Table of Contents

Research Handbook on International Banking and Governance

Research Handbook on International Banking and Governance

Elgar original reference

Edited by James R. Barth, Chen Lin and Clas Wihlborg

The contributors – top international scholars from finance, law and business – explore the role of governance, both internal and external, in explaining risk-taking and other aspects of the behavior of financial institutions. Additionally, they discuss market and policy features affecting objectives and quality of governance. The chapters provide in-depth analysis of factors such as: ownership, efficiency and stability; market discipline; compensation and performance; social responsibility; and governance in non-bank financial institutions. Only through this kind of rigorous examination can one hope to implement the financial reforms necessary and sufficient to reduce the likelihood and severity of future crises.

Chapter 17: The Boundary Problems in Financial Regulation

Charles A.E. Goodhart and Rosa M. Lastra

Subjects: economics and finance, money and banking


Charles A.E. Goodhart and Rosa M. Lastra* 17.1 INTRODUCTION As with territorial waters and the exclusive economic zone in fishing disputes between countries, where you draw the line of regulation, protection and government assistance is contentious. Calls either to widen the net of regulation (and related protection) or to limit protection, for example to some set of ‘narrow banks’, have proliferated in response to the crisis.1 The dichotomy between international (global) markets and institutions and national rules, exposing the limitations of the principle of national sovereignty, is a major challenge in the design of effective financial regulation. From the point of view of governance, the first boundary problem can contribute to more complex organizational structures, increasing the opacity of the financial system. The second issue may affect the location of different financial activities and the structure of the financial sector in different countries, also adding a layer of complexity to the governance of financial institutions. 17.2 FIRST BOUNDARY PROBLEM: THE ‘PERIMETER ISSUE’, THE DISTINCTION BETWEEN REGULATED AND NON-REGULATED (OR LESS REGULATED) ENTITIES The first boundary problem was examined at some length in the National Institute Economic Review (2008)2 and in the Appendix to the so-called Geneva Report (2009),3 focusing on cases where the non-regulated can provide a (partial) substitute for the services of the regulated.4 The unregulated frequently depend on services, such as payment services, and on back-up lines of credit from the regulated. In the build-up to the crisis, there are plenty of examples of unregulated entities...

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