Global Financial Regulation: Shortcomings and Reform Options

Peter Knaack,Emily Jones

doi:10.1111/1758-5899.12656

Abstract

AbstractStandard‐setting bodies in global finance follow a core‐periphery logic, imposing a rigid dichotomy between standard‐setters and standard‐takers. They also focus exclusively on promoting financial stability. We argue that both attributes are increasingly problematic in today's world of globalised finance. Developing countries outside of standard‐setting bodies are highly integrated into global finance and while they are not systemically important, they are greatly affected by the regulatory decisions taken in the core. Analysing Basel banking standards, we show how the two‐tier structure of decision‐making results in international standards that generate adverse implications for countries in the periphery, particularly developing countries. Focusing on debates over the regulation of non‐bank credit intermediation, we show how the exclusive focus on financial stability can operate to the detriment of other important policy objectives, including financial inclusion. To improve the efficacy of international standard setting we make a series of recommendations aimed at increasing the applicability of standards to a wide variety of jurisdictions, and widening the focus of standard‐setting beyond financial stability. We also propose the creation of a new standard‐setting body for the regulation of fintech that models a more inclusive and holistic approach.

Highlights

Standard-setting bodies in global finance follow a core-periphery logic, imposing a rigid dichotomy between standard-setters and standard-takers
We argue that the exclusive focus on financial stability has come, unnecessarily, at the cost of other important objectives, most notably that of financial inclusion
It would be far preferable to anticipate adverse implications of international standards on policy objectives such as financial inclusion from the outset, and to design standards with this in mind. To this end we propose expanding the mandates of standard-setting bodies in international finance, requiring them to analyse, anticipate and address adverse implications for financial inclusion and economic development when they formulate international standards

Summary

Global financial standards: the reform imperative

Over the past three decades financial globalisation has grown apace. Cross-border capital flows rose from US $0.5 trillion in 1980 to a peak of US$11.8 trillion in 2007, before decreasing markedly in the wake of the financial crisis (Lund et al, 2013). Our main argument is that despite recent governance reforms in major standard setting bodies (SSBs), a core-periphery logic persists that generates a dominant focus on ensuring financial stability in the core of the global economy. While vitally important, this focus on the core unnecessarily leads to marginalisation of issues that are relevant to developing and emerging countries. As with the two-tier system, the adverse consequences of the singular mandate of standard-setting bodies are felt most acutely by citizens of developing countries This is most apparent in the area of anti-money laundering, where the implementation of international standards had negative repercussions for financial inclusion.

Core-periphery dynamics in international finance

Challenges arising from two-tier decisionmaking

Challenges arising from an exclusive focus on financial stability

Findings

Reform options for standard-setting bodies