Domestic Financial Regulation Research Articles

FDI, Stock Market Development and Institutional Quality: An African Perspective

This paper empirically sought to establish the existence of relationships between foreign direct investment, stock market development and institutional quality, respectively. The study adopted a multiple regression analysis, using a panel of nine African countries between 2009 and 2016. Using the random effects model, we find that the relationship between foreign direct investment and stock market development is positive and statistically significant. On the other hand, institutional quality reflected a negative effect on FDI inflows, implying that countries with low quality institutions would struggle to attract inward FDI. The policy implications are that host countries’ policy makers should eliminate or reduce any practices that deter foreign direct investments, such as capital controls and risk of expropriation (institutions), while simultaneously improving the domestic financial infrastructure and related regulations.

글로벌 융복합 핀테크 혁신과 국내 금융규제에 대한 사례연구: Forbes 선정 스타트업(Start-up)을 중심으로

2008년 금융위기로 촉발된 미행정부의 금융규제 강화는 금융기업의 경영활동을 위축시키는 한편 정보통신 기술로 무장한 신생기업들이 금융시장에 진출할 수 있는 기회를 마련하였다. 이들 핀테크 스타트업 기업들은 단순히 ICT 기술을 금융서비스에 활용하는 수준을 넘어 ICT 기술을 매개로 한 융복합 혁신을 통해 금융시장의 새로운 경쟁자 내지 협력자로서의 지위를 공고히 하고 있다. 해외 유망 핀테크 스타트업 기업들은 금융산업내 기능의 융합, 금융산업과 다른 산업분야와의 융합을 통해 고객에게 새로운 금융서비스를 제공하고 있다. 또한 금융서비스를 제공하는 과정에 고객을 참여시키는 형태로 혁신적인 금융서비스를 시장에 선보이고 있다. 그러나 국내 금융시장은 과도한 금융규제로 인해 혁신적인 핀테크 기업의 출현이 가로막혀 있는 상황이다. 특히 국내 금융규제는 포지티브 규제방식을 채택하고 있어 네거티브 규제방식을 채택한 미국 등에 비해 높은 규제 장벽을 형성하고 있다. 규제는 개인이나 집단의 자유를 제한하고 의무를 부과하는 대신 공공복리를 증진시킨다는 목적에 따라 그 정당성을 인정받고 있다. 특히 금융산업은 국가 및 시장경제에 막대한 영향을 미치기 때문에 다양하고 강한 규제의 영향을 받기 마련이다. 기본적으로 금융서비스에 대한 규제가 존재하고 정보보호 관련 규제의 영향도 받는다. 이외에도 금융당국의 행정지도, 가이드라인과 같은 그림자 규제로부터 간섭을 받는다. 또한 이들 규제는 시장참여자의 첨예한 이해관계로부터 영향을 받는다. 결과적으로 이들 규제가 기술의 발전과 기업의 혁신성을 포용하지 못하면서 금융시장에 진출하려는 이들의 새로운 도전은 위법 논란에 휘말리고 결국 기업의 혁신활동을 저해하는 요인으로 작용하고 있다. 본 사례 연구의 목적은 시장에서 성공한 해외 핀테크 기업의 서비스 사례를 통해 다양한 형태의 융복합 혁신을 소개하고 국내 금융시장의 규제와 규제를 둘러싼 시장참여자의 이해관계가 이들 비즈니스에 미치는 영향을 이해하는데 있다. 이를 위해 본 연구는 2015년부터 2018년 까지 3회에 걸쳐 Forbes가 선정한 유망 핀테크 스타트업 중 융복합 혁신을 통해 새로운 가치를 소비자에게 제공하고 있는 9개의 해외 핀테크 스타트업의 비즈니스를 상세히 기술하였다. 또한 이들 비즈니스가 국내 금융시장에 진출했을 경우를 가정해 금융서비스 관련 규제, 정보보호 관련 규제 그리고 그림자규제가 이들 서비스에 미치는 구체적인 영향에 대해 논의하였다.

