No jurisdiction has undertaken the sort of fundamental rethinking of regulation in response to the GFC that the largest crisis since 1929 should have provoked, and that the crisis of 1929 did provoke. The reasons for this are many, but owe much to the exceptional complexity of modern globalised finance and to the political power of the financial sector generally (for the sector’s extraordinary profitability of the past 20 years has brought with it extraordinary influence and power).
The research has explored and evaluated various regulatory measures introduced and proposed in the post-crisis period. It has highlighted areas where changes have not gone far enough and where further reform is needed.
The forthcoming volume, Rethinking Global Finance and Its Regulation, edited by Buckley, Avgouleas & Arner, highlights the need for a post-crisis regulatory agenda that goes beyond merely “preparing to fight the last war”, and recognizes the changes in the fundamental nature of financial activity in the last forty years. The research suggests, inter alia,that:
• Given the change in banking from traditional capital allocation to much higher risk trading in complex products and the emergence of Too Big to Fail Institutions, regulators should require higher capital requirements and more stringent leverage controls.
• Despite the currently increasing role of central banks in prudential supervision, they should remain prudent, independent and focused on monetary stability, ignoring politics.
• Enforcement mechanisms should be enhanced.
• Regulators should monitor how ethical considerations are carried forward within organisations to transform organizational cultures rather than prescribing further layers of rules and regulations.
The article, Reconceptualising the Regulation of Global Finance, by Buckley, analyses the five major changes in the global financial system in the past 40 years, being the (i) the globalisation of the global financial system, (ii) the legalisation of financial gambling, (iii) the rise in algorithmic and high frequency trading and in dark pools, (iv) the fundamental changes in banks and bankers and (v) the rise in the role and power of ratings agencies. It then proceeds to analyse the potential responses to these changes including i) a sovereign bankruptcy regime, (ii) higher mandated bank capital levels; (iii) levies on banks, (iv) a financial transactions tax, (v) rigorous regulation of high frequency trading and dark pools, and (vi) removing the conflict in the role of the ratings agencies.
The article, The G20’s Performance in Global Financial Regulation, by Buckley suggests the G20 mandated reforms are useful and helpful but don’t address the fundamental changes of the past 40 years in the system. One reason for this is that none of the reforms initiated by the G20 have challenged the way of thinking that sees financial markets as an end in themselves and not merely a means to support the real economy. It concludes that the G20’s reforms are unlikely to be sufficient to avert another global financial crisis.
The article, Financial Innovation in East Asia, by Buckley, Arner & Panton, examines balancing the benefits of financial liberalisation and innovation against the real risks in financial sector development. It focuses on the role of regulation and legal and institutional infrastructure in supporting financial development and limiting the risk of financial crises. The article also addresses a series of issues with particular developmental significance in the region: trade finance, mortgage markets, SME finance, non-bank finance, and mobile financial services.
The chapter, 'Regulating Financial Innovation', by Avgouleas, explores how finance is nothing more than a long chain of innovations leading to development of novel financial products and processes to improve allocation of capital and risk management. Given the key role that access to capital and ability to handle risk to avoid loss play in fostering economic activity, growth, and promoting social organization, based on economic power, this assertion ought not to be surprising.
Yet much has gone wrong with contemporary financial innovation. This chapter reconceptualizes financial innovation and investigates this paradox. It discusses the risks of financial innovation and contemporary regulatory reforms addressing them. It then provides a critique of contemporary reforms. In this context, it stresses the need for a new framework for financial innovation to foster long-term growth and curb speculation. Regulation ought to focus on altering innovators' incentives through a properly balanced mix of incentives and sanctions.
The chapter, ‘Regional financial arrangements: lessons from the Eurozone Crisis for East Asia’, by Avgouleas, Arner and Ashraf, explores the financial integration that has been building steadily in East Asia over the past two decades. To support this process, countries in the region have undertaken a range of initiatives focusing on financial market development and stability. Prior to the GFC and the Eurozone debt crisis, the European Union frequently served as a model for East Asian financial integration. In the wake of the Eurozone financial crisis, this chapter argues that lessons from the EU financial integration experience remain important for East Asia. The chapter reviews the causes of the Eurozone crisis. In particular, it highlights the challenges raised by integrated supra-national banking markets in the absence of suitable institutions to absorb financial stability shocks. Based on this discussion the paper presents suggestions for future development of East Asian regional financial arrangements as they relate to both market development and crisis prevention and resolution in an environment of continuous financial liberalization within the ASEAN Economic Community and ASEAN+3.
The chapter, ’The Broken Glass of European Integration: Origins and Remedies of the Eurozone Crisis and Implications for Global Markets’, by Avgouleas and Arner, explores the reform of the EU integration mechanisms in the aftermath of the GFC and the Eurozone debt crisis as these mark an important milestone in the integration process and regionalism drive, especially because of the failure of various institutional mechanisms supposed to ensure financial market stability. The EU crisis response carries significant implications for the development and functioning of single market operations and has emphasized the need to improve international and regional coordination on fiscal, monetary and financial policies affecting other states.
This research has been presented at:
Reconceptualising Global Finance and its Regulation Workshop
The University of Hong Kong (December 2013)
The Trajectory of Financial Law in the 21st Century – Private Law Perspectives
University of Edinburgh (May 2014)
This research has been presented to University of Vienna, Austria (November 2014) and University of Goettingen, Germany (November 2014).