Financial Regulation in a Global Marketplace

Abstract

Rapid technological change, conglomeration, mergers, and globalization are rocking the financial industry here and abroad. In this paper we primarily address the implications of globalization for prudential regulation of firms in the financial industry. However, given the importance of the other three forces -- and the extent to which they reinforce or are by-products of the trend toward globalization -- we address them as well. Our bottom line is that regulators at both the national and international level will have to respond increasingly to market-driven changes. In particular, as financial institutions delve into a wider range of products and activities, policymakers almost certainly will have to decide whether they want to establish a single regulator to oversee all types of financial activity or whether they will be content with the segmented regulatory system long in place in some countries, such as the United States. We note that a trend outside the United States seems to be under way toward creation of a single national financial regulator, independent of the central bank, a development we cautiously support. More fundamentally, however, the central challenge that financial regulators, especially those supervising banking activities, will face is how to deal with the rapid and increasingly complex changes in the financial arena. Regulators are slowly -- too slowly in our view -- coming around to the view that they need help from the market to discipline financial institutions from taking excessive risks. We outline a plan for accelerating this process in the banking arena, although we are more circumspect about the need for international minimum standards for other types of financial institutions. We are more enthusiastic, however, about efforts to develop global accounting standards, which we believe would promote efficiency as well as safety and soundness of financial institutions in countries that use those standards. We argue that in accounting standards, and other areas of financial regulation, the advantages of harmonization must be balanced against the gains from regulatory competition, and we consider approaches that balance those considerations.