Special Edition-07.pdf - Lahore School of Economics

100
Muhammad Arshad Khan and Sajawal Khan
There is now general agreement among economists that
inappropriate regulatory and supervisory policies not only retard long-term
economic growth but also increase the likelihood of a financial crisis that
could spread beyond the country’s own borders. Table-1 provides the
importance of prudential and related regulations in the efficient
management of the financial system.
Table-1: Types of Financial Regulation: Objectives and Key Policy
Instruments
Type of
Regulation
Macroeconomic
Allocative
Structural
Prudential
Objectives
-To maintain control over
aggregate economic activity.
-To maintain internal and
external balance
-To influence the allocation
of financial resources in
favour of priority activities.
-To control the possible
abuse of monopoly power
by dominant firms.
-To preserve the safety and
soundness of individual
financial institutions and
sustain public confidence in
systemic stability.
Organizational -To ensure smooth
functioning and integrity of
financial markets and
information exchanges
Protective
Source: Vittas (1992, p. 63)
-To provide protection to
users of financial services,
especially consumers and
non-professional investors.
Key Policy Instruments
Reserve requirements, direct
credit and deposit ceilings,
interest rate controls,
restrictions on foreign capital
Selective credit allocation,
compulsory investment
requirements, preferential
interest rates.
Entry and merger controls,
geographic and functional
restrictions.
Authorization criteria,
minimum capital
requirements, limits on the
concentration of risks,
reporting requirements.
Disclosure of market
information, minimum
technical standards, rule of
market making and
participation.
Information disclosure to
consumers, compensation
funds, ombudsmen to
investigate and resolve
disputes.