The politics of bank ownership and currency policies in Central and Eastern Europe

ABSTRACTThis paper argues that state-owned, private domestic, and foreign banks have different preferences for exchange rate policies. More specifically, I posit that governments will be less willing and able to maintain fixed exchange rate arrangements in closed banking systems dominated by government-owned banks than in globalized banking systems with a large presence of foreign banks. The article’s principal claim rests on the notion that ownership structure of the banking system empowers different types of banks, affects their interests, and shapes the responsiveness of government politicians to bank demands. The bank ownership types further influence the stability of the domestic monetary system and financial regulation that are of paramount importance in the determination of exchange rate regimes. An empirical investigation of data on exchange rate regimes for 25 Central and Eastern European countries provides strong support for the theory. The results are robust to alternative estimation techniques, instrumental variable analysis, and the inclusion of several economic and political variables.

French DNCG management control versus UEFA Financial Fair Play: a divergent conception of financial regulation objectives

The French Football Federation was the first football governing body to put in place, in 1990, a financial regulation system. It might be expected that UEFA’s Financial Fair Play (FFP) system established in 2010 would be similar to French DNCG (National Direction for Management Control) regulations. However, while FFP is concerned with profitability, DNCG is focused on solvency. Hence, a French club may be loss-making and not compliant with FFP, while at the same time being solvent in accordance with DNCG rules. Our research confirms that most French clubs do not conform to FFP rules. As such, it provides further evidence that DNCG has not prevented poor financial management within French clubs. The coexistence of DNCG and FFP– or any other domestic financial regulation and FFP –may result in disparities between domestic clubs. As a consequence, there should be consistent financial regulation in all European leagues.

Beyond capital controls: Regulation of foreign currency derivatives markets in the Republic of Korea and Brazil after the global financial crisis

Within the management of capital flows, some emerging economies have been facing economic policy dilemmas after the global financial crisis, related to financial instrument operations, in a context of abundant liquidity in the advanced economies. However, neither the academic literature nor the financial institutions have paid sufficient attention to foreign currency (FX) derivatives regulation in emerging economies. This paper analyses the measures adopted by Brazil and the Republic of Korea. We find, first, that the breadth of regulation concerning FX derivatives operations depends on the actors involved and the type of contract used. Second, effective domestic institutions are needed to formulate and implement regulations. Third, countries should not limit their policy space through multilateral or bilateral agreements, and leave space for domestic financial regulation.

Shareholder Liability: A New (Old) Way of Thinking About Financial Regulation

In the wake of a series of crises, international and domestic financial regulation has become highly complex and prescriptive, and oriented to leverage, liquidity, and capital ratios among financial institutions. This raises concerns over monitoring incentives, and over the increased role of deposit insurance, which insulates depositors and shareholders from some or most of the costs of an institution’s failure. However, until the mid-20th Century, banking regulation in the United States, Canada, the UK and elsewhere relied mostly on monitoring by shareholders and depositors. Central banks did not necessarily exist, and where they did, they did not necessarily have a modern lender-of-last-resort function. There were financial regulators, but depositors were expected to pay attention to the behaviour of the banks that held their savings. Senior bank managers often were exposed to liability for net losses incurred in the event that their financial institutions failed, as were other shareholders. The limited-liability corporate form, while it existed, did not apply to deposit-taking financial institutions. The reason was that owner-managers of banks often had incentives, and the capacity, to use for their own benefit the funds they held on behalf of others. Nonetheless, while bank runs, failures and crises occurred, bank depositors were nearly always made whole, and financial crises tended to be sharp, brief, and localized. Over the course of the 20th Century, shareholder liability, or double liability as it is often called, disappeared from the regulatory framework, to be displaced by deposit insurance, which has the political and economic attraction of reducing the incidence of bank runs and limiting their impact on depositors. In Canada, concerns over deposit insurance arise mostly at the provincial level. A number of provinces have expanded the size and range of deposits they cover, and British Columbia, for example, has introduced unlimited deposit insurance. This expansion will pose stability risks for the provinces that oversee the insurers, and for regulators and depositors outside those provinces. Implicit and explicit federal backstops for such insurance raise cross-province concerns. All of these features pose risks that deserve attention. At the national or international level, regulators should focus more on incentives. While reintroducing shareholder responsibility for bank liabilities in an insolvency seems implausible, other equity-based market instruments, such as equity recourse notes as proposed by Bulow and Klemperer (2013) could achieve the same effect. Irrespective of such sweeping change, there are clear domestic imperatives. Provincial deposit insurers should retrench, with respect to their coverage, and converge on a common standard, coincident with that offered at the federal level, for reasons discussed at the end of this review. Further, transitional expansion of federal deposit insurance to cover deposits at credit unions shifting from provincial to federal jurisdiction, announced in January 2014, should be withdrawn at the earliest opportunity.

