Chapter 3 The Role of the Government in Financial Markets

Justification for Regulation zEconomic Activity zPerfectly Competitive Markets yMarket efficiency yLow-cost production zMarket Failure

Purposes of Regulation zPreventing Fraud by Securities Issuer zPromoting Competition and Fairness in Trading Securities zPromoting Stability of Financial Institutions zRestricting Foreign Activities in Domestic Market zControlling Level of Economic Activity

Forms of Regulation zDisclosure Regulation zFinancial Activity Regulation zRegulation of Financial Institutions zRegulation of Foreign Participants zBanking and Monetary Regulation

Regulation in the U.S. zDisclosure Regulation yThe Securities Act of 1933 yThe Securities Exchange Act of 1934 yThe Securities and Exchange Commission (SEC) zFinancial Activity Regulation yNASD yCFTC z Regulation of Financial Institutions yFed yBasle Agreement z Regulation of Foreign Participants yInternational Bank Act of 1978 yBasle Bank for International Settlements

Regulation in Japan zMinistry of Finance zDisclosure Regulation ySecurities Bureau zFinancial Activity Regulation ySecurities Bureau yBank of Japan z Regulations on Financial Institutions z Regulation of Foreign Participation z Role of Bank of Japan

Regulation in Germany zDisclosure Regulation zFinancial Activity Regulation yBond Market yStock Exchanges yTerminbörse z Regulations on Financial Institutions yUniversal Banks z Regulation of Foreign Participation z Role of Bundesbank

Regulation in the U. K. z“Big Bang” zDisclosure Regulation yFinancial Services Act of 1986 zFinancial Activity Regulation yDepartment of Trade and Industry (DIT) ySecurities and Investment Board (SIB) ySecurities Association z Regulations of Financial Institutions z Regulation of Foreign Participation z Role of Bank of England

Motivations for Regulatory Reform zFinancial Crisis yDisintermediation yS&L Crisis yStock Market Crash in October 1987 zFinancial Innovation yDerivative Instruments zGlobalization of World Financial Markets y“Big Bang”