Financial markets play a significant role in channeling funds from surplus spending units (fund givers) to deficit spending units (fund takers). Whether financial intermediation is carried out by banks or capital markets, market failures are ubiquitous and call for financial regulation. This...

This paper is one chapter of the volume “Regulation and Economics” of the second edition of the Encyclopedia of Law and Economics.The authors review the economics of banking and financial markets and the regulatory response to market failure. Market failure in finance depends on problems of...