Governance of Global financial Markets The law, The economics, The Politics

Cover
......Page 1
GOVERNANCE OF GLOBAL FINANCIAL MARKETS......Page 3
INTERNATIONAL CORPORATE LAW AND FINANCIAL MARKET REGULATION......Page 4
Title
......Page 5
Copyright
......Page 6
Dedication
......Page 7
Contents......Page 9
FOREWORD
......Page 15
PREFACE
......Page 17
ABBREVIATIONS
......Page 22
1. The autumn of 2008......Page 25
2. Why the GFC was not prevented?......Page 26
3.1 Overview......Page 28
3.2 Should finance be regulated?......Page 30
4. The post-2008 reforms......Page 32
5.2 Towards a new governance model......Page 36
6. Book structure......Page 39
PART I Financial markets and financial crises
......Page 43
1. Introduction......Page 45
2.1 How financial systems foster economic growth......Page 47
2.2 Mobilization, pooling of savings and ease of exchange......Page 48
2.3 Information production, facilitation of investor (saver) monitoring and capital allocation......Page 50
2.4 Risk management and risk reduction......Page 51
2.5 Corporate governance......Page 53
2.6 Evidence of the strong link between developed financial systems and economic growth......Page 54
2.7 FSD, availability of finance and poverty alleviation......Page 56
3.1 Complex instruments and international financial markets......Page 59
3.2.1 Swaps......Page 60
3.2.2 Forwards and futures contracts......Page 61
3.3.1 Background......Page 64
3.3.2 Securitization structures......Page 65
3.3.3 All is not good with structured finance......Page 67
3.4.1 Background......Page 71
(a) Credit Default Swaps......Page 72
(c) Credit Linked Notes (CLNs)......Page 74
3.5 Shadow banking......Page 75
4.1 Introductory remarks......Page 78
4.2 Efficient Markets Hypothesis versus Behavioural Finance......Page 81
4.2.1 Royal Dutch Shell......Page 83
4.2.2 Closed-end funds......Page 84
4.3 Other puzzles......Page 85
4.4. Adaptive markets......Page 86
5.1 The Jackson Hole Consensus......Page 88
5.2 Deregulation......Page 91
5.3 Washington Consensus policies......Page 94
6.1 The Asian Crisis......Page 96
6.2 The Global Financial Crisis......Page 98
6.3 Are financial markets inherently unstable?......Page 103
6.3.1 Financial instability hypothesis......Page 104
6.3.2 A financial revolution......Page 108
7. Summary of findings......Page 112
1. Introduction......Page 113
2.1 Global trade imbalances and lax monetary policies......Page 116
2.2.1. General observations......Page 120
2.2.2 Shadow banking and excessive maturity transformation......Page 122
2.2.3 Risk diversification increases interconnectedness and systemic risk: the role of credit default swaps......Page 125
(b) The CDS market increased the interconnectedness of global ­financial markets......Page 127
(c) Uncertainty and asymmetric information......Page 128
2.2.4 Financial innovation and market destabilisation......Page 129
2.3 Failed government policies......Page 130
2.4.1 Regulatory failure......Page 134
2.4.2 Deregulation fosters the emergence of mega-banks......Page 137
2.4.3 Regulatory failure and market discipline......Page 140
2.5 Irrational exuberance and other behavioural causes......Page 145
3.1 Executive compensation and corporate governance failures......Page 150
3.2 The ‘originate-to-distribute’ model......Page 153
3.3 The flawed information content and use of credit ratings......Page 154
4.1 Capital and investor protection regulations......Page 157
4.2 ‘Too-big-to-fail’ institutions and lack of cross-border special resolution regimes......Page 158
5.1 An alternative explanation of market and regulatory failure?......Page 160
5.2 Complexity, emergence and the GFC......Page 166
5.3 The role of insider rent-seeking......Page 170
5.4 A knowledge revolution......Page 174
6. Concluding remarks......Page 178
PART II The evolution of governance structures for international finance
......Page 179
I. Introduction......Page 181
2.1. Introductory remarks......Page 183
2.2. Monetary stability – financial stability and the IMF......Page 186
2.3.1. Overview......Page 189
(a) The Group of Ten (G-10)......Page 190
(a) The early days of the BCBS......Page 192
(b) The Basel I capital adequacy framework......Page 195
2.4.2 International Organization of Securities Commissions......Page 197
2.4.4 Financial Action Task Force......Page 199
2.4.5 Industry associations......Page 200
2.4.6 Industry think tanks......Page 202
2.5.1 World Bank: early years and mandate transformation......Page 203
2.5.2 Other international/regional development bodies......Page 205
2.6.1 Introductory remarks......Page 206
2.6.2 The ‘prudential regulation carve out’......Page 208
3.1 An overview of the NIFA......Page 209
3.2.1 The role of the G-7 during NIFA......Page 213
3.2.2 The role of the G-20 during NIFA......Page 215
3.2.3 The evolution of the IMF......Page 217
3.2.4 Financial Stability Forum: international oversight and co-ordination......Page 218
3.2.5 BCBS develops a risk-sensitive capital framework......Page 220
3.3.1 The main characteristics of FSAP surveys......Page 223
3.3.2 FSAP’s shortcomings......Page 224
3.4 A critique of NIFA......Page 227
4.1 Introductory remarks......Page 228
4.2 The emergence of the G-20......Page 229
4.3 The IMF......Page 230
4.4 From the FSF to the FSB......Page 231
4.5 The supervisory colleges......Page 233
5. Summary and concluding remarks......Page 234
