Hong Kong Financial Regulations For Housing
Introduction:
Financial regulations markets today are the biggest markets in the world. The foreign exchange market turns over US$1.2 trillion daily, roughly one quarter of annual world exports. The regulation of financial markets therefore concerns us all. This paper covers the What, Why, Who and How of financial regulation. Financial markets engage in the exchange of property rights. Financial assets are derivatives of physical or real assets, derivatives being property rights of property rights that are not “lumpy” or asset specific, and transactions costs in them being lower than transactions in real assets.
What is Financial Regulations?
The Palgrave Dictionary of Finance defines Financial regulations as action that ‘command and control’ the individual decisions of firms, in an effort to prevent private decision-making that would take inadequate account of the ‘public interest’. Regulation may be self-imposed, or as is usual, by a third party. The Government may intervene in a market or industry in the form of law, administrative rules, taxation or moral suasion. Self-regulation could be imposed through industry associations and codes of conduct.
Why Financial Regulations?
There are a few theories that attempt to explain the existence and forms of regulation, including:
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the competition for regulation theory suggests that there exists a market for regulation, in which consumers and producers compete. Regulation will serve the interests of those who are willing to offer the most for the regulation. Since regulation can be regarded as a public good, the free-rider problem suggests that the benefit to the individual consumer is likely to be small relative to the producer. Therefore producers will have more incentive to try and obtain favourable regulation through industry associations. A countervailing force is therefore the consumer lobby; and
capture theory suggests that producers capture regulatory agencies and control them in their own interests. Vested interests reinforce the regulatory framework to support their interests, but the danger is that such behaviour would result in non-competitiveness in the international market, leading to long-run social loss
What are we regulating?
We can regulate products, functions or institutions or a combination of all three. Problems arise when we have overlapping regulatory terrain, competing regulatory agencies and confused regulatory objectives. There are also arguments for and against the concentration and competition in regulatory agencies. A good example of a one-stop regulatory agency is the Monetary Authority of Singapore, which combines the regulation of the banking system, the securities market and the insurance industry in one institution. At the other end of the spectrum, the US banking sector is regulated by at least four different agencies, the Federal Reserve system, the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC) and the state banking commissioners.
Approaches to Financial Regulations:
The latest mantra on financial regulations is the International Monetary Fund’s approach, which calls for “Internal Governance, Official Oversight, and Market Incentives”.
The first line of protection against bank failure must be internal management’s own risk controls. The growing complexity and variety of banking business suggests that neither the authorities nor informed customers can prevent internal management from making mistakes if internal controls do not work. The best defense against mistakes and fraud are proper internal governance, or checks and balances. Internal dual controls, together with both internal and external auditors, plus a proper disclosure policy would give the best incentives for internal management to perform according to proper rules of behaviour.
Why are we deregulating?
There are four major reasons why de-regulation is occurring:
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Globalisation
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Financial innovation and disintermediation
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Changing consumer behaviour, e.g. aging population
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Excessive costs
Should the Central Bank also act as the Supervisor?
There are several arguments in support for the assumption of supervisory role by the central bank. The first is efficiency consideration. There is huge overlap between the areas of interest of, and information required by, and available to, both the supervisor and the central bank. Second, rescue or liquidity crisis will normally involve and require the immediate provision of liquidity, which can only be done by the central bank. This is facilitated by internalizing the supervisory body within the central bank.
Conclusion:
Financial Regulations is an art, not a science. It involves complicated trade-offs between competing interests. As Walter Bagehot said over 120 years ago, money will not manage itself. The regulation of money will be debated in the years to come.