Table of Contents

The Financial Crisis and the Regulation of Finance

The Financial Crisis and the Regulation of Finance

Edited by Christopher J. Green, Eric J. Pentecost and Tom Weyman-Jones

The 2007–08 financial crisis has posed substantial challenges for bankers, economists and regulators: was it preventable, and how can such crises be avoided in future? This book addresses these questions. The Financial Crisis and the Regulation of Finance includes a comprehensive overview of the crisis and reviews the theory and practise of regulation in the UK and worldwide. The contributors – all international experts on financial markets and regulation – provide perspectives and analysis on macro-prudential regulation, the regulation of financial firms, and the role of shareholders and disclosure.

Chapter 4: Economic Evidence and Financial Regulation

Peter Andrews

Subjects: economics and finance, financial economics and regulation, money and banking


Peter Andrews1 INTRODUCTION This short chapter summarises the main roles of financial regulators and draws attention to the important economic trade-offs that financial regulators have to make. It shows some of the ways in which the UK Financial Services Authority (FSA) has gathered the economic evidence needed to make these trade-offs in an informed way. It identifies an Occasional Paper, written for the FSA by David Llewellyn soon after the FSA was established, as an important catalyst for the FSA’s ground-breaking work in this area. It sets out the statutory context for using economic evidence in UK financial regulation and summarises the concepts laid down in the Occasional Paper. It then describes the FSA’s use of these concepts in its own approach to the economics of financial regulation. It briefly discusses criticisms of the FSA’s approach and a few of the results obtained by the FSA from using it. It identifies the further challenges that lie ahead if the FSA is to continue to improve the quality of its decisions by learning more about the interactions between financial regulations and financial markets that determine whether or not regulation is beneficial in practice. THE TRADE-OFFS FACING FINANCIAL REGULATORS: WHY THEY NEED ECONOMIC EVIDENCE Financial regulators face extremely difficult choices. Typically, financial regulation involves mandating prudential standards for financial firms, rules for market conduct and disclosures to be made to consumers. The first of these activities aims mostly to combat the negative externalities of firms’ failure.2 The third aims mostly to reduce...

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