A Comprehensive Financial Sector Regulatory Framework Study for Ghana

Abstract

This report presents the findings from a study of the regulatory framework of Ghana’s financial sector and presents recommendations for reform. The literature on financial sector regulation confirms the consensus that financial markets support the growth of economies by offering intermediation and ancillary services to the users of financial products. However, because of imperfections in the market, financial markets are susceptible to market failure. The regulation of financial markets is justified in terms of interventions to mitigate market failure, leading to an overall increase in economic welfare. There are 2 complementary forms of regulation for financial markets. There is a realization that market conduct and prudential regulation may conflict in situations where prudential standards undermine market conduct best practices. Therefore, many countries have moved towards establishing market conduct regulation independently of prudential regulation while establishing coordinating mechanisms between the two. There are advantages and disadvantages associated with the operation of each of the models of regulatory architecture. There is no evidence that one model of regulatory architecture is necessarily more effective than another. Despite the recent drift towards Twin Peaks, it does not guarantee a more effective regulatory framework. Ghana currently operates a ‘silo’ system which is largely a historical accident. Although a continuation of the present silo system is an option, the study concludes that the need to decisively address the weaknesses of the existing regulatory framework provides adequate justification for modifying Ghana’s financial regulation architecture. Therefore, the study recommends that Ghana implements a Twin Peaks regulatory model. This report is an outputs of the MACRO Economic Programme which is supported by the Department for International Development