Chapter 5
Regulations of Financial
Systems
1
Overview of Financial
Regulation
Financial regulation is a form of
regulation or supervision, which
subjects financial institutions and
markets to certain requirements,
restrictions and guidelines, aiming to
maintain the integrity of the financial
system.
This may be handled by either a
government or non-government
organization.
2
Cont’d
Regulations of financial systems differ
from one country to another.
The financial regulations are defined by
the government authorities of different
countries.
The principal objective of these
government authorities is to regulate
the financial activities going on in the
country.
3
Cont’d
The financial regulatory bodies control
the stock markets, bond markets, foreign
exchange markets, and various other
segments of financial markets and
financial institutions.
The financial regulations are laid out for
the purpose of creating a fair and
customer-friendly environment in the
financial market of a particular country,
which is conducive for economic growth.
4
Cont’d
Some of the examples of financial
regulatory bodies are:
National bank of Ethiopia
Federal Reserve Bank & Securities and
Exchange Commission (SEC) in the United
States
Reserve Bank of India (RBI),
Securities and Exchange Board of India
(SEBI),
Financial Services Authority (FSA) in the
United Kingdom, and many others
5
Why regulation?
prevent issuers of securities from
defrauding investors by concealing
relevant information
promote competition and fairness in
the trading of financial securities
promote stability of financial
institutions
restrict activities of foreign concerns
in domestic markets and
institutions
control the level of economic activity
6
Objectives of The Regulatory Bodies
The statutory objectives of the regulatory
bodies include the following:
Market confidence: Sustaining
confidence in the financial markets is
one of the most important objectives of
the financial regulatory bodies
Consumer protection: Ensuring the
most suitable level of customer
protection
7
Cont’d
Public awareness: Encouraging public
awareness about the financial market
through imparting educational
programs
Eliminating financial crime: The
financial regulations are designed for
the purpose of reducing financial
crimes and frauds
8
Regulatory Principles
The regulatory principles that are followed
by the regulators of financial system
include:
Role of management: Regulatory
measures on the senior management of
the financial institutions so that they do
not take decisions that are harmful to the
financial market
9
Cont’d
Innovation: Innovation should be
facilitated with restriction so that the
financial products and services launched
are compliant to the rules and regulations
International aspects: Strict monitoring
should be there to see whether the
international standards are maintained or
not
Efficiency and economy: The financial
resources of a country should be used in
the most prudent and effective way
10
Cont’d
Proportionality: The financial regulations
that are imposed should be proportional to
the advantages that are anticipated from
the regulations
Competition: There should be strict
supervision on the financial market for the
purpose of minimizing harmful effects of
competition.
11
Aims of regulation
The specific aims of financial regulators
are usually:
To enforce applicable laws
To prosecute cases of market misconduct,
such as insider trading
To license providers of financial services
To protect clients, and investigate
complaints
To maintain confidence in the financial
system
12
Designing a System of Financial Regulation
Five Steps to Reform
1. Assess the strengths and weaknesses of the
financial system
2. Determine the desired future shape of the
system
how flexible?
how open?
3. Assess compliance with international standards
4. Review the structural options
5. Map them against local market conditions
13
Authority by Country
The following is a short listing of
regulatory authorities in various
jurisdictions:
United States;
◦ U.S. Securities and Exchange Commission (SEC)
◦ Commodity Futures Trading Commission (CFTC)
◦ Federal Reserve System ("Fed")
◦ Federal Deposit Insurance Corporation (FDIC)
◦ Office of the Controller of the Currency (OCC)
◦ National Credit Union Administration (NCUA)
◦ Office of Thrift Supervision (OTS), USA
14
Cont’d
Financial Services Authority (FSA), UK
Financial Services Agency (FSA), Japan
Federal Financial Supervisory Authority (BaFin),
Germany
Autorité des marchés financiers (France) (AFM),
France
Monetary Authority of Singapore (MAS), Singapore
Swiss Financial Market Supervisory Authority
(FINMA), Switzerland
Commissione Nazionale per le Società e la Borsa
(CONSOB), Italy
Autoriteit Financiële Markten (AFM), Netherlands
15
Cont’d
People's Republic of China
◦ China Securities Regulatory Commission (CSRC)
◦ China Insurance Regulatory Commission (CIRC)
◦ China Banking Regulatory Commission (CBRC)
Comissão de Valores Mobiliários (CVM),
Brazil
Canada
◦ Investment Dealers Association of Canada (IDA)
◦ Office of the Superintendent of Financial Instituti
ons
(OSFI)
16
End of Chapter
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Financial markets and Institutions 17
