Supervision and Regulation of Financial Firms

Thomas H. Stanton

in Why Some Firms Thrive While Others Fail

Published in print July 2012 | ISBN: 9780199915996
Published online September 2012 | e-ISBN: 9780199950324 | DOI:
Supervision and Regulation of Financial Firms

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Chapter 7 looks at organization and management of financial supervisors. The Gramm-Leach-Bliley Act of 1999 reflected deregulatory sentiment and left serious gaps in the regulatory system. The apparently benevolent period of the early 2000s, when it did not seem easily possible for financial institutions to make serious mistakes, lulled not only financial firms and rating agencies, but also policy makers and supervisors into complacency. Supervisors were reluctant to bring enforcement actions against firms that appeared to be so profitable. Supervisors often were unable or unwilling to set limits when firms engaged in regulatory arbitrage, especially to avoid capital requirements. Informal prodding was the approach of choice for supervisors who feared that a supervised firm might move to another supervisor that seemed more congenial. If a supervised firm left to another regulator, the agency losing jurisdiction over the firm would lose budget resources. Interagency cooperation to set limits on risky practices was difficult and meant that interagency guidance often was weak and late.

Keywords: financial supervision; regulatory arbitrage; Gramm-Leach-Bliley Act; capital requirements; interagency guidance; risky practices; enforcement; guidance

Chapter.  12103 words.  Illustrated.

Subjects: Financial Markets

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