Rigid regulation, dynamic markets and adaptive enforcement
(English)Manuscript (preprint) (Other academic)
When market adopts a new product, service or organization of business, the existing regulation becomes increasingly incomplete due to the slow pace of the regulatory process. For several reasons, this mismatch is inevitable, and even has its benefits. The ‘rules of the game’ must be stable for economic actors to plan for and initiate the uncertain trial-and-error process of innovation. At the same time however, the institutional structure of the state must also be flexible to facilitate for these market dynamics. In this article, the adaptive enforcement of financial regulations made by supervisors is argued to be an example of this institutional flexibility. The adaptive enforcement can help to bridge the gap between the ‘rigid’ and incomplete regulation and a changed market, say after a broad adoption of an innovation. The financial markets are commonly recognized as prone to innovate and adopt innovations, so this may be a market for which the mismatch between the ‘rigid regulation’ and the dynamic market at time is especially troublesome. Through its room for credible discretion, the enforcer of the financial regulation ideally adapts its enforcement of ‘rigid’ regulation to a changing market, such as following a broad market adoption of an innovation. In an empirical case, it is shown how the Swedish banking supervisor during the 1910s adapted its enforcement of the banking act to the very dynamic bank market.
Regulation; enforcement; discretion; Sweden
Economics and Business
IdentifiersURN: urn:nbn:se:liu:diva-77436OAI: oai:DiVA.org:liu-77436DiVA: diva2:526938