A Keynesian alternative to the Washington consensus policies for international development

The Washington consensus was identified as a neoliberal manifesto and received a vast amount of criticism. In response, lately, John Williamson has offered a new set of policies in the 'After the Washington Consensus'. The aim of this paper is to determine whether there has been any substantial change in the recommended policies, and to offer a Keynesian proposal. Due to space limitations, the Keynesian perspective developed concentrates on: the state interventionist policies used by the industrialised countries; the excessive priority given to price stability instead of full employment; recycling the country's savings back into the domestic economy in coordination with industrial policy and domestic financial regulation; supporting interest rate policies that aim at a stable and permanently low level of interest rates and to direct credit to specific parts of the economy; regulation of foreign banks and reinforcement of fair competition; and the role of globalisation in development and capital controls.

The Interest Group Theory of Financial Development: Evidence from Regulation

We use a new dataset of de jure measures of trade, capital account, product market, and domestic financial regulation for 91 countries from 1973 to 2005 to test Rajan and Zingales’s (2003) interest group theory of financial development. In line with the theory, we find strong evidence that trade liberalization is a leading indicator of domestic financial liberalization. This result is robust to the use of different data frequencies (annual, 5-year intervals), estimation methods (OLS, 2SLS, system GMM) and a check for non-linear effects. However, in contrast to the theory, we do not find consistent evidence of an effect of capital account liberalization.

The Europeanisation of Macroeconomic Policies and Financial Regulation in Italy

This research asks to what extent, how and why two key domains of domestic political economy, namely, macroeconomic policies and financial services regulation, have been Europeanised in Italy over the last decade. The impacts of Economic and Monetary Union and European Union financial services regulation are assessed by tracing the change in interests, ideas and institutions in these policy areas and identifying the causal mechanisms through which change came about (or was resisted). It is concluded that the degree of Europeanisation and its effects have been uneven across different elements of the political economy and some distinctive national features have remained.

Ethiopia’s WTO Accession and Financial Services Liberalization: Striking the Balance between Trade Liberalization and Domestic Policy Space

This article examines some of the main provisions of the General Agreement on Trade in Services (GATS) and the Annex on Financial Services to evaluate its impact on domestic financial regulation and macroeconomic policy. Inparticular, it analyzes whether Ethiopia can – upon accession and within the WTO’s GATS framework – achieve the objective of liberalizing internationaltrade in financial services while maintaining adequate domestic regulatory institutions and the normative framework needed in this regard. The articleinvestigates whether GATS provides a flexible framework for Ethiopia to negotiate liberalization commitments while at the same time preserving asufficient level of domestic regulatory space to achieve financial and economicstability.Key words: WTO accession, GATS, financial liberalization, domestic policy space, trade liberalization, Ethiopia

The interest group theory of financial development: Evidence from regulation

We use a new dataset of de jure measures of trade, capital account, product market, and domestic financial regulation for 91 countries from 1973 to 2005 to test Rajan and Zingales’s (2003) interest group theory of financial development. In line with the theory, we find strong evidence that trade liberalization is a leading indicator of domestic financial liberalization. This result is robust to the use of different data frequencies (annual, 5-year intervals), estimation methods (OLS, 2SLS, system GMM) and a check for non-linear effects. However, in contrast to the theory, we do not find consistent evidence of an effect of capital account liberalization.

Domestic Financial Regulation and External Borrowing

This paper studies the relationship between domestic financial regulation and the incentive of non-banks to borrow from banks abroad using BIS banking data in a gravity framework. Conditional on a large set of macroeconomic controls, we find that under tighter domestic financial regulation non-banks borrow more abroad. Non-banks in a country on the upper quartile of a financial deregulation index borrow 21%-28% more than non-banks in a country with minimum regulation. The finding also holds for more disaggregated regulation measures. Interest rate controls and entry barriers to the banking sector are the most relevant types of regulation. The results in this paper indicate that international borrowing and lending is a prominent element to be taken into account in designing financial stability tools.

