The Global Financial Crisis (GFC) is over. Many banks have repaid the bailout dollars and bonus payments are back. What was all the fuss about anyway? Nothing will change because the market will always find a way to overcome attempts to regulate it and the behavior of market participants. This paper attempts to address the authenticity of the above scathing opinion on the apparent apathy with which the global financial market reacts to the domestic and global financial regulations.
This gist of this discussion will be to highlight what can and should be done by the GFC governments to regulate this out-and-out wayward market trend. Significant attention will also be given in discussing the nature of mitigation efforts made so far as well as the probability of success for such efforts. It will be argued that the existing financial regulations have been rendered obsolete by the contemporary global changes in economical and technological capabilities and that the key to averting future GFC lies on a mutual and globally-responsive overhaul of the existing legal and technical financial controls.
Global Financial Market at a Glance It is interesting to note that despite the strict regulatory measures adopted by GFC governments at both domestic and global levels, financial institutions have always sneaked in their crooked activities’. This has happened as a result of deregulation measures which soon follows the regulation measures. A good example is the case of the international debt market where the trading in bonds has been on several jurisdictions deregulated to allow for more ease of accessing them by local and international clients.
Such deregulation has both negative and positive ramifications for instance; it leads to increased integration of the global financial markets while when unchecked it can result to a serious GFC. Again, there is the perceived notion that strict financial regulations leads to the killing of the culture of competitiveness, innovation and efficiency. It is also argued that regulating financial institutions would interfere with their efficient risk taking mechanisms and hence make them more vulnerable to future GFC.
This argument is buttressed by the fact that large financial institutions especially those with international tentacles have got well structured risk management mechanisms. Conversely, according to a study carried out at the University of Bath’s School of management based on three key pillars of Basel II this is not true. The study findings indicate that the use of regulatory measures to monitor the activities of banking institutions does indeed lead to increased efficiency in terms of profit and cost management.
These are very strong indicators given the study was conducted on 752 commercial banks doing business in 87 countries between 199 and 2006. Moreover, it tested key indicators of cost and profit efficiency. Banks that are not regulated may be tempted to engage in unethical behaviors which may land them in risky legal tussles and hence fail to serve their clients well. Ultimately this may lead to economic stagnation and hence lowered standards of living. On the opposite, well regulated banks have been noted to deliver their mandate of serving their clients in mutually beneficial ways and therefore in the long run promote economic growth.
Needless to say banks that adhere to the set regulations hardly experience any legal ligations. GFC Mitigation Measures The impacts of the slowly disappearing GFC cannot be overemphasized. From a global perspective large multinational banks and insurance companies were “mutually” forced to close down while others were absorbed by other lucky institutions that apparently were bailed out by the public coffers. No doubt this has resulted in a number of jurisdictional and global regulations to avert future GFCs.
Due to the inherent discrepancies among key players in the global financial markets some of these regulations have been significantly distinct. Again, the impacts of the GFC are always varied and therefore in mitigation, varied measures should be employed. The issuance strict financial regulations to tame wayward financial institutions at the domestic and global arena are nothing new. Chronicling the operations of financial institutions in comparison with domestic, regional, and global regulations leads to the assumptions that indeed financial regulations have always been around.
Going back to 1995, a tripartite summit of financial institutions comprising of banks, securities, and insurance regulators converged on the main agenda of streamlining the ease of sharing information regarding the operations of multinational financial institutions. Back then the main impediment to a stable and efficient global financial market was perceived to be the apparent apathy with which domestic financial regulators tinkered with critical information on huge financial institutions with cross-border operations.
As such, the summit which is also referred to as the Basle Committee emphasized on the urgent need for all global financial market supervisors to mutually ensure that crucial information is not withheld especially in cases when it apparent that a certain global institution is on the verge of collapsing. It can be argued that the underlying propulsion to this bold resolution was to ensure that the global financial market remained stable and free from crooked deeds.
As a matter of fact, one of the key clauses contained in this resolution was that financial analysis of huge conglomerates of financial institutions be done on a comprehensive and consolidated basis as opposed to individualized approach. To ensure that these regulations remained in force, it was proposed that a central supervisor who would be in charge of a whole financial conglomerate should be appointed for purposes of close scrutiny and accountability.
