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. The regulatory framework will shape market behaviour. Therefore, the design and practice of the regulatory framework determines the efficiency and performance of the regulated market. Why Regulations? There are a few theories that attempt to explain the existence and forms of regulation, including: - 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 BIS Review 55/1997  -2-  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.

References: Bank for International Settlements, “Report on Financial Stability in Emerging Market Economies”, April, 1997 Bullock, Alan, Stallybrass Oliver and Trombley Stephen, The Fontana Dictionary of Modern Thought, Fontana Press, 1988 Commonwealth of Australia, “Financial System Inquiry: Final Report Overview” - the Wallis Report -, Australian Government Publishing Service, March 1997 Dale, Richard, Regulating the New Financial Markets, Proceedings of a conference “The Future of the Financial System” held at the H.C. Coombs Centre for Financial Studies, Kirribilli on 8/9 July 1996, Economic Group, Reserve Bank of Australia Davies, Howard, Market and Regulatory Structures in a Global Environment, speech at the Federal Receive Bank of Atlanta’s Financial Markets Conference, February 1997 Goodhart, Charles, Some Regulatory Concerns, LSE Financial Market Group, An ESRC Research Centre, Special Paper No. 79, December 1995 Greenspan, Alan, Remarks at the Spring Meeting of the Institute of International Finance, Washington DC, April 1997 Hoenig, Thomas M., “Rethinking Financial Regulation”, Federal Reserve Bank of Kansas City, Economic Review , Second Quarter 1996, Vol.81, No.2  BIS Review 55/1997  -9-  Lindgren, Carl-Johan, Gillian Garcia, and Matthew I. Saal, “Bank Soundness and Macroeconomic Policy”, International Monetary Fund, Washington, DC , 1996 Sheng, Andrew, “Bank Restructuring: Lessons from the 1980s”, World Bank, 1996 Sheng, Andrew, “Managing Derivative Market Risks”, Hong Kong Monetary Authority, January, 1997 The Palgrave Dictionary of Economics Footnote: I am grateful to Carmen Chu for research assistance in the preparation of this paper and to Raymond Li and Osbert Lam for useful comments. BIS Review 55/1997