Regulation

• Regulation - some countries have central banks as regulators to ensure financial institutions aren't partaking in risky activities leading to a collapse
• FSCS (Regulator):

  • provides an £85,000 deposit insurance for the consumer if the bank goes bust/runs out of money
• Asymmetric information - when one party has more information than the other, preventing one from making a rational decision
• Externalities - the cost that third parties pay that the financial market does not pay eg. taxpayers after 2008
• Market Bubble - when the price of assets rise hugely, then fall usually a result of herd behaviour
• Market rigging - where a group collude to fix prices or limit supply
• Insider trading -

  • eg. Martha Stewart sold 4 thousand ImClone shares a day before the stock plummented
• Regulatory capture - when the regulators are influenced to be biased as they are related in the industry (friend, ex-worker)
• Financial Policy Committee (FPC) - Macro prudential regulator:

  • Identify, monitor and protect against systemic risk (Stress testers)
  • Instruct PRA & FCA in tackling stability issues
  • Advise governments on bailouts
• Prudential Regulation Authority (PRA) - Micro prudential regulator:

  • Maintain stability of banks
  • supervise management of risky deals
  • industry standards are set
  • specify ratios
• Finanical Conduct Authority (FCA) micro/gov run by the Treasury

  • Protect consumers & increase confidence
  • ensure conduct of business are legal - no market rigging
  • there is competition in the market - deregulation
  • Banning misleading adverts for financial products - loan sharks
• Deregulation - Too much regulation is unnecessary and can reduce competitiveness of an industry