Research On The Incentive Mechanism And Institutional Arrangement Of Financial Regulation

Financial regulation is an institutional arrangement established with the broking out of banking crises to maintain the stability of finance system and protect the benefit of depositors. Its main objectives of financial regulation are to redress the failures in financial market, protect the benefits of depositors and investors, improve financial efficiency, and promote the social welfare. However, the above-mentioned goals are hardly to be achieved both in domestic and foreign financial regulation practices, and conversely, more serious market failures caused by the increasing instability of financial system and the lower financial efficiency. Theoretical and empirical analysis explicates that the key to the regulation failure is incentive confliction between the social public and regulatory institutions under asymmetric information. Therefore, the basic solution to these problems is to form a regulatory mechanism of incentive compatibility between them so as to lower the degree of asymmetric information with well-designed information disclosure system, sound rating agencies and high transparency in financial regulation. Besides, an incentive structure in regulatory authorities should be formed to make the internal incomes based on relative achievements rather than the fixed income from financial allocation by definite defining responsibilities, sound achievement rating mechanism and salary reforms to the staffs. In these conditions, the incentive compatibility between regulatory institutions and financial institutions will be formed with the stronger market restriction, well-designed institutional arrangement of financial regulation and improved means of financial regulation as well as safety network.