The development of the prudential regulatory framework as a response to the problems posed by financial firms operating with limited liability

Having examined the role UK company law plays in facilitating risk-taking by company directors and managers, this chapter turns to the examination of the development of the regulatory framework that seeks to ensure financial stability, that is, micro- and macro-prudential regulation. Broadly defined, financial regulation comprises the legislative, regulatory and soft-law rules and principles that apply to financial institutions and their senior employees. Most accounts of the history of banking regulation and supervision in the UK place its inception in the late 1970s and emphasise the fact that a formal licensing requirement and supervisory regime for all banking institutions was only introduced by the Banking Act 1987. In the case of financial regulation, the complexity of financial institutions and the nature of financial transactions as inherently risky and inevitably based on limited information makes it impossible to assess ex ante which behaviours or business strategies are excessively risky.