New financial regulations and higher capital regulations are inevitable, because it is clear by now that too much reliance on concepts like fair value accounting drags the balance sheet too far away from the reality and excessive innovation, more accurately, deliberate attempt to make it difficult for buyers to know the real picture of the securities involved in many derivatives which is a big reason behind trillion dollar crisis termed as Financial Weapon of Mass Destruction. CDSs are especially notorious as well as the short selling to cause the fall of companies. I think there will be more rules guiding the valuation of financial products, higher capital & margin requirements and stricter rules on issuance of MBS/ABS. And of course to stop Madoff like scandal, there could be a compulsory requirement for third party administration of accounts involving pension fund,hedge fund and mutual fund.
This will impact the capital market by reducing the amount of capital involved and the volume of transaction, lower number of creation of exchange based derivatives, funds going into low regulated markets, and overall lower level of economic activities which will reduce the overall growth of capital and financial markets however it will bring more stability and predictability. No doubt it will further reduce the incentive for many investment as regulation cost money and that will be charged back to investors.
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