Regulating Global Financial Markets
| DOI | http://doi.org/10.1111/1467-6478.00129 |
| Author | Jason Haines,Sol Picciotto |
| Date | 01 September 1999 |
| Published date | 01 September 1999 |
This paper discusses the role of regulation in the emergence of a global
system of linked financial markets. It traces the origins of the interna-
tionalization of financial markets to the emergence of new competitive
pressures, rooted in changes in the social structures of savings and
investment, breaking down both national systems of financial control
and international arrangements for monetary and financial co-ordina-
tion. These changes have been accompanied and facilitated by a process
of international re-regulation, through informal specialist networks.
Although these have facilitated the international diffusion of regulatory
standards and practices, and attempted to co-ordinate them, they are
greatly hampered by espousing the perspectives of the various markets
and firms which it is their task to supervise. Together with their mini-
malist view of the aims of public legitimation and oversight of financial
markets, they have proved inadequate to prevent the destabilizing
effects of the new global finance on the world economy.
© Blackwell Publishers Ltd 1999, 108 Cowley Road, Oxford OX4 1JF, UK and 350 Main Street, Malden, MA 02148, USA
* Professor of Law, Department of Law, Lancaster University, Lancaster
LA1 4YN, England
** Research Fellow, Institute of Advanced Legal Studies, 17 Russell Square,
London WC1B 5DR, England
This paper greatly benefited from a grant from the Leverhulme Trust to fund research by the
authors into Regulation of Globalized Futures Markets. Earlier papers exploring these issues
were presented to the Second Consortium on Globalization, Law and Social Sciences,
University of Glasgow, June 1996; and the Third Consortium on Globalization, Law and
Social Sciences, Institute for Law and Society, New York University, United States of
America, April 1997. A draft of this paper was delivered at the W. G. Hart Workshop on
Transnational (Corporate) Finance and the Challenge to the Law, Institute for Advanced
Legal Studies, University of London, July 1998. We are grateful to the organizers and partic-
ipants at these workshops for the opportunity to debate the issues, and especially to David
Campbell, Kevin Dowd, and Dede Boden for many helpful comments and fruitful discussions,
and to the journal’s referees for specific suggestions. We would also like to thank the many
financial market participants and regulators who have spared some of their valuable time to
participate in our continuing research.
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JOURNAL OF LAW AND SOCIETY
VOLUME 26, NUMBER 3, SEPTEMBER 1999
ISSN: 0263–323X, pp. 351–68
Regulating Global Financial Markets
SOL PICCIOTTO* AND JASON HAINES**
INTRODUCTION
There can be few issues of greater public importance than the regulation of
global financial markets. The international liberalization of financial mar-
kets which gathered momentum in the 1980s has involved a qualitative
jump in financial volatility and risk, as well as in the complexity and cost
of the devices which are supposed to manage those risks. Consequently, the
1990s have been marked by a series of highly publicized financial disasters
of various kinds. The 1994–5 Mexican peso crisis, due to a rapid inflow and
even quicker outflow of short-term capital (mainly from United States
mutual funds), was responded to by a $50 billion bail-out. Yet within less
than eighteen months came the 1997 Asian crisis, triggered by the with-
drawal of short-term loans channelled through an international chain of
financial intermediaries, resulting in an International Monetary Fund
(IMF)-led package of over $117 billion to Thailand, Indonesia, and Korea.1
In both these cases, financial disasters due to volatile, short-term, interna-
tional capital flows have led to a more general economic crisis, requiring
multilateral rescue measures to avert global repercussions as contagion
threatened other countries: the Asian crisis also engulfed Russia and dam-
aged Brazil. Both the Mexican and Asian crises resulted from inadequately
monitored large-scale flows of private, short-term capital.2In addition to
these major events, the opening up of national capital markets to global
competition has also resulted in financial sector crises in many countries:
research for the IMF has estimated the costs of such crises at between 3 per
cent and 25 per cent of GDP.3
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© Blackwell Publishers Ltd 1999
1 Bank for International Settlements (BIS), Basle, 68th Annual Report (1998).
2Attention has mainly been focused on the inadequacy of monitoring by the capital-importing
countries of the scale and uses made of foreign borrowing, and the inadequacy of their
prudential supervision arrangements. However, already in mid-1996 the BIS noted the rapid
growth of lending to ‘emerging markets’, especially in Asia and by European banks, with a
predominance of short-term loans and a shift to lending to the non-bank private sector, part-
ly to circumvent host country restrictions on bank borrowing. This should have alerted home
country supervisors, although their fears may have been lulled by the apparently low expo-
sures to particular country risk (C.M. Miles, ‘The Asian Crisis: Experiences and Lessons for
a Home and Host Supervisor’, paper for conference on The Asian Financial Crisis and its
Regulatory Implications, LSE/ESRC Financial Markets Group, London, May 1998).
However, it seems that the inter-bank market was used to channel loans to other destinations:
in particular, banks in Korea (which became classified as Zone A for the purposes of the Basle
capital adequacy requirements once admitted to the OECD in 1996) apparently on-lent to
other countries, such as Russia.
3The United States Savings and Loan disasters of 1984–91 cost 3 per cent of GDP, and the
continuing Japanese bad loans crisis will have very high absolute costs, but the impact on
smaller economies is even higher: recent cases include Venezuela 18 per cent; Bulgaria, 14
per cent; Mexico, 12–15 per cent; Hungary, 10 per cent; several cases (Argentina, Chile,
Côte d’Ivoire) have cost over 25 per cent of GDP: see M. Goldstein and P. Turner, Banking
Crises in Emerging Economies: Origins and Policy Options, BIS Economic Papers no. 46
(1996), citing research by Caprio and Klingebiel.
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