Research Discussion Papers, Bank of Finland
Regulatory choices in global financial markets – restoring the role of aggregate utility in the shaping of market supervision
Abstract: In financial market studies, public supervision has rarely
been found to have any effects on financial market development. This is
true, even though the primary objective of supervisory legislation is the
limitation of market failures and externalities. Studies conducted by eg
the World Bank and La Porta & al imply that whereas private enforcement
contributes to financial market development, there is limited evidence that
public supervision does the same. The objective of the paper is to
empirically investigate the relation between public supervision and
financial market development. This is done by focusing on major legislative
features directing the supervisor and hence affecting market participant
activities. The markets investigated comprise banks, investment firms,
investment fund companies and listed companies in the United States, United
Kingdom, Sweden, Finland, Poland and Estonia for the years 1996 to 2005.
The results suggest that certain features of public supervision correlate
with financial market development. Strong legal obligations for the
supervisor to develop legislation correlate significantly with higher
company market values. Emphasizing economic aspects in the formulation of
supervisory objectives corresponds with higher market profitability.
Furthermore, severe monetary sanctions applicable to company directors
correlate negatively with market growth. Unexpectedly, the same is true for
a high degree of supervisory independence. The results imply links between
public supervision and financial market development in a manner not always
in line with previous research. Why this is the case, requires further
investigation. One possible explanation may be methodological, based on the
fact that in the present study legislative features are perceived in a
conceptual rather than a technical manner.
Keywords: financial institution; regulation; supervision; utility; (follow links to similar papers)
JEL-Codes: G28; K23; O16; (follow links to similar papers)
36 pages, January 1, 2008
Before downloading any of the electronic versions below
you should read our statement on
for viewing Postscript files and the
Acrobat Reader for viewing and printing pdf files.
Full text versions of the paper:
Questions (including download problems) about the papers in this series should be directed to Minna Nyman ()
Report other problems with accessing this service to Sune Karlsson ()
or Helena Lundin ().
Design by Joachim Ekebom