Regulating the Modern Financial Firm: Implications of Disintermediation and Conglomeration

Abstract

Today's financial institutions perform activities ranging from banking to securities underwriting and from asset management to insurance services. In this rapidly changing environment, conglomerates dominate the financial industry and financial market con-ditions play a significant role. Unfortunately, the theory of financial intermediation in which most of banking regulation finds its rationale does not seem to provide answers to the most relevant regulatory questions. This paper surveys the literature on banking regulation and assesses which aspects are the most pertinent under current circumstances. It argues that the principal concern in designing a regulatory framework should be about systemic risk, that the need to contain government-induced moral hazard remains but is not limited to banks, and that solvency regulation aiming at protecting investors is losing its raison d'etre. An overview of open questions in modern financial regulation and suggestions for future research conclude the paper.

Keywords: Banking regulation, financial conglomerates, disintermediation, financial markets

JEL Classification: G21, G24, G28, G34