financial markets, market failure, microprudential regulation, macroprudential regulation, Bank of England
Financial markets are subject to various forms of market failure. The complexity of financial products means that imperfect information is a feature of most financial products, often because consumers find it difficult to understand the risks and likely future returns they might get from buying them. Asymmetric information (where the seller knows more than the buyer) can generate a lack of confidence in financial products and markets. On top of this, the global financial crisis (GFC) graphically demonstrated how systemic risk can be a hugely damaging negative externality that could result in ‘bank runs’ and endanger the whole global economy. Other forms of market failure include market-rigging and speculative herding.
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