In extension, the work of the group culminated into what came to be popularly referred to as the Joint Forum, an umbrella platform composed of all the Basle Committee members, with the International Securities Commission and International Association of Insurance Supervisors being incorporated to cover all the key sectors of global finance flow channels. Further additional measures were as well incorporated to seal off any potential loopholes.
For instance, the Windsor Declaration of May 1995 was one such “loophole sealing” conference that agreed for renewed efforts in regard to material declaration. The forum also agreed that stable agencies such as exchanges, clearing houses, as well as trusted market players would be responsible for the storage of critical data regarding material wealth held by cross-border financial operators. Another very important global regulation conference was the Basel Committee which sought to enforce more restrictions but among key market players that were deemed as the greatest victims of GFC.
Analytically, the Basel Committee is a redesign of the Basle Committee. They were both meant to step up supervisory measures on financial activities. However, the Basel Committee which apparently lacks the global touch that the Basle Committee enjoyed is a creation of the G10 nations that met in Basel, Switzerland and collectively opted to adopt a more mutually-based financial regulations homogeneity that is not founded on any legal obligations but purely on mutual basis.
As a matter of fact, the committee resolutions held that sovereign nation states were not to be coerced into adopting its resolutions, furthermore the resolutions were not aimed at creating an homogeneous financial market t hat has every nation discarding its domestic regulations and adopting the agreed upon regulations.
The US for instance, a country whose banks, securities and insurance institutions attended the Basle Committee applies additional regulations on all non-US financial institutions intending to acquire a US financial institution or even to start banking services in the country to declare crucial information such as their financial position, the organizational culture and strategies, future intentions, as well as their operations in home country as well as in other countries.
Contained in the Foreign Bank Supervision Enhancement Act (FBSEA) of 1991, these seemingly rigorous procedures are meant to evaluate the financial and organizational credibility of foreign owned banks so as to avoid any future incidences of such banks suddenly going underground. As a matter of fact, this was a sure measure towards sustained financial transparency at both the domestic and global level. This argument is buttressed by former US chief of Federal Reserve, Mr. Greenspan who boldly summarized the whole global financial market in a few words that, “trust is a principle of central importance to all financial systems [and its absence is an indicator that the entire financial] system is weakened”. These regulations were championed by the collapse of the Bank of Credit and Commerce International (BCCI) in 1991 that has secretly acquired the First American bank shares without the consent of the Federal Reserve.
To buttress the importance of cross-border comprehensive and consolidated supervisory and mutual sharing of crucial information regarding the activities of large financial conglomerates it can be argued that, even if the Federal Reserves could have been aware of the BCCI prior acquisition of the First American Bank it would have done very little in regards to averting its collapse. As a matter of fact, the aversion of the collapse could only have been made possible if the home country supervisor would have furnished the American counterparts with its financial situation in real time.
GFC governments have also reacted to global socio-economic and political imbalances in a number of ways while attempting to stabilize global financial markets. For instance, following the September 11 terrorist attack in New York more regulations were enacted to fight terrorists’ activities funding through US banks. Anti-money laundering regulations were put in place to monitor suspicious account holders and make real time investigations to break terrorists’ rackets. There was dire need to fight the war against terrorism from the financial institutions s perspective.
Again, the insurance sector which initially was under state regulators was restructured at the federal level and a federal regulator put in place for easy monitoring and accountability. Funds channeled through US banks from terrorists groups or even nations considered to be hubs for terrorism were withheld in accordance with freezing provisions enacted. In Australia for instance, the history of market regulations spans back in 1945 when seemingly quantitative rules which barred any form of off-shoring as well as international banks from investing in the Australian market.
Over the days there have been a number of changes made in tandem with the changing market trends. However, it can be argued that the prime mover in regards to the change of these regulations is the realization that they are inhibitors to competition as well as innovation. More risk management based regulations have been adopted giving the local financial institutions a competitive edge in the face of the highly competitive and efficient global market.
Starting from 2004 more integrative measures were put in place to allow for sustainable global economic market with minimal restrictions on cross-border banking practices. This was inline with the trans-Tasman resolutions that were entered with New Zealand to make the region more porous to global financial institutions. By all measures the Australian case can be termed as a true success story of integration where the Australian Accounting Standards has adopted various International Financial Reporting Standards allowing comprehensive and consolidated supervisory and reporting.