The Governance of the Black Holes of the World Economy: Shadow Banking and Offshore Finance

Abstract

This paper focuses on regulatory challenges posed by two interconnected structures of global financial system – economy of tax havens (or offshore financial centres), and shadow banking system. The financial crisis of 2007-09 has revealed that tax havens structures and shadow banking entities a central role in practise of financial institutions reliant on financial innovation. Thriving on complexity, opaque networks and driven by arbitrage, two phenomena pose tremendous challenges to national and international regulators aiming to restore financial cycle in recessionary environment. In this paper, we analyse the state of play and current plans for governance of tax havens, offshore finance and shadow banking industry. We find that although offshore financial centres and shadow banking are outside scope of academic economics, they have attracted a lot of attention on part of financial researchers and regulators. Along with other macro-prudential and system risk concerns, regulation, or governance of these black holes of global economy is increasingly assuming a central place on agenda of financial regulators. In what follows, we explore reasons behind this development.