Asian Regulatory Responses to the Global Financial Crisis

The global financial and economic crisis marks an important turning point for finance and the Asian growth model. Regional consensus is now supporting economic rebalancing away from the dominant focus on exports to developed markets toward more and more balanced economic structure supported by domestic and regional financial development. In relation to finance, the crisis highlights the neces-sity of addressing a range of issues across the region. First, Asian approaches to financial liberalization, prudential regulation, and financial innovation are likely to be closely considered around the world. At the same time, while the region has not been at the center of the global crisis—in contrast to the Asian financial crisis of 1997–98—it nonetheless provides an important opportunity to strengthen domestic and regional financial regulations. Second, beyond the postcrisis issues, and the prevention of systemic risk in particular, finance must continue to play a central role in supporting economic development and poverty reduction across the region. While the global crisis has highlighted once again the risks of finance, a central objective, across Asia, must be financial sector development to support economic growth and development. Third, in addition to domestic reform, the crisis provides an opportunity to enhance the international financial architecture, not only to improve its efficacy, but also to enhance the role of empowered Asian economies in global fora and institutions. At the same time, weaknesses in the international financial architecture suggest the need for Asian regional alternatives to address liquidity, liberalization, regulation, and exchange rate volatility.

Capital Management Techniques in Developing Countries: An Assessment of Experiences from the 1990's and Lessons for the Future

This paper uses the term, capital management techniques, to refer to two complementary (and often overlapping) types of financial policies: Policies that govern international private capital flows and those that enforce prudential management of domestic financial institutions. The paper shows that regimes of capital management take diverse forms and are multi-faceted. The paper also shows that capital management techniques can be static or dynamic. Static management techniques are those that authorities do not modify in response to changes in circumstances. Capital management techniques can also be dynamic, meaning that they can be activated or adjusted as circumstances warrant. Three types of circumstances trigger implementation of management techniques or lead authorities to strengthen or adjust existing regulations - changes in the economic environment, the identification of vulnerabilities, and the attempt to close loopholes in existing measures. The paper presents seven case studies of the diverse capital management techniques employed in Chile, Colombia, Taiwan Province of China, India, China, Singapore and Malaysia during the 1990s. The cases reveal that policymakers were able to use capital management techniques to achieve critical macroeconomic objectives. These included the prevention of maturity and locational mismatch; attraction of favored forms of foreign investment; reduction in overall financial fragility, currency risk, and speculative pressures in the economy; insulation from the contagion effects of financial crises; and enhancement of the autonomy of economic and social policy. The paper examines the structural factors that contributed to these achievements, and also weighs the costs associated with these measures against their macroeconomic benefits. The paper concludes by considering the general policy lessons of these seven experiences. The most important of these lessons are as follows. 1.) Capital management techniques can enhance overall financial and currency stability, buttress the autonomy of macro and micro-economic policy, and bias investment toward the long-term. 2.) The efficacy of capital management techniques is highest in the presence of strong macroeconomic fundamentals, though management techniques can also improve fundamentals. 3.) The nimble, dynamic application of capital management techniques is an important component of policy success. 4.) Controls over international capital flows and prudential domestic financial regulation often function as complementary policy tools, and these tools can be useful to policymakers over the long run. 5.) State and administrative capacity play important roles in the success of capital management techniques. 6.) Evidence suggests that the macroeconomic benefits of capital management techniques probably outweigh their microeconomic costs. 7.) Capital management techniques work best when they are coherent and consistent with a national development vision. 8.) There is no single type of capital management technique that works best for all developing countries. Indeed our cases, demonstrate a rather large array of effective techniques. There are sound reasons for cautious optimism regarding the ability of policymakers in the developing world to build upon these lessons. In particular, we are heartened by the growing understanding of the problems with capital account convertibility in developing countries; by the increasing recognition of the achievements of capital management techniques by important figures in academia, the IMF and the business community; and by the potential for some developing countries (such as China, India, Malaysia, Chile, Singapore) to play a lead role in discussions of the feasibility and efficacy of various capital management techniques.

