Regulation of capital markets is needed to prevent 'market failure' in the form of shocks to the financial system and the exploitation of ill-informed customers, but the scope of regulation may also reflect the interests of firms which benefit from the reduction in competition which regulation may cause.

Regulation brings costs as well as benefits, and it remains to be clearly demonstrated that these costs have been worth bearing in all areas. Undue risk-taking may even be stimulated, as in the case of deposit insurance.

Regulation now incorporates internationally agreed minimum ratios of bank capital to assets (bank deposit liabilities are so far ignored). This is open to various objections, such as the neglect of correlation between the returns on different assets, the use of book values and the international variety of accounting methods. Positions in financial instruments, however, will be regulated on the basis of market values, reflecting liabilities as well as assets. Regulation may therefore become more complex and costly, perhaps diverting business to less regulated types of firm and to new centres.