A review and comparison of legislative,regulatory and institutional reform in the US and UK - Essay Example

The regulation of financial markets and its implications have been a topic of considerable interest among researchers and policy makers for a long time.On the one hand, it is argued that the regulation of financial markets has welfare benefits due to the existence of market imperfections On the other hand, it is argued that financial market regulation imposes significant costs to an economy that outweighs the benefits (Benston, 1998).It has been argued that the inappropriate regulatory measures combined with many other factors have resulted in the recent economic crisis.

Given this, essay examines the regulatory, institutional and legislative reforms in US and UK in the pre crisis, crisis and post crisis periods. The main aim is to compare the reforms in these periods and their impact on the capital markets in US and UK. This essay is organized as follows. Section 2 discusses the theoretical arguments regarding regulation, section 3 discusses the reforms in pre crisis period, section 4 discusses the reforms in the crisis period, section 5 discusses the reforms in the post crisis period and section 6 concludes the essay. 2. Theoretical Arguments Financial market regulation is mainly aimed at correcting market imperfection and ensuring allocative efficiency of resources (Giorgio et al, 2000).

Based on these the three main reasons for financial market regulation are identified as (i) ensuring microeconomic and macroeconomic stability (ii) equitable resource distribution and (iii) allocative efficiency of resources. 2.1. . ations on integrity requirements etc and other regulations like portfolio investment limits, regulations on off balance activities etc(Giorgio et al, 2000). 2.2.Equitable Resource Distribution Based on the objective of equitable resource distribution, the financial market regulation is aimed at making the markets and intermediaries transparent and to protect the investors (Giorgio et al, 2000).

In this regard, the measures include takeovers and public offers regulations, regulations of insider trading, manipulation, price discovery mechanisms, which are aimed at equal treatment, and business conduct rules aimed at non-discrimination etc. 2.3. Allocative Efficiency of Resources Based on this objective, the financial market regulation is aimed at enhancing competition among the financial intermediaries through regulating the competitive structure of the markets as well as regulations of concentrations etc (Giorgio et al, 2000).

This view supports competition by arguing that competition helps banks to earn great market share and high efficiency(Demsetz,1973 ). Based on this view, competition and concentration are not in opposite directions. Rather, competition promotes concentration and hence bank efficiency. However, this theory assumes that there are no efficient barriers to entry. According to this view competition increases concentration only if the banks, which have high market share have a special advantage in developing output which are not available to other banks.

In such a case, it leads to increased efficiency of the banks, which have this advantage (Demsetz,1973 ). Here, the profits will not be reduced by competition since it will be very difficult for other banks to overcome the superior performance using their inputs. This is because, in this case, it is not