Cómo escapar de la trampa de la credibilidad política: el nuevo debate sobre la arquitectura financiera internacional

Durante la última década, los políticos latinoamericanos —sobre todo los argentinos— han buscado la credibilidad política ante los mercados financieros internacionales. Esto ha llevado a crear políticas de tasas de cambio fijas y de apertura de capital, y ahora se está promoviendo la dolarización de las economías. Podemos decir —a su favor—, que estas políticas han ayudado a detener la inflación y recuperar el orden fiscal. Sin embargo, también han sido muy costosas en términos de desempleo, distribución del ingreso y seguridad laboral; también han reducido las posibilidades de autonomía política nacional, han generado una búsqueda excesivamente celosa de equilibrio fiscal y han promovido condiciones de vulnerabilidad financiera. Tal y como se la concibe actualmente, la búsqueda de credibilidad política ha resultado ser una trampa, para escapar de ella es necesario introducir nuevas regulaciones a los mercados financieros nacionales e internacionales, con el fin de conservar el dinamismo de los mercados sin perder espacio para la autonomía política nacional.

A developing country view of the current global crisis: what should not be forgotten and what should be done

Macroeconomic theory will surely be affected by the current global crisis. There are signs that some ‘old’ theories and insights will have a comeback. This paper argues that among them economists should not forget the lessons that have been learnt from three decades of several financial crises in developing countries. We emphasise two important lessons. First, preventing crises in developing countries requires not only the regulation of domestic financial systems, but also a consistent set of macroeconomic policies. In particular we stress the need for consistency between the exchange rate rule, the capital account regime and the domestic financial market regulations. Second, financial crises in developing countries tend to worsen both the balance of payments and the fiscal balance. Traditional adjustment policies tend to exacerbate the recessive trends in output and employment. This is just the opposite of what is required and what governments in developed countries are able to do. Developing countries should push for an agenda that helps them deal with these problems.

Review: Everyday Politics of the World Economy

EVERYDAY POLITICS OF THE WORLD ECONOMY Edited by John M. Hobs on and Leonard Seabrooke New York: Cambridge University Press, 2007. 254pp. US$34.99 PaPer (ISBN 978-0-521-70163-1)The contributors to this volume focus on the less glamorous, more obscure aspects of global economic processes, which they refer to as the international political More to the point, they explore ways in which apparently weak actors may nonetheless determine results in the global economy. Their goal is to expose alternative views or possibilities and to reveal the relevance of actors and aspects of the global economy that elude much contemporary research. The pieces successfully establish counterpoints to orthodox thinking. While there are clearly limits to the conclusions we can draw from individual chapters, the volume represents a significant effort to move our thinking the box, and is well worth reading for that very reason.Part one examines how weak actors develop strategies and techniques for subverting international regimes from within. All too often research emphasizes the role of the most powerful actors in creating and imposing international regimes and goes no further. The authors in this section introduce us to some of the actors who have reshaped regimes through their everyday actions - ranging from foreign domestic workers to states defying international accords on financial reporting. These pieces underscore how much international regimes require the acceptance and adaptation of other actors to make them effective. As J. C. Sharmanputs it, a dialogic conception of discursive politics is needed, enabling us to see how international regimes evolve through contestation and interaction between those at the top and those at the bottom (46). The evolution of specific regimes is often misunderstood or specified incorrectly because weak actors are ignored.Andrew Herod demonstrates that global communications networks expose different sorts of actors to new strategic possibilities. He challenges the assumption that globalization benefits capital only. Globalization also allows workers the opportunity to observe strategies implemented elsewhere, to communicate more easily for the purposes of learning or coordinating activities, and to publicize their efforts to ever-wider authences. Fortunately, the authors do not merely examine weak actors we might consider morally virtuous. By highlighting the success of states in evading regulatory directives from the IMF and other international financial organizations, tax havens have undermined the regime designed by the most powerful states in the global economy - to the benefit of those seeking to avoid paying taxes, but also allowing criminals greater opportunities to launder ill-gotten gains, or giving terrorists the ability to move resources outside the purview of security agencies.The pieces in part two share a common thrust: analysis typically focuses on policymakers' intentions and instruments, but outcomes are determined by the reactions of micro-level actors whose motives and interests remain understudied. Leonard Seabrooke explores the ways in which domestic financial regulations link to and inform international monetary policies, Paul Langley shows how alterations in financial regulation and pension schemes interact with private investors' decisions to produce unexpected results, while A.D. Morton shows how peasants can implement strategies resisting change in rural settings. Each is compelling in certain ways, but also could perhaps have done more to draw out consequences. …

