Global Financial Regulation: Shortcomings and Reform Options
| Author | Emily Jones,Peter Knaack |
| DOI | http://doi.org/10.1111/1758-5899.12656 |
| Published date | 01 May 2019 |
| Date | 01 May 2019 |
Global Financial Regulation: Shortcomings and
Reform Options
Emily Jones and Peter Knaack
Blavatnik School of Government, University of Oxford
Abstract
Standard-setting bodies in global finance follow a core-periphery logic, imposing a rigid dichotomy between standard-setters
and standard-takers. They also focus exclusively on promoting financial stability. We argue that both attributes are increasingly
problematic in today’s world of globalised finance. Developing countries outside of standard-setting bodies are highly inte-
grated into global finance and while they are not systemically important, they are greatly affected by the regulatory decisions
taken in the core. Analysing Basel banking standards, we show how the two-tier structure of decision-making results in inter-
national standards that generate adverse implications for countries in the periphery, particularly developing countries. Focus-
ing on debates over the regulation of non-bank credit intermediation, we show how the exclusive focus on financial stability
can operate to the detriment of other important policy objectives, including financial inclusion. To improve the efficacy of
international standard setting we make a series of recommendations aimed at increasing the applicability of standards to a
wide variety of jurisdictions, and widening the focus of standard-setting beyond financial stability. We also propose the cre-
ation of a new standard-setting body for the regulation of fintech that models a more inclusive and holistic approach.
Policy Implications
•Strengthen the voice of developing countries in global financial standard-setting by expanding and strengthening the
institutional channels of consultation, and by fostering collaboration among developing country regulators.
•Direct key standard-setting bodies in financial regulation, and related international organisations, to conduct research on
the impact of standards on developing countries at the standard design stage, not post hoc.
•Amend the charter of global standard-setting bodies to explicitly recognise the need for differentiated standards and com-
mit to build proportionality into their design, so they can be readily adapted for use in a wide range of jurisdictions.
•Create a new standard-setting body for digital financial services with a dual mandate of harnessing both financial stability
and financial inclusion.
1. Global financial standards: the reform
imperative
Over the past three decades financial globalisation has
grown apace. Cross-border capital flows rose from US
$0.5 trillion in 1980 to a peak of US$11.8 trillion in 2007,
before decreasing markedly in the wake of the financial cri-
sis (Lund et al., 2013). Cross-border banks were a major
vehicle of financial globalisation, especially in developing
countries (Claessens, 2017). In tandem, financial innovation
and integration have increased the speed and extent to
which shocks are transmitted across asset classes and coun-
tries (Davies and Green, 2008).
The global financial crisis of 2007–08 was a powerful
reminder that inadequate regulation and supervision in
countries at the core of the financial system can have glo-
bal repercussions, and it proved to be a clarion call for
strengthening international regulatory cooperation (Bauerle
Danzman et al., 2017). We have seen a far-reaching reform
effort, particularly in international banking regulation. While
the reforms have substantially improved the solvency and
liquidity of globally systemic banks, deficiencies remain
(Aikman et al., 2018). Our main argument is that despite
recent governance reforms in major standard setting bod-
ies (SSBs), a core-periphery logic persists that generates a
dominant focus on ensuring financial stability in the core
of the global economy. While vitally important, this focus
on the core unnecessarily leads to marginalisation of issues
that are particularly relevant to developing and emerging
countries.
A two-tier structure dominates decision-making in inter-
national financial regulation. While the membership of
standard-setting bodies varies, all restrict rule-making
power to a select number of mostly developed economies.
The Financial Stability Board (FSB) at the apex of interna-
tional regulatory cooperation includes only 25 jurisdictions,
while the Basel Committee on Banking Supervision has
28.
1
All other jurisdictions have access to specific channels
of consultation, but in practice they are relegated to the
role of rule-takers.
As financial globalisation has intensified, there has been a
step-change in the level of integration of countries into
Global Policy (2019) 10:2 doi: 10.1111/1758-5899.12656 ©2019 The Authors. Global Policy published by Durham University and John Wiley & Sons, Ltd.
This is an open access article under the terms of the Creative Commons Attribution License, which permits use,
distribution and reproduction in any medium, provided the original work is properly cited.
Global Policy Volume 10 . Issue 2 . May 2019 193
Research Article
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