Recent worldwide banking crises have focused attention on the issue of financial sector regulation in emerging markets, especially since financial crises are more damaging to those economies than to the economies of industrialized nations. Scholars and policy makers alike recently have addressed the fundamental causes of such crises. Many have pointed to the need for stability in the banking sector and for effective early warning systems to prevent future failures. Calls for additional prudential regulation, however, often have overlooked the importance of institutional variation in national capital markets.
This policy short argues that financial sector regulatory policy should vary because conditions in emerging markets are different. It presents evidence that (1) variation in national capital market structure (how firms raise external funds) exists; and (2) government regulation should reflect this variation, both to prevent future crises and to promote economic growth in the long run.
These arguments are based primarily upon examination of Central and Eastern Europe, especially the Czech Republic, Hungary, Poland, and to some extent the Russian Federation, where the change from state socialist to market-oriented economies highlights the interactions among financial sector policy, privatization, and growth.