Openness and Domestic Financial Liberalization: Which Comes First?

We use a new dataset of de jure measures of trade, capital account, product markets, and domestic financial regulation covering 91 countries from 1973 to 2005 to examine the links between openness and domestic financial liberalization. We find strong evidence that trade liberalization is a leading indicator of domestic financial liberalization. This result holds with different data frequencies (from annual to 5-year intervals), estimation methods (OLS and 2SLS), trade liberalization measures (tariff and non-tariff), and after controlling for domestic product market liberalization, whose agriculture component is a robust leading indicator of domestic financial liberalization in low- and middleincome countries. The primacy of trade liberalization is consistent with Rajan and Zingales’s (2003) positive interest-group theory of financial development and McKinnon’s (1991) normative “order of economic liberalization.” The data do not confirm, instead, either of the contrasting implications of these two theories for the sequencing of capital account and domestic financial liberalization.

Global Standards for Domestic Financial Regulations: Concourse, Competition and Mutual Reinforcement between Different Types of Global Administration

Over the last decades, the number of international standards for financial regulation has increased remarkably. Transgovernmental networks for banking, securities and insurance regulation, such as the Basel Committee, IOSCO and IAIS, all constitute standards setting bodies. Similarly, also international organizations like the IMF and the World Bank produce international financial standards. Furthermore, the Financial Stability Forum – FSF brings together not only the transgovernmental regulatory networks mentioned above, but also intergovernmental international organizations (the IMF and World Bank, in particular) and private bodies with regulatory functions, such as the International Accounting Standards Board (IASB) and the International Auditing and Assurance Standards Board (IAASB), one of the International Federation of Accountants' (IFAC) technical committees. This article aims to analyse the mutual interaction between global financial standards established by organisms corresponding to different models of global administration. What kind of connection links rules which have been developed by different types of global regulators? Is there competition between global financial standards originating from different bodies or are these standards mutually reinforcing? How are conflicts between global rules solved? The analysis will seek to answer such questions by examining three possible ways of interaction between global financial standards. In the first place, I will look at the trend towards a codification of global financial standards, the most obvious product of which is the development of the FSF's "Compendium of Standards". Secondly, the incorporation of standards established by private bodies within regulatory regimes referring to public bodies will be taken into account. Thirdly, I will examine if, and to what extent, the emergence of new mechanisms for the assessment on countries' compliance with global financial standards may result in the prevalence of some global rules over others.

Banking at the Margins: A Geography of Financial Exclusion in Los Angeles

A changing regulatory environment, intensified competition, and the increasingly global and privatised nature of financial markets have taken a heavy toll on the US banking industry. In the 1980s over 1100 banks failed in the United States, more than in any decade since the 1930s. In this paper I examine the relationship between the eroding competitive position of the banking industry and an unfolding geography of financial exclusion affecting one low-income community in Los Angeles. First, I briefly outline the causes of banks' deteriorating competitive position, focusing on the mismatch between domestic financial regulation and the requirements of competition in retail markets through the 1980s. Second, I draw on research, using secondary sources and workplace-based interviews, to describe how some banks in Los Angeles are responding to these pressures by reorganising their production systems at an interregional, intermetropolitan, and intrametropolitan scale. Third, I concentrate on this intrametropolitan scale, documenting the rationalisation of branch networks and the rise of alternative financial institutions in part of South Central Los Angeles. To which communities are banks and their less regulated competitors to be held accountable? By way of conclusion, I argue that regulation needs to clarify this issue while also supporting the development of community-controlled financial institutions that can expand access to financial services in low-income neighbourhoods.