Book contents
- Frontmatter
- Contents
- List of figures
- List of tables
- Preface
- List of conference participants
- Foreword
- 1 Introduction
- 2 Banking competition and European integration
- Discussion
- 3 Banking, financial intermediation and corporate finance
- Discussion
- 4 How (not) to integrate the European capital markets
- Discussion
- 5 European financial regulation: a framework for policy analysis
- Discussion
- 6 Corporate mergers in international economic integration
- Discussion
- 7 Capital flight and tax competition: are there viable solutions to both problems?
- Discussion
- 8 Reflections on the fiscal implications of a common currency
- Discussion
- 9 Currency competition and the transition to monetary union: does competition between currencies lead to price level and exchange-rate stability?
- 10 Currency competition and the transition to monetary union: currency competition and the evolution of multi-currency regions
- Discussion of chapters 9 and 10
- 11 Problems of European monetary integration
- Discussion
- Index
5 - European financial regulation: a framework for policy analysis
Published online by Cambridge University Press: 04 August 2010
- Frontmatter
- Contents
- List of figures
- List of tables
- Preface
- List of conference participants
- Foreword
- 1 Introduction
- 2 Banking competition and European integration
- Discussion
- 3 Banking, financial intermediation and corporate finance
- Discussion
- 4 How (not) to integrate the European capital markets
- Discussion
- 5 European financial regulation: a framework for policy analysis
- Discussion
- 6 Corporate mergers in international economic integration
- Discussion
- 7 Capital flight and tax competition: are there viable solutions to both problems?
- Discussion
- 8 Reflections on the fiscal implications of a common currency
- Discussion
- 9 Currency competition and the transition to monetary union: does competition between currencies lead to price level and exchange-rate stability?
- 10 Currency competition and the transition to monetary union: currency competition and the evolution of multi-currency regions
- Discussion of chapters 9 and 10
- 11 Problems of European monetary integration
- Discussion
- Index
Summary
The wages of labour vary according to the small or great trust which must be reposed with the workman. The wages of goldsmiths and jewellers are everywhere superior to those of many other workmen, not only of equal, but of much superior ingenuity, on account of the precious metals with which they are entrusted. We trust our health to the physician; our fortune and sometimes our life and reputation to the lawyer and attorney. Such confidence could not safely be reposed in people of a very mean or low condition.
(Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, p. 105.)Introduction
The regulation of financial services is normally associated with banks. Banks transform short-term deposits into long-term loans. This leaves them exposed to withdrawals that necessitate the premature liquidation of long-term assets. If the net realizable value of assets falls below deposits, then banks are unable to service withdrawals in full and insolvency may result. Perceiving this risk, investors may be induced to withdraw their deposits from financially sound banks in anticipation of similar behaviour by others. Investment decisions by investors can therefore impinge on others and banks are prone to runs (Diamond and Dybvig, 1983). Furthermore, if a run on one bank can prompt a run elsewhere then there is a risk of contagion. In particular, if the ability of other banks to launch rescues of troubled banks is dependent on their own financial condition then investors may correctly infer information about the soundness of the financial system from bank failures (see Aghion, Bolton and Dewatripont, 1988). There are therefore externalities between investors and between institutions that justify regulation.
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- European Financial Integration , pp. 112 - 132Publisher: Cambridge University PressPrint publication year: 1991
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