Financial Sector Regulation and Implications for Growth

Growth with equity is the foremost objective in all economies in the world today, especially in the emerging market economies (EMEs), where the poor still make up a sizeable proportion of the population. To ensure growth and development with equity, financial sector policies are expected to be tuned to sub-serve these broad objectives. Though there is no unanimity among economists, including Nobel laureates, on the relevance of finance for growth, the crisis has provided ample evidence that a stable financial system will have a positive impact on both growth and equity and an unstable one will harm both these economic objectives. There could, however, be conflicts in the short and medium term between the objective of financial stability on the one hand, and growth and equity on the other hand. But there cannot be any dispute that in the long term all three objectives are simultaneously achievable. This paper highlights the interaction between prudential and other financial sector and macroeconomic policies and goes on to review financial sector regulation in the pre-crisis, mid-crisis and post-crisis periods, with a special focus on issues specific to the EMEs in the implementation of Basel II and III. The paper argues that even though the EMEs find implementing the Basel capital regulations a major challenge, in the long run following these standards will contribute to strengthening their banking systems. The paper also emphasises that some aspects of regulation can be oriented towards achieving the development objectives of EMEs without necessarily sacrificing prudent regulation and financial stability considerations, and that EMEs can supplement their development objectives with other well designed financial sector policies.Full publication: "http://ssrn.com/abstract=2002004" Financial Sector Regulation for Growth, Equity and Stability