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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 chapter studies how different jurisdictions cope with market failures in banking and capital markets with a focus on how such market failures are addressed in different jurisdictions. We identify significant divergences in financial regulation despite the similarity of market failures. The drivers of such divergences are the private law underpinnings of financial markets, diverging policy objectives and regulatory goals, and the varying structure of financial markets. However, in the past few decades, there has been significant harmonization and convergence of financial regulation at the global level. We identify two main drivers of convergence: convergence with the aim to reduce transactions costs for cross-border transactions, mainly driven by pressure from industry associations; and convergence in financial regulations to address risk spillovers and prevent potential race-to-the-bottom from regulatory arbitrage. Discussing the drivers of divergence and convergence in financial regulation, this chapter provides an analytical framework for the comparative analysis of financial regulation.

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