A Tangled Web
| Author | Amar Bhattacharya |
| Position | Director of the G-24 Secretariat |
| Pages | 40-43 |
Page 40
Everyone agrees on reforming the governance of fi nancial markets, but who will do what remains unclear
The financial crisis sweeping the world has brought into sharp focus serious weaknesses in how today's global fi nancial markets are governed. Since the 1970s, the world's fi nancial markets-dominated by the institutions of mature markets-grew exponentially, much faster in fact than any other global markets.
The expansion was driven by the mutually reinforcing forces of deregulation and financial innovation. Banks played a central role in this sharp, sustained expansion and progressive internationalization, but capital markets and the trend toward securitization also helped transform finance.
What didn't grow-or rather couldn't keep up-with the proliferation of these markets were the institutions and structures that oversee them by setting and implementing regulations. There remained a gnawing gap between market activities and regulatory scope, especially in relation to mature markets.
The current financial crisis has dramatically revealed how these regulatory weaknesses have hurt the global economy and highlighted the need for global approaches to regulating global markets. Treated until the 1990s as only one-and an arcane one at that-aspect of the broader agenda of global economic governance, financial market reform is now universally recognized as a central and urgent global priority. But although there are many reform proposals, there is no agreement as yet on how much reform is needed, who will do what, and how international cooperation will be coordinated and enforced.
Page 41
Until the early 1980s, national fi nancial systems were bank dominated, relatively tightly regulated, and with limited international exposures. Starting with the modest issuance of eurobonds during that decade, cross-border fi nancial fl ows and linkages started to expand dramatically. And although the 1980s debt crises arrested the integration of developing countries and the 1990s fi nancial crisis severely hurt some emerging markets, these crises had little impact on the evolution and expansion of global fi nancial markets.
Led by the rapid growth in international banking, global financial markets continued to boom-from just $0.1 trillion in 1970 to $6.3 trillion in 1990 and to a massive $31.8 trillion in 2007. This was accompanied by a consolidation of the international banking industry-a result of a wave of cross-border mergers and acquisitions. Banks entered areas of activity that had previously been the preserve of non-bank institutions (such as underwriting, asset management, investment banking, and proprietary trading), blurring distinctions between banks and other financial institutions and leading to a "shadow banking" system with large segments of bank activity outside the perimeters of regulation. And rapid growth of complex securitized products, such as credit derivatives, sharply increased banks' leverage and masked underlying risks. The credit derivative market-which was insignificant in 2001-grew to about $50 trillion by 2007.
The 1997-98 Asian crisis triggered a range of initiatives to reform the architecture of the international fi nancial system (see box) and thereby reduce the likelihood and costs of future financial crises and cross-border spillovers.
In the immediate aftermath of the crisis, working groups (the so-called Willard groups) were set up, drawing on policymakers from 22 developed and emerging market countries as well as the international financial institutions (IFIs) to identify reform priorities in the areas of transparency, strengthening of financial systems, and resolving...
To continue reading
Request your trial