The Financial Sector and the Appropriate Regulatory Response in CARICOM

In the Caribbean, an important part of the regulatory authority's responsibility is to promote the development of the financial sector. The underdeveloped nature of the financial sector usually manifests itself in a paucity of institutions and instruments (Bourne, Social and Economic Studies 34:139–163, 1985; Bourne, Structure, Costs and Efficiency of the Financial System. Unpublished U.W.I St, 1988b). They have to promote prudent behavior but they also have to ensure that their actions do not damage the development of the sector. The general financial regulatory problem of the trade-off between safety and efficiency is, therefore, compounded by the fact that regulators are interested in widening and deepening the financial sector and are very averse to letting institutions fail. These conditions highlight both the relatively greater need for strong regulatory systems, as well as the greater difficulties faced by regulators in developing countries. In this context this chapter looks at the rationale for regulation, emerging trends in the financial system both internationally and regionally, the implication of these trends for regulators and supervisors in the financial sector and appropriate policy responses for the region.