How can principles-based regulation contribute to good supervision?

Abstract

In the past two decades, the trend in financial supervisory legislation was to replace detailed rules with more open ‘principles’. After the crisis, principles-based regulation was seen as part of the problem and it seemed that is was carried to its grave. The reality is less clear-cut, however. Financial supervisory legislation, as it stands today, remains a mix of detailed rules and open standards. Therefore, this chapter discusses whether the criticism of the principles-based approach was justified and to establish whether principles-based regulation contributes towards the desired market conduct and ‘good supervision’ of the financial sector.