Friday, February 8, 2013

Is it Time for Global Financial Regulation With Teeth?

In a globally interconnected marketplace, just how effective can country-by-country regulation really be? According to David Wright, Secretary General of IOSCO, this fragmented regulation from jurisdiction to jurisdiction may be doing more harm than good.  The tools currently being used to coordinate financial regulation internationally are too soft, Wright says. Without legally binding global enforcement mechanisms, much of this coordination, standard setting, and monitoring will never be truly effective.
Compliance with agreed, well worked out, effective global standards is a public good that, ceteris paribus, will enhance global financial stability and economic welfare. Yet, in reality the global implementation tool box is bare to ensure it.
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So who will resolve the global disputes? Or ensure correct interpretations of global standards? What penalties will there be for global regulatory pariahs and miscreants? The dual answer is that if we don’t change our global financial regulatory institutions, no one; and none.

Mr. Wright does not propose a one-size-fits-all regulatory approach, however.  Rather, he sees a treaty creating a set of globally agreed upon basic policy principles that is implemented by all signatory jurisdictions, with appropriate cross-border enforcement authority, binding dispute settlement, and sanctioning possibilities.  The US and others will no doubt feel threatened by this proposal, but Wright sees the US and emerging markets as big winners under such a treaty regime.

But surely the biggest gainer of all would be the U.S. itself – notably its financial industry writ large which is still the most powerful and diverse on earth. The U.S. industry would have huge export opportunities in the predictable,  big, well regulated markets of tomorrow. Indeed agreement on the new global financial regulatory framework could be accompanied by supplementary market opening initiatives in the WTO.
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There is also an important Emerging Market perspective here. Some Emerging Market countries are (rightly) growing in confidence to consider themselves as having graduated to the “emerged” category. Others continue to look towards developed economies by learning from their successes and, recently, their shortcomings. IOSCO has a major role to provide technical assistance to help its members develop their securities markets on the basis of sound IOSCO standards and principles and intends to step up its efforts by developing an IOSCO Foundation for this purpose. That said the U.S. is still considered to have the leading technical expertise on the intricacies of financial markets – but will this always be the case as the ladder changes? Could U.S influence decline significantly if it shuns efforts to enhance global regulatory coordination and institution building?  

In David Wright's view, there are only three options: 1) the status quo, which he says is just not working, 2) the law of the jungle - essentially doing nothing, or 3) some global institutional framework with the teeth necessary to enforce, settle disputes, and apply sanctions.