How Should Microprudential Control Be Strengthened to Prevent Local and Global Financial Market Failure?

Abstract

The financial crises in the advanced economies over the past six years have rightly focused attention on failures of financial supervision and regulation. However, the results of this focus have not always been constructive in reducing systemic risk while fostering the development of financial markets to meet the needs of an increasingly complex and interconnected global economy. This chapter briefly outlines what we should and should not expect microprudential control to do. It also provides a few observations on what else needs to be put in place to reduce the risk of future systemic crises as much as possible. It draws mainly on what has happened in the USA but those who know Europe can quickly draw parallels and contrasts with the situation here.