1. Chapter 20 Learning Objectives The key factors in influencing the type of government regulation The main issues facing regulators today The dominant types of regulation One size does not fit all in regulatory matters

2. Chronology of Recent Changes

3. Guiding Principles in Government Regulation Fills a gap that can be left by the operation of unfettered market forces as in Contagion effects of bank failures Ensures the safety of the financial system via Prudential requirements Promotes efficiency of the financial system Encourages competition in the market place Promotes social goals such as ensuring the existence of domestic banks

4. Leveling the Playing Field Regulation is a cyclical phenomenon Forces of regulation are usually aimed at leveling the playing field among competitors. These forces include: Technological change Globalization and consolidation Improvements in payments and settlement systems Frequency of regulatory reform Jurisdictional issues Demographics Corporate governance

5. What has happened to Asymmetric Information? Technological change has reduced the size and incidence of asymmetric information Technological change also forces regulators to rethink how they regulate the financial sector to deal with changes in information BIS capital convergence requirements Consolidation of supervisory functions Ownership rules and merger restrictions

6. Ownership Rules and Restrictions: The U.S. versus Canada Bank Holding Companies Permitted ? USA (yes)Canada (NO until 2002) Universal banking Permitted? USA (unrestricted)Canada (restricted) Competition from Foreign Banks? USA (significant)Canada (small) Banking Industry Concentration? USA (low)Canada (high)

7. Forms of Government Regulation Self-Regulation Canadian Bankers’ Association Corporate Governance Institutional Regulation Banks versus near-banks, insurance cos.,… leads to the “pillars” approach to regulation Provincial versus Federal Institutions Functional Regulation Safety and soundness of business practices Market conduct conducive to competition Protection of consumers’ interests (avoidance of self- dealing)

8. Existing Regulatory Barriers in the US and Canada Form of Regulation CanadaUSA Interest rateNone Type of activitySomeNone Barriers to entrySomeFew Ownership restrictions SomeNone Int’l activitiesNone

9. Summary Regulations follow a set of guiding principles Regulatory activity in Canada has been geared toward leveling the playing field Asymmetric information problems remain but require new regulatory responses The forms of regulation are: self-regulation, institutional and functional