The Principles of Regulatory Reform for International Transaction Agreements: Implications for Financial Services in APEC

The author identifies key principles for trade liberalization and regulatory reform for consideration by APEC members approaching bilateral or sub-regional negotiations, and then focuses specifically on how to address market failure problems stemming from externalities versus information asymmetry in the financial services industry. The paper examines the principles of regulatory reform and applies them to the development of regulatory reform for international transaction agreements in financial markets. Principally, international transaction agreements should focus on dismantling international trade barriers, and then attempt to correct market failures. When market failures arise from externalities, negotiations should be directed to give supervisory control responsibility to domestic regulatory authorities. Conversely, when market failures arise from asymmetric information, negotiations should work to correct adverse selection and moral hazard problems.