Presentation Summary #6
Colin MAYER Said Business School, University of Oxford
Most academics believe that investor protection is key to financial development and economic growth. This assertion is based on the notion that investor protection is critical to the willingness of minority investors to participate in the financing of corporations. The policy prescription from this view would be to strengthen investor protection, and development will follow.
The spirit of the prevailing economic paradigm of the day is this: if there is a problem, regulate it. No sound economist could dispute the importance of regulation in financial markets. The preeminence of investor protection pervades most current financial market policy proposals. In Europe, there are proposals to introduce a range of new regulatory standards to promote financial market integration. The European Commission believes that the breakdown of barriers to a market in corporate control is a fundamental requirement for the establishment of an integrated European financial market.
These policies come at a price. The most serious risk of financial regulation is not the cost that it imposes on investors and financial institutions but its effect on corporations and the rest of the economy. Regulation threatens diversity and innovation in financial institutions and systems. This is a particular concern in relation to regulation at an international level. There is a natural inclination for regulators to favour harmonization. Not only is it tidier and avoids "runs to the bottom" but it also allows best practice from one regime to be imposed elsewhere.
And therein lies the heart of the problem. While regulations often seek promote perceived best practices, another view is that best practice varies across countries, time and activities. What is suited to one economy is quite different from another. What is suited to one firm is quite different from another.
So, I would warn against the current trend to see salvation in regulation. Instead, I suggest that we should think about the real sources of market failure in financial markets and target regulation very specifically at those. Critical to this is information disclosure and transparency.
