Effects of inappropriate Financial Regulation

With the recent financial crisis and discussions over the Basel III framework, regulation of banking systems is likely to be modified, if only to address on-going changes in banking technology. In the aftermath of the crisis, there is a risk of ‘regulatory overshot’, that is, the risk that heavy regulation might result in unnecessary costs in the form of additional administrative costs, excessive barriers to economies of scale, scope or innovation, or the creation of rents. An additional risk is posed by the apparent increase in concentration in banking sectors in many economies since the financial crisis. All this could increase the cost of capital to the rest of the economy and impede economic growth. The objectives of this paper are twofold: