Direct finance and Indirect finance

Regulation of the Financial System

• Two Main Reasons for Regulation (Financial sector is one of the most heavily regulated sectors of the economy)
• To increase the information available to investors:
• Reduce adverse selection and moral hazard problems
• SEC forces corporations to disclose information to reduce insider trading
• To ensure the soundness of financial intermediaries:
• Restrictions on entry
• Disclosure Laws (SEC)
• Restrictions on Assets and Activities
• Deposit Insurance
• Limits on Competition
• Restrictions on Interest Rates (no longer in effect)