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Financial integration across borders and across sectors: implications for regulatory structures

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image for OpenScout resource :: Financial integration across borders and across sectors: implications for regulatory structures

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This paper considers the generic processes and linkages that comprise financial intermediation -the basic "financial hydraulics" that ultimately drive efficiency and innovation in the financial system and its impact on real-sector resource allocation and economic growth. It goes on to document some of the structural changes that have occured in both national and global financial systems, and suggests how the microeconomics of financial intermediation work. These can have an enormous impact on the industrial structure of the financial services industry and on individual firms. Sequentially, financial channels that exhibit greater static and dynamic efficiency have supplanted less efficient ones. Competitive distortions can retard this process, but they usually extract significant economic costs and at the same time divert financial flows into other venues, either domestically or elsewhere. We next examine the consequences of this process in term of financial sector reconfiguration, both within and between the four major segments of the industry (commercial banking, securities and investment banking, insurance, and asset management) as well as within and between national financial systems. The paper then superimposes key regulatory overlays onto the basic economics and facts of reconfiguration in financial intermediation. This is a "special" industry, due both to the imbedded systemic risks and its fiduciary nature. Balancing financial efficiency against stability and fairness is not easy. The economics of financial intermediation are highly regulation-sensitive, so small changes in regulation can create important changes in markets. Regulators inevitably make some mistakes, and regulatory mandates are unusually contentious and vulnerable to entrenched economic interests. The final section of the paper considers the linkages between structural change in financial intermediation and supervisory and regulatory functions, including some comparisons between US and European legacies and prospects.

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en

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application/pdf

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http://flora.insead.edu/fichiersti_wp/inseadwp2001/2001-30.pdf

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Copyright INSEAD. All rights reserved