Regulation and the Evolution of the Financial Services Industry

This paper provides a foundation for evaluating recent changes in regulatory design in light of the increasingly competitive and dynamic environment of banking. Intrusive, control-oriented direct and indirect approaches to regulation have become very costly. Regulation that focuses on setting minimum requirements will become dominant. Supervision would then primarily aim at verifying compliance. We argue that the viability of this approach requires a well-developed financial system and adequate internal control systems, primarily to align incentives within institutions.