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Abstract

In synthesizing harmonious regulation with market sensitive monetary policies, regulators and central bankers can maintain global confidence and minimize systemic failure. The improvements in communications and transportation, the gains from technology and the miniaturization of the goods the world produces have fueled a growing volume of international trade. Financial institutions, in turn, have sought constantly to find more effective and efficient ways to facilitate and finance these activities, and at the same time manage the related risks. There are two clear areas of common interest which may serve as a guideline for central bankers, bank supervisors, and regulators developing compatible rules and regulations. Some of the greatest challenges to bank supervisors arise when organizations link banking activities with other financial or nonfinancial businesses. As capital markets become more important, they pose new challenges in the setting of monetary policy. Well-functioning capital markets require a sound legal and regulatory structure if investors are to have sufficient confidence to part with their funds for potentially long periods of time, especially given the impersonal nature of capital markets and the remoteness of issuers of securities from the holders of those securities. Capital markets can foster economic growth and efficiency by stimulating and mobilizing saving and thereby raising investment. In the United States, capital markets have had a major impact on banks. Capital markets may also discipline central banks in much the same way as the foreign exchange market. The central bankers may need to assess whether a large price move in the value of an asset or a group of assets is a result of economic fundamentals or whether it is bubble based on emotional reactions of market participants (or simply inadequate information).

Part I discusses the importance of compatible regulatory regimes. Part II discusses two clear areas of common interest which may serve as a guideline for central bankers, bank supervisors, and regulators developing compatible rules and regulations—maintaining healthy, responsive, and financially strong banking and financial systems, and building and maintaining an adequate legal and regulatory structure. Part III identifies some of the greatest challenges to bank supervisors, namely when organizations link banking activities with other financial or nonfinancial businesses. Part IV analyzes the role of the Federal Reserve in domestic capital markets. Part V discusses why well-functioning capital markets require a sound legal and regulatory structure. Part VI outlines the general economic implications of well-functioning capital markets. Part VII focusses on the economic implications of these capital markets specifically for banks. Part VIII focusses on economic implications for monetary policy. Finally, Part IX identifies potential challenges of capital markets.

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