Efficiency in Financial Regulation and Reform of Supervisory Authorities: A Survey in the APEC Region

Abstract

Traditionally, the financial regulation it used to structure itself on the basis of specialized authorities, each one responsible to supervise the intermediaries by the type of activity that was carried out. The current trend is toward an integrated model that reunite in one or two authorities the different functions that previously were responsibility of diverse specialized agencies. From the modern theory of economic of regulation, it is possible to assess a regulatory regimen by how close is to address the market failures on the market supposed to be regulated and how high is the social cost it imposed over its regulated entities and the market as a whole. A regulatory regime of fragmented supervisory authorities increases the risk of regulatory failures therefore not always capable to exploit the economies of scale and scope in a regulatory task which is intensive in opportune information gathering and processing, also exposed to regulatory forbearance and becoming interest groups by themselves. In fact, becoming each regulator a monopoly over its regulated entities, creating rents by protecting a turf of captive supervisory powers incompatible and unsynchronized with each other. Therefore, incrementing the cost of regulation.

Considering the cost of regulation as a fixed cost on each domestic financial market. An efficient setting would be a low fixed cost relative to a high sized financial market. The relative performance between the multiple regulatory agencies model and the single regulator model is empirically an open question, despite of the international spread of the single model in the last decade in more than ten countries. Low income countries with severe underdeveloped financial markets and costly multiple authorities scheme calls for a prime candidates to reform its financial regulatory. Using indicators from supervisory cost and financial activity size, Mexico appears to be an economy with the highest fixed regulatory cost with an underdeveloped or small size financial sector therefore, it means a highly inefficient regulatory organization. Urgent supervisory institutional scheme reform is required according with international benchmarks.

Keywords: Banking Regulation, Prudential Regulation, Regulatory Failures

JEL Classification: G28, K23, L51