Friday, 22 April 2011 10:20

Reforming Financial Institutions

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The ongoing economic crisis has revealed the necessity of global governance and has provided a proof that national states have a key role to play as regulators. This economic decline is an opportunity to review deregulation policies and to reflect on imperfections of the market economy which has become excessively speculative and monetary.

How far should economic regulations go? What should be the nature and span of state interventions? What international institutions should be founded or activated to outline a new model of global governance? What role should the European Union play in the formation of a new world deal?

The implementation of regulation must also be consistent across jurisdictions, and requires full cooperation among national authorities. Severe financial crises of the magnitude of the current one tend to reinforce national bias in policy actions. To some extent, this can be explained by local specificities and the pressures to react rapidly to financial stress.

But if this kind of nationalistic orientation goes too far and becomes entrenched, it can hamper cross-border finance, undo some of the benefits of many years of globalisation, impede a level playing field and economic efficiency, and reduce global growth and well-being. So we need both international standards and strong supervision cooperation to properly support national frameworks.

The G20 is playing a key role in achieving such coordination. It has provided strong political impetus for international cooperation, with a clear commitment by G20 members to implement international agreements and standards. This is particularly important because we are dealing with new and complex financial reforms.

A). Institutional reform of international financial institutions:

- Since financial transactions take place between different national and regulatory jurisdictions, how can we coordinate the work of those dispersed regulatory bodies?

  • Should further actions to remove market imbalances be coordinated under the auspices of the IMF, WTO, the G20 or rather other entity?
  • What should be the role of IMF and WTO in the management of global markets?
  • What regulatory prerogatives should these institutions have?
  • Should it be their responsibility to identify and resolve structural perils and imbalances of the global market?

B). Other key issues and questions for research regarding global financial regulation:

  • How to balance a measured, long-term view of the cyclical and unpredictable nature of financial markets with the need for global regulation and stability?
  • How to effectively balance domestic sovereignty over economic regulations and international economic stability?
  • How to detect damaging behaviour by financial market actors and restrict those actions or mitigate their impact?
  • Is it possible to guarantee a high degree of security and stability of financial markets without stifling innovation?
  • How to avoid the risk of overregulation which will hinder progress?
  • Can civil society be included and engaged in global governance of financial markets?
  • Have not the present depression, including the subprime crisis, been triggered by government incentives?
  • Is it true that current states' interventions put in place to avoid an economic catastrophe are setting stage for the next crisis?
  • Is it possible to identify and avoid "perverse incentives" – incentives that have unintended, negative effects against the own interests of the promoter? Can bail-outs, state interventions and international regulations turn into "perverse incentives?
  • What is the share of responsibility of regulatory bodies, central banks and parliaments in creating future economic crises?

c). Management of the too big-to-fail institutions:

  • How to regulate systemically important financial institutions?
  • How should they be controlled?
  • Is it morally right to bail-out irresponsible financial actors by giving them access to tax-payers money?
  • What kind of corrective measures should be used against institutions that do not internalise, but socialise, negative consequences of their strategies, especially risk-taking?
  • What sort of rules are necessary to impede abuses of power in finance?
  • How to re-establish mutual trust and transparency?
  • Should the appetite of big financial institutions for risk taking by curbed or regulated?
Read 2461 times Last modified on Friday, 22 April 2011 11:32

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