Financial Crises and the Prudential Regulations: Theory, Practice and the Way Forward

Abstract

Inadequate regulations or failure of regulations to keep pace with financial innovations could have been reasons for financial crises but equally critical contributing factors for financial distress have been inadequate internal control, false assumptions about market and liquidity, and lack of due diligence processes. It is obvious, therefore, that the regulations may strengthen but cannot substitute the internal controls and risk management framework at the level of the financial institution.It is a challenge is to incentivize the financial market participants to join the regulators in pursuit of effective risk optimization and strengthening of the financial stability. Collaboration and coordination are needed between the regulators and the regulated entities for achieving the common good of a stable and efficient financial system.

Keywords: Financial Crisis, Regulations, Banking

JEL Classification: G21