The CAMELS Approach
The regulatory and government policies should be predictable, contemplative, and effective in reaching their goals. This is because it is challenging for any business entity to operate in an environment governed by an uncertain regulatory system. In other words, regulators should tailor their tools to ensure a stable regulatory environment.
The main regulatory tools and government interventions include:
A good example of a price mechanism is taxing polluters while subsidizing those who engage in environmentally friendly production procedures.
Public financing can include the provision of loans to individual investors or firms whose activities the government supports. However, the level of funding depends on factors such as political ideologies, the government in power, its structure, and a country’s GDP.
Examples of mandating include banks’ capital requirements and registration with a securities commission for certain operations. Restricted activities include insider trading and short selling.
Public goods are services an individual can consume without reducing their availability to others. As such, no one disadvantages others when they consume such goods and services. Some of the public goods include infrastructure and national defense (security).
Which of the following is a regulatory tool that self-regulating organizations are least likely to use?
- Provision of public goods.
- Restrictions of behaviors.
- Price mechanisms.
The correct answer is C.
SROs regulate the actions of their members and provide public products in the form of standards and regulation of their members’ activities. They are unlikely to use price mechanisms.
Reading 10: Economics of Regulation
LOS 10 (g) Describe tools of regulatory intervention in markets.
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