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The use of evidence and economic analysis in policymaking is on the rise, and accounting standard setting and financial regulation are no exception. This article discusses the promise of evidence-based policymaking in accounting and financial markets as well as the challenges and opportunities for research supporting this endeavor. In principle, using sound theory and robust empirical evidence should lead to better policies and regulations. But despite its obvious appeal and substantial promise, evidence-based policymaking is easier demanded than done. It faces many challenges related to the difficulty of providing relevant causal evidence, lack of data, the reliability of published research, and the transmission of research findings. Overcoming these challenges requires substantial infrastructure investments for generating and disseminating relevant research. To illustrate this point, I draw parallels to the rise of evidence-based medicine. The article provides several concrete suggestions for the research process and the aggregation of research findings if scientific evidence is to inform policymaking. I discuss how policymakers can foster and support policy-relevant research, chiefly by providing and generating data. The article also points to potential pitfalls when research becomes increasingly policy-oriented.
This policy letter provides evidence for the crucial importance of the initial regulatory treatment for the further development of financial innovations by exploring the emergence and initial legal framing of off-balance-sheet leasing in Germany. Due to a missing legal framework, lease contracts occurred as an innovative social practice of off-balance-sheet financing. However, this lacking legal framing impeded the development of this financial innovation as it also created legal uncertainties. This was about to change after the initial legal framing of leasing in the 1970’s which eliminated those legal uncertainties and off-balance-sheet leasing entered into a stunning period of growth while laying the foundation of a regulatory resiliency against efforts that seek to abandon the off-balance-sheet treatment of leases. As the initial legal framing is crucial for the further development of a financial innovation, we propose the French approach for the initial vindication of new financial products in which the principles-based rules are aligned with the capabilities of regulators to intervene, even when a financial innovation complies with the letter of the law. In this way, regulators could regulate the frontier of financial innovations and weed out those which are entirely or mainly driven by regulatory arbitrage considerations while maintaining the beneficial elements of those products.
While the debate about the needs and merits of cryptocurrency regulation is ongoing, the unprecedented price hikes of cryptocurrencies towards the end of 2017 triggered a somewhat unexpected sort of regulation in the form of public statements by governments and financial supervisors. It kicked in rather quickly and turned out to be much more effective than imagined. These interventions can be identified as one of the main factors that drove asset prices down, thereby preventing destabilizing bubbles. The experience of the supervisory response to the cryptocurrency bubble of the past months keeps important insights for any prospective regulation of cryptocurrencies. First, public statements are a highly effective regulatory tool in the short term as they manage market expectations, a fact which is well-known as forward guidance in monetary policy. So far, the legal framework in the EU takes insufficient account of the regulatory role of public statements. Second, regulation needs to keep up with the incredible speed of fintech innovations. Some regulators addressed the challenge by adopting a ‘sandbox’ approach. However, the ‘sandbox’ approach clearly calls for international cooperation. To achieve a balance between safety and innovation, international cooperation should emulate the experimental character of sandboxes. One could conceive of a ‘sandbox for regulators’, an arrangement which would facilitate the exchange of information on regulatory initiatives among authorities but also the coordination of communication and forward guidance.