Views on improving the integrity of global capital markets
31 March 2011

A New Global Financial Architecture: Stalled

In the current issue of Foreign Affairs, Ian Bremmer and Nouriel Roubini paint a pessimistic picture of potential global coordination of financial services regulation. As they put it, “… the process of creating a new international financial architecture is unlikely to create a structure that complies with any credible building code.”

Bremmer and Roubini cite increasingly inward looking policymakers in the U.S. and Europe as contributing to a leadership void in international financial regulation. Countries in Asia Pacific seem reluctant to align themselves with a western regulatory system that did not acquit itself well in the crisis. And impulses among the western countries to attend to pressing domestic issues of jobs and economic security hinder grander ambitions to remake a global regulatory system that detects and manages systemic risks. Woe unto the domestic politician who handicaps local banks when the economic pump needs priming.

It isn’t impossible to have a more optimistic vision of the potential for global coordination. Certainly, the G-20 communiqués say the right things and convey the right intent to learn lessons from the crisis, discourage regulatory arbitrage, and make future bailouts unnecessary. Efforts in the U.S. and EU to create the necessary systemic-risk-management infrastructure among regulators is nascent, with the U.S. Financial Services Oversight Council and European Systemic Risk Board having been organized but just starting substantive work. Needless to say, international coordination between these groups is largely theoretical at this point. The Basel 3 framework around capital requirements for global banks has been proposed, but national and regional implementation over the next five to 10 years is not without significant challenges.

If Bremmer and Roubini are right, prospects for either a global super-regulator or well coordinated network of local regulators are pipe dreams. Politics might be local, but economics certainly isn’t. More urgency should be attached to getting national systemic-risk-management mechanisms organized and operating to detect brewing crises before they have impact. And as local efforts take hold, advocates for investors should be pressing for meaningful global coordination of universal high standards to protect the interconnected global financial system.

About the Author(s)
Bob Dannhauser, CFA

Bob Dannhauser, CFA, is head of global private wealth management at CFA Institute.

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