6th June 2016
The modern financial system has been considered globally integrated since the liberalization of capital markets and a series of deregulatory measures were adopted at the national level in the 1980s and 1990s. This provoked widespread efforts to harmonize laws and standards across borders, but these really only took off in the wake of the global economic crisis of 2007-2008. Eight years on, the introduction of robust, international financial controls still tops the agenda of major economies and powerful political clusters like the G20 and G8 groups.
What’s driving convergence in this sector?
There are two main factors at play here:
Global markets and systemic risk: At the height of their market supremacy, ‘too-big-too-fail’ financial institutions took advantage of fragmented legal frameworks and were able to hand out loans to subprime debtors, borrow too much from other banks, and trade dodgy securities. And we all know what happened next. This learning has driven regulatory cooperation at an international level ever since.
Political will to harmonize regulations: It has been widely acknowledged that the lethal combination of international regulators and misbehaving market agents was to blame for the economic chaos that ensued post-2008. A united and robust response was the only way for shamed policymakers to deal effectively with the soaring debt and rising unemployment wreaking havoc on the global economy and regain credibility among their constituents.
What are the barriers to convergence?
But the traffic is not all one way. There remain barriers to further convergence:
Inconsistent and/or ineffective application: Despite considerable progress that has been made in recent years to harmonize financial regulation, it is still common for countries to implement the rules very differently.
Lack of coordinated enforcement: There remains a substantial lack of communication and coordination between enforcement bodies.
Differences between major economic players: The EU and US are at the forefront of efforts to converge regulations, but some key differences remain in their approach and legal frameworks, which are severely blocking harmonization at the international level.
Who’s setting the rules?
The stakeholder landscape in the financial sector is as complex and diverse as the assets they trade. Chief among those setting the rules are:
Direct market participants, including banks and other financial institutions, rating agencies, and global accounting and auditing companies
In terms of which countries or regions are in the driving seat, it is the US and EU. This is to be expected, not only because they represent the largest markets and economies in the world, respectively, but also because they were the most badly hit in the fall-out of the economic crisis.
What does the future look like?
Regulators’ efforts are slowly producing an international legal framework that reflects the global nature of the sector, and the systemic risk it poses to the global economy. The G10’s Basel III agreement of 2010 is a cornerstone example.
Nevertheless, convergence of financial regulation is a slow, difficult process, with many barriers remaining. Again, Basel III is an example, with its entry into force repeatedly delayed due to outstanding concerns among certain financial institutions and even governments. But the aftershock of the economic crisis remains fresh in the minds of the industry. And so long as that remains the case, cooperation will continue at the international level.
Read the full report here
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