The Global Financial Crisis and the Evolution of Markets, Institutions and RegulationEssay Preview: The Global Financial Crisis and the Evolution of Markets, Institutions and RegulationReport this essay1. Introduction2. Regulations and the development of markets3. The role of crises in contributing to the emergence of international institutions4. Reforms of the international financial architecture5. A new global framework and global leadership6. The evolution of central banks following the global financial crisis7. Financial information gaps and global financial stability8. The future of multinational banks following the global financial crisis9. ConclusionReferencesElsevierJournal of Banking & FinanceVolume 35, Issue 3, March 2011, Pages 502-511Journal of Banking & FinanceThe global financial crisis and the evolution of markets, institutions and regulationAuthor links open overlay panelFariborzMoshirianShow moreAbstractThis paper analyses the recent global financial crisis in the context of the dual processes of market development and regulation. It discusses how, in the absence of a globally integrated financial framework, past and present regulations and interventions in reaction to national and global financial crises did not resolve the cross border regulatory arbitrage. The paper discusses how crises often lead to the emergence of new national and international institutions. It also analyses the proposed “new global framework” that needs to be in place if the policy recommendations contained in the G20 communiqué are going to be effectively implemented. The paper argues that unless international agreements are ratified by all nations and become part of national rules and laws, the presence of regulatory arbitrage and the lack of adequate cross border information and data may prevent the global economy from addressing the underlying causes of the recent global financial crisis. The paper also discusses the evolution of central banks and their new role in contributing to global financial stability. The paper argues that the recent global financial crisis has provided a unique opportunity to go beyond economic data and attempt to capture cross border financial data and other information that could assist international and national institutions to measure and manage financial risk more effectively. Finally, the paper discusses “too big to fail” and argues that only an internationally integrated financial system will make large banks global, both when operational and in the event of insolvency.
Previous article in issueNext article in issueKeywordsGlobal financial crisisThe G20 groupToo big to failFinancial regulationJEL classificationG15G251. IntroductionThe sub-prime credit problems that started in the US during 2007 affected the financial sector in other countries, particularly Europe. Deterioration in the financial sectors of the US and Europe has affected national financial systems in different parts of the world and led to the global financial crisis. Given the unprecedented scale of the recent global financial crisis since the Great Depression, the real global economy has also been hard hit by this crisis. The sharp decline in the value of assets, real estate, prices of commodities, the collapse of a number of large banks and non-banks and an increase in the level of unemployment, led the IMF to refer to the recent global recession as “the Great Recession.”
As the global financial crisis intensified, more financial institutions in different parts of the world failed and the global economic outlook deteriorated, some governments became pro-active in the market in an attempt to rescue their banks and other sectors of their economies. Some governments offered blanket guarantees to their depositors and creditors as a way of containing a systemic crisis. As a further response to the recent global financial crisis, some governments also became partial or full owners of some banks and other firms, introduced more regulations for their national financial systems and asked their central banks to become more active in the market as market stabilisers. The global financial crisis also reduced international trade activities, introduced financial protectionism, led to capital outflows from developing countries and to a significant deterioration in the life of millions of people, particularly in developing countries.
At the same time, as a way of addressing the challenges of the recent global financial crisis, a more influential G20 emerged, with the participation of their heads of state, as the key forum to discuss issues associated with global financial stability.
A number of studies have attempted to analyse the causes of the sub-prime credit problems and/or the associated financial instability that eventually led to the recent global financial crisis. Popov and Ongena (2011) discussed aspects of the interbank market, while Dolly King and Wen (2011) study is an attempt to analyse the influence of corporate governance structure and managerial risk-taking behaviour. The study by Tsai et al. (2011) deals with aspects of credit reporting system for multinational banks. Ang and Mauck (2011) discuss fire sales and acquisitions which are relevant to aspects of financial crises.
One of these studies by Claessen et al. (2009) highlights some of the key issues with respect to global risk measures and risk management. The study by Ivashina and Scharfstein (2010) highlights the importance of the source of funding for banks and the way banks reacted to the illiquidity crisis, particularly after the collapse of the Lehman Brothers. Another study by Caprio et al. (2008) showed that the main reason for the sub-prime credit problems and financial instability was not the actions of some greedy individuals or the unexpected weakening of major institutions in a particular country at a particular time but rather a failure of regulators and supervisors in various countries where “contradictory political and bureaucratic incentives” undermined their capacity for effective financial regulation and supervision.
In conclusion, the findings of the research in this report strongly suggest that the international banking system provides the financing for many serious and complex problems and, in many cases, has been forced to act as a brake on a systemic and systemic approach to financial instability in the financial system, with deleterious financial consequences. A failure to act on these issues as a brake on a systemic approach to financial stability is critical because it suggests that the world’s financial system is less dependent on the financial sector than its other sectors for security and financial stability. The failure of the global banking system to address the systemic and systemic challenges posed by a serious and complex financial crisis risks undermining the ability of central banks and markets to take action in response to significant changes in financial markets.
This is why, as the authors of this report say, we need deeper and wider reform of this system.
The central bankers of the world needed to act against the most important and dangerous global economic problems – namely, global financial instability.
Their failure, as the leading voices for this critical task, is a matter of critical importance. It has created an environment in which Wall Street and central bankers are unable to act, making it all the more important that we develop policies that will improve the situation. In essence, they have forced it on our very governments, especially those of Germany and France, and at the same time, a country so divided in their view that it cannot act to protect them and their country from threats and to prevent contagion like the one in Cyprus in early 2012. Even within the governments of the two major Western European and Asian autocracies, there was little or no political pressure in any other manner. But within Washington the government of the United States had to act against what we were seeing with the crisis of Cyprus.
What we need to do is to support and develop institutions that will enable us to understand and act upon the causes of these crises and to work to help mitigate them.
This is especially important when governments of the U.S. approach this crisis by being supportive of the crisis and by responding to its fundamental problems such as inadequate governance, systemic deficiencies in financial markets, and insufficient regulatory action.
As this report was made public last year, the Federal Reserve, through the Federal Open Market Committee (FOMC), has issued guidelines to assist banks and financial institutions to respond urgently to the challenges facing their businesses. In addition, the U.S. government has adopted actions to help financial services firms prepare for the risks that they face, while the Federal Communications Commission (FCC) has adopted some measures to better integrate the services into the regulatory system when they are required. While these efforts have been successful, none of them have successfully protected the financial stability of our banking system.
In this report we ask why, despite our strong commitment to working on the future of the financial sector, the financial system still poses major challenges for and challenges for the developing world. The problem we are facing is that the financial system is not in a position to manage risks well and provide adequate financial services, because it risks becoming embedded with financial institutions.
While banking is not necessarily insolvent, it is not necessarily secure. It is a source of great risk, and it poses a significant challenge to our economy and to the development of our