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2 the challenges for financial regulation the global

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2.The challenges for financial regulationThe (global) developments in financial services industries have generally led to improvedoutcomes in terms of more efficient financial services provision, greater diversity offinancial services, and greater access to financial services.Economiesconsumers andfirms alikehave greatly benefited.Yet, these developments are also leading to newchallenges facing financial sector regulators and other policy makers.These challengesrelate in large part to financial stability as new, possibly systemic risks arise.Stability is,however, not the only concern of policy makers. New issues also have come up in termsof making financial markets function properly, in the sense of delivering the best possiblefinancial services at the lowest cost to an as wide as possible set of consumers.For both stability and efficiency purposes, there has consequently been a parallel trend toadapt regulations and adopt new regulations in some areas (”re-regulation”) to assurewell-functioning financial systems and markets.The design and applicability of thesenew regulations have been subject to many discussions. Issues arising have been various,but include: the overall approach to financial sector regulation and supervision in light ofchanges in the special nature of banks; competition policy in financial intermediation;consumer protection; the costs of regulation; and further harmonization of rules andpractices. I will discuss these issues in turn, focusing in the next section more specificallyon the issues facing developing countries.
82.1 Overall approach and the (special) role of banks.Liberalization has meant thatbanks and other financial institutions have moved from being under close control withlittle competition to having to satisfy minimum prudential standards with more generalsupervisory oversight and enforcement of good internal risk management practices.Inmost countries and circumstances, these approaches have led to greater stability; in mostdeveloped countries banks and other financial institutions have been able to withstandseveral large shocks over the last decade (e.g., the late 1990s’ global financial crises, thebursting of the internet bubble) relatively unscathed.Yet, in the first earlier phases ofliberalization and in both developed and developing countries, liberalization hascontributed to vulnerabilities and even led to financial crises.Some of this was asfinancial markets’ participants and supervisors only slowly “learned” the new world, butsome was also due to ill-designed financial liberalization efforts.More recently, some(near systemic) financial crises have been triggered by failures of non-bank financialinstitutions, such as hedge funds and large corporations engaged in financial transactions,showing that risks can easily arise from (or migrate to) subsectors falling outside thetraditional financial system.

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