The Development and Regulation of Nonbank Financial Institutions

Article excerpt

The Development and Regulation of Nonbank Financial Institutions, by Jeffrey Carmichael and Michael Pomerleano, March 2002, World Bank

How important are nonbank financial institutions to the success of emerging economies? What role does regulation of these institutions play to ensure this success? These and other questions are addressed by Carmichael and Pomerleano in The Development and Regulation of Nonbank Financial Institutions published by The World Bank. The work is a fascinating journey through the intricate web of nonbank financial institution regulation, its origins and evolution, and how regulation has influenced the development of financial market networks in countries striving for economic development.

The main theme of the book is the relationship between financial development and economic advancement in countries where The World Bank is most active and the role of nonbank financial institutions in meeting this goal. Using appropriate quantitative and qualitative information to support this idea, Carmichael and Pomerleano write convincingly about the positive influence of nonbank financial institutions in these developing economies. Although this reviewer needs no convincing that efficient financial markets and institutions are at the heart of a country's economic health, Carmichael and Pomerleano provide sufficient documentation of the positive influence of nonbank financial institutions that would sway the opinion of even the most severe skeptic.

The major audience is those who create and design financial policy but finance professors, graduate students, and legislators would benefit from reading the work. Early chapters provide an overview of the nature of nonbank financial institutions and principles of regulation, which helps a novice understand the rationale and characteristics of various financial institutions and the structure of their regulatory systems. The book's subsequent chapters thoroughly describe market characteristics of insurance companies, savings institutions, securities firms, and specialized firms such as leasing companies and real estate. Sophisticated readers may find themselves using the information to begin thinking about alternative regulatory schemes for domestic markets. This line of thought is motivated by the authors' discussion of how efficient (or inefficient) regulatory structures are currently.

The structure and content of the work gives all readers a greater appreciation for the importance of sound financial markets for economic growth. Discussion of the significance of strong capital markets to economic stability emphasizes how fortunate we are in the United States. It is safe to say that we take our financial system for granted and may balk at the need for regulatory oversight. However, as one considers the economic difficulties of countries that do not have well functioning capital markets and regulatory structures, the benefits become apparent.

>From the standpoint of someone who teaches about financial institutions, this book brings together information on the regulatory schemes that greatly affect the operations of financial institutions, both domestically and internationally. …