The Global Financial Crisis and the Evolution of Markets, Institutions and Regulation

1. Introduction

2. Regulations and the development of markets

3. The role of crises in contributing to the emergence of international institutions

4. Reforms of the international financial architecture

5. A new global framework and global leadership

6. The evolution of central banks following the global financial crisis

7. Financial information gaps and global financial stability

8. The future of multinational banks following the global financial crisis

9. Conclusion

References

Elsevier

Journal of Banking & Finance

Volume 35, Issue 3, March 2011, Pages 502-511

Journal of Banking & Finance

The global financial crisis and the evolution of markets, institutions and regulation

Author links open overlay panelFariborzMoshirian

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https://doi.org/10.1016/j.jbankfin.2010.08.010Get rights and content

Abstract

This paper analyses the recent global financial crisis in the context of the dual processes of market development and regulation. It discusses how, in the absence of a globally integrated financial framework, past and present regulations and interventions in reaction to national and global financial crises did not resolve the cross border regulatory arbitrage. The paper discusses how crises often lead to the emergence of new national and international institutions. It also analyses the proposed “new global framework” that needs to be in place if the policy recommendations contained in the G20 communiqué are going to be effectively implemented. The paper argues that unless international agreements are ratified by all nations and become part of national rules and laws, the presence of regulatory arbitrage and the lack of adequate cross border information and data may prevent the global economy from addressing the underlying causes of the recent global financial crisis. The paper also discusses the evolution of central banks and their new role in contributing to global financial stability. The paper argues that the recent global financial crisis has provided a unique opportunity to go beyond economic data and attempt to capture cross border financial data and other information that could assist international and national institutions to measure and manage financial risk more effectively. Finally, the paper discusses “too big to fail” and argues that only an internationally integrated financial system will make large banks global, both when operational and in the event of insolvency.

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Keywords

Global financial crisisThe G20 groupToo big to failFinancial regulation

JEL classification

G15G25

1. Introduction

The sub-prime credit problems that started in the US during 2007 affected the financial sector in other countries, particularly Europe. Deterioration in the financial sectors of the US and Europe has affected national financial systems in different parts of the world and led to the global financial crisis. Given the unprecedented scale of the recent global financial crisis since the Great Depression, the real global economy has also been hard hit by this crisis. The sharp decline in the value of assets, real estate, prices of commodities, the collapse of a number of large banks and non-banks and an increase in the level of unemployment, led the IMF to refer to the recent global recession as “the Great Recession.”

As the global financial crisis intensified, more financial institutions in different parts of the world failed and the global economic outlook deteriorated, some governments became pro-active in the market in an attempt to rescue their banks and other sectors of their economies. Some governments offered blanket guarantees to their depositors and creditors as a way of containing a systemic crisis. As a further response to the recent global financial crisis, some governments also became partial or full owners of some banks and other firms, introduced more regulations for their national financial systems and asked their central banks to become more active in the market as market stabilisers. The global financial crisis also reduced international trade activities, introduced financial protectionism, led to capital outflows from developing countries and to a significant deterioration in the life of millions of people, particularly in developing countries.

At the same time, as a way of addressing the challenges of the recent global financial crisis, a more influential G20 emerged, with the participation of their heads of state, as the key forum to discuss issues associated with global financial stability.

A number of studies have attempted to analyse the causes of the sub-prime credit problems and/or the associated financial instability that eventually led to the recent global financial crisis. Popov and Ongena (2011) discussed aspects of the interbank market, while Dolly King and Wen (2011) study is an attempt to analyse the influence of corporate governance structure and managerial risk-taking behaviour. The study by Tsai et al. (2011) deals with aspects of credit reporting system for multinational banks. Ang and Mauck (2011) discuss fire sales and acquisitions which are relevant to aspects of financial crises.

One of these studies by Claessen et al. (2009) highlights some of the key issues with respect to global risk measures and risk management. The study by Ivashina and Scharfstein (2010) highlights the importance of the source of funding for banks and the way banks reacted to the illiquidity crisis, particularly after the collapse of the Lehman Brothers. Another study by Caprio et al. (2008) showed that the main reason for the sub-prime credit problems and financial instability was not the actions of some greedy individuals or the unexpected weakening of major institutions in a particular country at a particular time but rather a failure of regulators and supervisors in various countries where “contradictory political and bureaucratic incentives” undermined their capacity for effective financial regulation and supervision.