This chapter discusses the banking regulatory and supervisory practices in China with reference to the international standard for banking supervision, namely, the Basel Core Principles for Effective Banking Supervision (BCPs).¹ While China has incorporated many sound practices advocated by the BCPs, there are quite a few areas where significant differences can be observed with respect to qualification review of senior management, broader regulation at the product level, prescriptive rules, and guidance for risk management.

      The findings presented here are intended to further enhance the understanding of the international standard on banking supervision as well as its implementation in emerging markets....

    • 6 Banking Supervision in Indonesia
      (pp. 158-168)
      ANWAR NASUTION

      The focus of this discussion is on the process of building a strong system of financial supervision and regulation in Indonesia.¹ To start with, I believe that the basic principles of risk-focused supervision are highly relevant to emerging economies so as to avoid waste of resources, cost overruns, and inefficient spending in their development efforts. I also believe that a sound supervisory framework should be dynamic and reflect the realities of the financial sector for which it is created. As such, though the best practices in the market-based, advanced economies are an important starting point for considering how to enhance...

  7. Part IV. Financial Market Development and Stability
    • 7 Who Should Regulate Systemic Stability Risk? The Relevance for Asia
      (pp. 171-202)
      MASAHIRO KAWAI and MICHAEL POMERLEANO

      A review of past crises suggests that there were almost always policy mistakes leading to financial vulnerabilities, systemic risks, and eventually financial crises. Often these past crises were slow to unfold. In the case of the United States’ subprime loan crisis, incipient signs of a crisis appeared in the summer of 2007. Bear Stearns collapsed in the spring of 2008. The crisis could have been spotted in its early stages. So the questions are: What is needed to prevent a systemic crisis? Who should have the responsibility to do this? How should a country establish such an arrangement to forestall...

    • 8 Financial Development: A Broader Perspective
      (pp. 203-225)
      RICHARD REID

      Although the latest bout of financial turmoil has sparked renewed interest in the desirability of financial development, and the optimal size and structure of the financial system, the debate over the relationship between financial development and economic growth has, of course, been active for many years. This topic has been of intense relevance for emerging economies, particularly against the backdrop of increased capital flows in recent years. Exposure to high capital flows carries both potential benefits and risks, and the ability to deal with these flows successfully will depend partly on the level of sophistication of the domestic financial system....

    • 9 Financial Development in Emerging Markets: The Indian Experience
      (pp. 226-262)
      K. P. KRISHNAN

      It is broadly recognized in economic literature that efficient and developed financial markets can lead to increased economic growth by improving the efficiency of allocation and utilization of savings in the economy. Better functioning financial systems ease the external financing constraints that impede firm and industrial expansion. There is a growing body of empirical analyses, including firm-level studies, industry-level studies, individual country studies, and cross-country comparisons, that prove this strong, positive link between the functioning of the financial system and long-term economic growth. Specifically, financial systems facilitate the trading, hedging, diversifying, and pooling of risk. In addition, they better allocate...

  8. Part V. Improving Financial Access in Emerging Markets
    • 10 Universalizing Complete Access to Finance: Key Conceptual Issues
      (pp. 265-283)
      SUYASH RAI, BINDU ANANTH and NACHIKET MOR

      A household’s financial life can be seen as a combination of exposure to time and contingent states. Financial wealth can be seen as a combination of assets that are currently owned and the present value of future income discounted at an appropriate risk-adjusted rate. Financial services must help a household manage and increase its consumption smoothly and fully utilize its human capital, financial capital, and other resources to improve its well-being. There are, therefore, two core functions that the financial system has to fulfill for each and every household: first, management of risk by movement of resources across contingent states,...

    • 11 Financial Inclusion and Financial Stability: Current Policy Issues
      (pp. 284-318)
      ALFRED HANNIG and STEFAN JANSEN

      The recent financial crisis has shown that financial innovation can have devastating systemic impacts. International standard setters’ and national regulators’ response has been a global concerted effort to overhaul and tighten financial regulations. However, at a time of designing stricter regulations, it is crucial to avoid a backlash against financial inclusion.

      In this chapter, we argue that greater financial inclusion presents opportunities to enhance financial stability. Our arguments are based on the following insights:

      Financial inclusion poses risks at the institutional level, but these are hardly systemic in nature. Evidence suggests that low-income savers and borrowers tend to maintain solid...

  9. Part VI. Cross-Border Regulation: Current Policy Issues
    • 12 Cross-Border Regulation after the Global Financial Crisis
      (pp. 321-364)
      ALEJANDRO WERNER and GUILLERMO ZAMARRIPA

      This chapter is about contagion among financial systems in a world that is global and interconnected. It argues that contagion effects from the recent financial crisis will have direct implications for reshaping the regulatory and supervisory framework.

      The period of financial and economic expansion prior to the subprime crisis was underpinned by low real interest rates and excess liquidity, which facilitated robust global economic growth. Such expansion was accompanied by high leverage, excessive risk taking, and a greater openness of financial sectors to foreign investment. This contributed significantly to a more interconnected global system, thereby increasing the likelihood of contagion...

    • 13 Addressing Private Sector Currency Mismatches in Emerging Europe
      (pp. 365-406)
      JEROMIN ZETTELMEYER, PIROSKA M. NAGY and STEPHEN JEFFREY

      The 2008–09 financial crisis has highlighted the problems associated with currency mismatches on the balance sheets of emerging market borrowers, particularly in emerging Europe. Currency mismatches aggravated the crises in countries with large currency depreciations, such as Hungary and Ukraine, complicated the crisis response, and induced highly contractionary macroeconomic policies in countries that defended their pegs, such as Latvia.

      As a result, the question of how these economies can better manage their foreign exchange (FX) risk—or even “de-dollarize”—is again receiving much attention in the ongoing policy debate.¹ It also has begun to translate into tougher regulation. For...

  10. Contributors
    (pp. 407-408)
  11. Index
    (pp. 409-424)
  12. Back Matter
    (pp. 425-426)