A new quantitative study shows rules-based regulation dampens volatility, but implementation quality matters more than the label for mature hubs.

The long-standing debate between rules-based and principles-based regulation is not merely academic; it has a quantifiable impact on economic growth, stability, and investor confidence, according to new research.

The research evaluates eight jurisdictions, including several in the Asia Pacific region, to offer a practical lens for policymakers. It finds that while rule clarity provides a powerful anchor against volatility, the quality of implementation and supervisory transparency ultimately drive performance.

The study, which uses a Python-driven model to analyse macro-financial data from 2010 to 2020, finds that rules-based systems are generally associated with lower economic volatility. By codifying clear, non-negotiable thresholds, these regimes help to anchor expectations and reduce swings in growth and inflation. This is particularly beneficial for frontier and commodity-oriented markets seeking to build credibility and attract durable investment.

However, the research also shows that principles-based approaches can achieve comparable, and sometimes superior, outcomes in mature financial hubs where supervisory capacity and transparency are high. The key, the paper argues, is not the formal label on the rulebook but the quality of its execution.

Hubs and frontier markets

The paper’s methodology provides a view of how different regulatory architectures perform - scoring jurisdictions on five indicators: GDP growth, CPI inflation, FDI-to-GDP, Ease of Doing Business (EOB), and the Regulatory Quality Index (RQI).

Among mature financial centres, Hong Kong, classified as a rules-based system, ranked first overall in the study. Its leading position was driven by exceptionally strong performance in attracting foreign direct investment relative to its GDP, alongside high scores for its business environment and regulatory quality.

In contrast, Australia, classified as a principles-based system, ranked a close second. Its strong performance demonstrates that calibrated discretion can also deliver good outcomes. The country’s high scores for inflation control and regulatory quality compensated for more modest GDP and FDI metrics, underscoring that when governance is strong, a principles-based approach can match its rule-dense peers.

The findings for frontier markets paint a more heterogeneous picture. Mongolia, a rules-based jurisdiction, recorded high scores for GDP growth and FDI inflows but was held back by higher inflation volatility and weaker institutional scores. Indonesia, also rules-based, showed a similar trade-off, with its strong GDP growth being offset by below-average scores on governance and inflation control.

Conversely, the data for frontier markets operating under principles-based frameworks illustrates the risks of regulatory flexibility when institutional capacity is still developing. Papua New Guinea, for instance, saw its strong growth metrics undermined by significant inflation volatility and low institutional scores, resulting in the lowest composite ranking in the study. Similarly, Peru struggled to attract investment or generate momentum, lagging significantly in FDI and GDP performance.

These results highlight a central theme of the research: for developing markets, headline growth can be undermined by volatility and institutional weaknesses. The data suggests that these economies realise the largest gains when rule clarity is paired with incremental improvements in administrative capacity and public disclosure, broadening the base of their economic stability.

Social licence and predictability

A key insight from the paper is the concept of "social licence" – the informal, extra-statutory confidence that investors, customers, and supervisors extend to institutions that demonstrate credible and transparent risk management. This social licence, while not formal regulation, operates adjacent to it and can significantly reinforce or undermine official rules.

The research posits that markets respond to credibility signals. When supervisory actions, such as the granting of waivers or model approvals, are predictable, well-signalled, and explained through public disclosures, discretion ceases to be perceived as arbitrary.

This predictability strengthens an institution's social licence, which in turn can lead to lower funding spreads and more stable capital inflows. In network terms, this creates a "preferential-attachment" dynamic, where capital and counterparties naturally cluster around jurisdictions and institutions that are seen as reliable hubs.

Recommendations for policymakers

The paper concludes not by declaring a winner between rules-based and principles-based regulation, but by advocating for a strategic approach that blends the strengths of both. The evidence suggests that implementation quality, supervisory capacity, and transparency are the ultimate drivers of positive economic outcomes.

For frontier and commodity-exposed markets, the recommendation is to first lock in credibility by codifying non-negotiable prudential floors for capital, liquidity, and conduct. Publishing supervisory metrics can help compress volatility and lift institutional baselines, which the model shows is critical for improving overall performance.

For mature hubs like Hong Kong and Australia, the framework supports layering calibrated, auditable discretion on top of those solid floors. To ensure discretion remains predictable, the paper suggests three key tools: maintaining time-stamped decision logs, using metric-bound sunset clauses for waivers, and establishing independent peer-review loops.

Ultimately, the research treats regulatory architecture as a strategic tool. Codified thresholds create the stability needed for long-term planning and cross-border investment, while disciplined, transparent discretion allows regulators to maintain trust while adapting to market innovation and crisis.

The research paper is available in full here.

--

The paper's author is Philip Keller, a risk strategist with over a decade of leadership experience across financial institutions in Europe, Asia, and the Americas, where he focused on strengthening governance frameworks and operational risk capabilities. He holds a Master of Science in Global Finance from NYU Stern and HKUST, alongside advanced certifications in data analytics and financial engineering from Harvard, MIT and Stanford. Since 2018, Keller has also served on the judging panel for the Regulation Asia Awards for Excellence.