Weak financial intermediaries and problems with financial regulation and supervision have been significant factors in many financial crises, including the problems surrounding the developing country debt crisis and the US savings and loan crisis in the 1980s, the collapses of Bank of Credit and Commerce International (BCCI) and Barings, and the Mexican and Asian financial crises in the 1990s. As discussed in the Part I, these various problems have led to a wide range of international efforts directed towards supporting financial stability.

This part discusses a central focus of recent international efforts: financial markets, their regulation and supervision. Specifically, it addresses the main areas covered by international financial standards: banking, securities, insurance, pensions, microfinance and financial conglomerates. In general, however, standards only address stability and not the role of development. This part attempts to take both into account.

Effective prudential regulation and supervision of financial markets and intermediaries (including banks, insurance companies, securities intermediaries and pension funds) are essential to the financial stability and efficient functioning of any economy because of the central role of the financial system in collecting and allocating savings and investment. Financial intermediaries, by their nature, raise dangers very familiar indeed to any market economy (e.g., financial intermediation and consequent systemic risk). Regulation and supervision are therefore necessary, however, the implications of this for legal and institutional development were largely ignored outside of developed countries prior to the 1990s. This changed with the advent of significant financial crises in a number of countries from the mid-1990s.