Regulating Financial Markets: a Critique and Some Proposals

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Financial services, financial firms and financial markets are regulated to a greater extent than most other products and services. In this radical book Professor George Benston provides a comprehensive critique of the justifications for financial services regulation, and provides an innovative proposal for reform.

Executive Summary

Financial services, financial firms and financial markets are regulated to a greater extent than most other products and services. Financial service regulation goes back centuries

It provides benefits to governments (for example, from direct and indirect taxation of banks) and to regulated financial institutions (which gain where entry is restricted).

Consumer protection is a common reason given for financial regulation. But consumers in financial markets are probably less subject to fraud, misrepresentation, discrimination and information asymmetry than consumers of other products.

Concern about 'negative externalities' (costs born by others) is another argument for regulation. However, on examination it is clear there are few genuine externalities.

Regulations on externality grounds is justified only for financial institutions which hold government-insured deposits; for insurance companies which provide government-mandated non-contracting third party insurance ) for instance, for cars); and for companies which underwrite long-term life insurance and annuities.

Financial regulation incurs costs, borne by consumers and taxpayers, which probably exceed the benefits they receive. There are substantial unintended costs (such as reduced div