- Political stability
- Fiscal affairs
- Monetary policy
- Regulated markets
- Privatisation
- Macroeconomic developments
Innovations and supervision
submited on 15.11.2007 in category Political stability | Fiscal affairs | Monetary policy | Regulated markets | Privatisation | Macroeconomic developments
submited on 15.11.2007 in category Political stability | Fiscal affairs | Monetary policy | Regulated markets | Privatisation | Macroeconomic developments
Last week Bulgarian lawmakers urgently extended the scope of financial supervision activities. Among insurance activities were also included contracts, which have options to acquire real estate property via payment of life-long pension or rent (thus enterprises, offering such a product, have to obtain a license as insurers). This change is induced by the activity of a company, offering product, which is new to the Bulgarian market. From the economic perspective it is not the particular case with the concrete company that is intriguing (it seems more of a judicial issue), but rather the argumentation, with which the supervision expansion is legitimated and the introduction of an entry barrier before this undeveloped market segment. In general, this argumentation comes down to the following – due to the lack of sufficient guarantees for execution of particular contracts the state has to intervene and further guarantee their implementation.
Soon before that The Bulgarian Association of Licensed Investment Intermediaries (BALIP) via a special letter appealed to the Financial Supervision Commission to take “serious measures, through which it can overcome the obvious misbalance between the volume of securities available on the capital market and the free liquid resource, willing to make such investments, which leads to the worrying tendency toward overvaluation of companies on the Bulgarian Stock Exchange”. Behind the argumentation in this case lays the understanding that market participants (or at least some of them) are not competent enough and can be easily manipulated.
These developments again raise the question to what extent it is effective to make parliament intervention in a state of dynamically developing markets. The financial system is an object of a considerably more serious intervention from the side of the state in comparison with the others sectors of the economy. The aim of this intervention is to correct potential market imperfections (induced mainly by information asymmetry) and to guarantee stability. The boundary between the freedom to negotiate and intervention is quite subtle. On one hand, market freedom and competition create effective mechanisms for overcoming certain market failures, as they induce willingness toward improving efficiency; reduce the opportunities for realizing monopoly rent and stimulate the introduction of new products and services.
Improving liquidity on the stock exchange for example is a typical market decision of the problem of manipulation opportunities. On the other hand, the inappropriate policy could generate negative effects for the financial sector functioning, and therefore for the broader economy. In addition, heavy regulation of a particular market with the argument that some of the participants in it are not capable of making the right decisions, could after all result in the so called moral hazard – such a policy induces among investors the common feeling that the state is “taking care” of security and market participants stability and thus risks before investments and necessity of monitoring are being overlooked.
Breaching the balance of regulating the financial industry very often leads to generating additional expenses for companies and to raising barriers before competition and development of innovations. That is why we think that the relatively lighter regulatory regime of the so called other financial intermediaries (investment funds, leasing and factoring companies, consumer credit companies, special purpose vehicles) is the main reason for them to implement financial innovations considerably faster than banks, pension funds and insurers, which are subject to significant supervision restrictions. This explains to a large extent also the tendency (particularly active in Bulgaria recently) for banks to create such companies, through which they are increasing their flexibility. This way, in fact, some of the heavily regulated activities gradually shift toward segments with fewer restrictions.
The dynamic development of the Bulgarian financial market in recent years suggests careful reconsideration of the role of financial supervision. Globalization, the strengthening competitive pressure, the still low local market penetration (i.e. the presence of sufficient growth potential) and technological development is leading, and will continue to do so, to emergence of new market participants and to incessant expansion of the scope and complexity of provided financial products. With that being said, financial regulation must clearly state its role, which ought to neither replace the court, nor restrict competition and innovations.
Soon before that The Bulgarian Association of Licensed Investment Intermediaries (BALIP) via a special letter appealed to the Financial Supervision Commission to take “serious measures, through which it can overcome the obvious misbalance between the volume of securities available on the capital market and the free liquid resource, willing to make such investments, which leads to the worrying tendency toward overvaluation of companies on the Bulgarian Stock Exchange”. Behind the argumentation in this case lays the understanding that market participants (or at least some of them) are not competent enough and can be easily manipulated.
These developments again raise the question to what extent it is effective to make parliament intervention in a state of dynamically developing markets. The financial system is an object of a considerably more serious intervention from the side of the state in comparison with the others sectors of the economy. The aim of this intervention is to correct potential market imperfections (induced mainly by information asymmetry) and to guarantee stability. The boundary between the freedom to negotiate and intervention is quite subtle. On one hand, market freedom and competition create effective mechanisms for overcoming certain market failures, as they induce willingness toward improving efficiency; reduce the opportunities for realizing monopoly rent and stimulate the introduction of new products and services.
Improving liquidity on the stock exchange for example is a typical market decision of the problem of manipulation opportunities. On the other hand, the inappropriate policy could generate negative effects for the financial sector functioning, and therefore for the broader economy. In addition, heavy regulation of a particular market with the argument that some of the participants in it are not capable of making the right decisions, could after all result in the so called moral hazard – such a policy induces among investors the common feeling that the state is “taking care” of security and market participants stability and thus risks before investments and necessity of monitoring are being overlooked.
Breaching the balance of regulating the financial industry very often leads to generating additional expenses for companies and to raising barriers before competition and development of innovations. That is why we think that the relatively lighter regulatory regime of the so called other financial intermediaries (investment funds, leasing and factoring companies, consumer credit companies, special purpose vehicles) is the main reason for them to implement financial innovations considerably faster than banks, pension funds and insurers, which are subject to significant supervision restrictions. This explains to a large extent also the tendency (particularly active in Bulgaria recently) for banks to create such companies, through which they are increasing their flexibility. This way, in fact, some of the heavily regulated activities gradually shift toward segments with fewer restrictions.
The dynamic development of the Bulgarian financial market in recent years suggests careful reconsideration of the role of financial supervision. Globalization, the strengthening competitive pressure, the still low local market penetration (i.e. the presence of sufficient growth potential) and technological development is leading, and will continue to do so, to emergence of new market participants and to incessant expansion of the scope and complexity of provided financial products. With that being said, financial regulation must clearly state its role, which ought to neither replace the court, nor restrict competition and innovations.
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