The Role of a Global Supervisor for International Financial Markets
| Published date | 01 January 2001 |
| DOI | https://doi.org/10.1108/eb025989 |
| Date | 01 January 2001 |
| Pages | 234-247 |
| Author | Kern Alexander |
| Subject Matter | Accounting & finance |
Journal
of
Financial Crime
—
Vol.
8 No. 3 —
Analysis
The Role
of a
Global Supervisor
for
International Financial Markets
Kern Alexander
THE NEED
FOR
INTERNATIONAL
REGULATION
The need
for
international regulation
of
financial
markets became apparent
in the
mid-1970s
in
response
to the
post-Bretton Woods liberalisation
of financial markets.
The
elimination
of the
fixed
exchange rate parity with gold resulted
in the
privatisation
of
financial risk, which created pressure
to eliminate controls
on
cross-border capital move-
ments
and the
further deregulation
of
financial
markets.
It
became necessary
for
national regulatory
authorities
to
promote safe
and
sound banking
systems through
the
effective management
of
systemic risk
in
national markets. Similarly,
the
need
for
international standards
of
prudential super-
vision
was
also recognised,
to
prevent solvent bank-
ing institutions
in one
jurisdiction from losing
business
to
less respectable institutions operating
in
other jurisdictions whose laws permitted cut-rate
financial services
and
other risky financial practices.1
The privatisation
of
financial risk also created
the
need
for
financial institutions
to
spread their risks
over many assets
and
activities, which
led, in
turn,
to
a
significant increase
in
short-term cross-border
portfolio investment that
has, in
many instances,
exposed capital-importing countries
to
increased
systemic risk
due to the
volatility of such investments.
The first major banking collapses that resulted
from
the
privatisation
of
financial risk
and
which
focused
the
attention
of the
international financial
community
on the
need
for
enhanced international
banking supervision occurred
in 1974 and
involved
major banks from Great Britain, West Germany
and
the
USA. In June 1974, West German authorities
closed
the
Herstatt Bankhaus (Herstatt) following
losses from foreign exchange dealings that threatened
severe disruption
of
the
US
clearance system,2 while
UK authorities closed
the
British-Israel Bank
of
London
for
insolvency problems.3
The
closure
of
Herstatt
and the
British-Israel Bank
of
London
exposed major weaknesses
in the
international bank-
ing system.4 Shortly thereafter,
the
Franklin National
Bank
in the USA
collapsed under
the
combined
weight
of bad
management
in the
volatile domestic
wholesale deposit base, excessive speculation
in
international foreign exchange markets,
and
over-
ambitious efforts
to
expand.5 Despite such poor
management,
the US
Federal Reserve chose
to
guarantee
the
bank's failed short-term foreign
exchange commitments.6
It has
been argued that
these banking collapses occurred because
of
the lack
of adequate regulatory standards
for the
risk-taking
activities
of
banks.7
During
the
1980s
and
1990s,
a
market-led global
financial system emerged
in
which
the
volume
of
financial
assets,
the
sophistication
of
international
financial transactions,
and
advances
in
computer
and telecommunications technology increased dra-
matically.
By
contrast,
no
corresponding institutional
framework
has
been developed
on the
international
level
to
provide effective supervision
and
regulation
of globalised financial markets.
As
compared with
the Bretton Woods
era, the
current international
financial order
has led to
recurring financial crises
and declines
in the
rates
of
economic growth
and investment.8 Consequently, governments have
attempted
to
recover some
of
the regulatory controls
that
had
been utilised under
the
Bretton Woods
system.
The
establishment
of
various international
financial organisations9
in the
areas
of
banking,
securities, insurance
and
accounting
has
resulted
in
the adoption
of
minimum international standards
of
prudential supervision
and
competitive equality
for
financial markets. Nevertheless, recent financial
crises
and the
severe economic costs they have
imposed
on
economies throughout
the
world
demonstrate
the
inadequacies
of the
current inter-
national regulatory framework. Indeed,
the
desire
to
act to
establish
a new
international financial
architecture
has
been
an
important objective
of
the Group
of
Seven.10 This
was
expressed
in the
1999 Economic Report
of
the President:
'Traditionally, supervision
and
regulation
of
financial systems have been domestically based.
But
the
increased global integration
of
financial
markets
and the
proliferation
of
institutions doing
cross-border transactions suggest
the
desirability
Journal
of
Financial Crime
Vol.
8.
No.
3.2001,
pp. 234-247
Henry Stewart Publications
ISSN 0969-6453
Page 234
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