On the Political Economy of Banking and Financial Regulatory Reform in Emerging Markets

Randall S. Kroszner
1998 Social Science Research Network  
Economists have devoted much effort to analyzing the causes of banking and financial sector troubles and at proposing solutions. Problems of moral hazard, adverse selection, lack of market discipline, conflicts of interest, time inconsistency, and information asymmetry have been thoroughly studied in the context of banking and financial markets, both empirically and theoretically. A wide range of policy alternatives to minimize the impact of these problems in developed, emerging, and transition
more » ... ing, and transition economies have been carefully constructed. Economists, however, have given little attention to analyzing how to implement durable and effective banking and financial sector reform. This weakness arises from the tradition of emphasizing normative welfare evaluations of institutions and regulations and ignoring the question of why they exist and why they have the forms they do. Rather than take the regulations as given, the rapidly growing field of political economy provides a positive analysis of how and why regulations evolve as they do and what forces can lead to durable policy change. The goal of this paper is to provide a framework for understanding why particular banking and financial regulations arise in particular circumstances and what causes them to change. This subject thus far has received relatively little study so this paper is an exploratory first step toward developing a systematic framework. The positive analysis of how regulatory change has evolved
doi:10.2139/ssrn.143555 fatcat:g3v42jt75rerxpoqu5e5dgr3oa