Institutional Investment and Financial Regulation: An International Comparison

The last thirty years have been a period of remarkable change in global financial markets, over which liberalisation, technology and consumer needs have critically shaped financial systems. Liberalisation of financial systems was largely a consequence of the hypothesis that government restrictions interfere with credit allocation and lead to a lower quantity and quality of investment (McKinnon, 1973). Liberalisation involved the removal of government regulations and controls on the exchange rate, international capital flows and the banking sector. Concurrent with liberalisation, demographic and workforce trends altered customers’ financial needs and led to changes in financial distribution channels, products and suppliers; technology made financial transactions easier to access, faster and further reaching (Australian Government, 1997). Together, these changes have increased: short-termism, the correlation of investors’ beliefs and the susceptibility of the financial system to crises (Brock, 1999; Carmichael, 1999). Since the late 1970s there has been an increase in the frequency of banking crises across the world. Evidence suggests that this is because, in most cases, liberalisation was not accompanied by an adequate regulatory framework, so it led to increased risk-taking (Kaminsky and Reinhart, 1999).