1. Introduction......Page 237
2.1 Regulation rationales......Page 241
2.2 The advantages of soft law and TRNs in the context of global financial governance......Page 245
2.3.1 Regulatory co-ordination......Page 249
2.3.2 Monitoring and enforcement......Page 255
2.4 The issue of legitimacy......Page 256
3.1 Introductory remarks......Page 260
3.2 The flaws of the Basel capital framework......Page 261
3.3 Regulatory arbitrage through asset transformation, credit ratings and other follies......Page 262
3.4 The systemic implications of neglecting liquidity......Page 264
3.5 Flawed risk models and procyclicality......Page 267
4.1 Overview of the issue......Page 270
4.2.1 Kaupthing......Page 273
4.2.2 Fortis......Page 274
4.2.3 Dexia......Page 275
4.3 Lack of cross-border resolution regimes and ‘too-big-to-fail’ institutions......Page 276
5. What should be done?......Page 280
PART III Regulatory reform and a new governance model for global financial markets
......Page 283
1.1 Overview......Page 285
1.2.1 The US reforms......Page 286
1.2.2 Reform in the EU......Page 287
(a) The shift to macro-prudential regulation......Page 290
(b) Substantive reforms......Page 294
2.1.1 Introductory remarks......Page 296
2.1.2 FSOC powers and duties......Page 299
2.1.3 Enhanced ‘prudential standards’......Page 300
2.1.4 Supervision of systemically important activities......Page 302
2.2.1 Background and summary......Page 304
2.2.2 Regulation of swap dealers......Page 306
2.2.3 Prudential and reporting obligations of derivatives dealers......Page 309
2.2.4 Trading and clearing requirements......Page 310
2.2.5 Trading centralization......Page 311
2.3 Registration of hedge fund advisers......Page 312
3.1.1 Capital adequacy regulation and remuneration policy......Page 313
3.1.2 The regulation of credit rating agencies in the EU......Page 316
3.1.3 New rules for derivatives trading and clearing......Page 318
(a) Centralization of OTC derivatives clearing and ‘eligible’ ­contracts......Page 319
(b) Clearing obligations of non-financial counterparties......Page 320
(c) Regulation and supervision of CCPs, non-discrimination, and interoperability......Page 321
(d) Risk management for non-cleared contracts......Page 323
(e) Reporting obligations and trade depositories......Page 324
3.1.4 Hedge funds......Page 325
3.2.1 Introductory remarks......Page 326
(a) Objectives and tasks/powers......Page 328
(b) Structure and decision-making process......Page 332
3.2.3 The European Supervisory Authorities (ESAs)......Page 334
(a) Tasks and powers of the ESAs......Page 335
(b) The supervision of EU financial institutions......Page 339
(d) ESA organization, decision-making, accountability and appeals......Page 341
3.2.4 Evaluation of the new arrangements......Page 343
4.1.1 Overview......Page 345
4.1.2 Capital components......Page 346
4.1.3 Tier 2 capital......Page 347
4.2.1 The capital conservation buffer......Page 348
4.2.2 The countercyclical buffer......Page 349
4.3 Containing leverage......Page 354
4.4 Liquidity ratios......Page 356
4.4.1 Liquidity coverage ratio......Page 357
(b)  Definition of the standard......Page 361
(b) Concentration of funding......Page 363
(c) Available unencumbered assets......Page 364
4.5 Risk management and supervision......Page 365
4.6 Evaluation of Basel III......Page 368
1. Introduction......Page 372
2. FSB principles for the supervision of SIFIs......Page 375
3.1 The Volcker Rule......Page 376
3.2 Ban on proprietary trading......Page 378
3.3 Limited sponsoring or investing in private equity and hedge funds......Page 380
3.4 The regime for non-bank financial companies......Page 382
3.5 UK proposals on the structure of the banking industry......Page 383
4.1.1 Overview......Page 384
4.1.2 The policy debate......Page 387
4.2 Capital surcharges......Page 392
5.1 What is the problem?......Page 394
5.2.1 BCBS Cross-Border Resolution Group recommendations......Page 397
5.2.2 The FSB recommendations......Page 400
5.2.3 IMF recommendations......Page 402
6.1 Enhanced supervision and failure prevention......Page 405
6.2.1 Overview......Page 408
6.2.2 The special liquidation process......Page 409
6.2.3 OLA triggers/thresholds......Page 410
6.2.4 FDIC powers under the OLA......Page 411
6.2.5 Bridge bank......Page 413
6.2.6 Financing resolution and repayment plan......Page 414
6.3 Evaluation......Page 417
7.1 General principles......Page 418
7.2.1 Strengthened supervision......Page 420
7.2.2 Restrictions on inter-group asset transfers and intra-group financing......Page 422
7.2.3 Asset transfers......Page 424
7.3 Recovery plans and group recovery plans......Page 425
7.4 Resolution plans......Page 427
7.5 Early intervention powers......Page 431
7.6.1 Overview......Page 433
7.6.2 Resolution tools......Page 434
7.6.3 Bail-in debt mechanism......Page 439
(a) Comprehensive approach......Page 441
7.6.4 Group level resolution......Page 442
7.7 Financing resolution......Page 446
7.8 Evaluation of the EU resolution regime......Page 448
8. Summary and conclusions......Page 449
1.1 Overview......Page 453
1.2 Summary of the proposal......Page 456
2.1 General principles: the importance of shared values......Page 459
2.2 The global macro-prudential supervisor......Page 464
2.3 A global micro-prudential authority......Page 466
2.4 Global financial policy, regulation and risk knowledge authority......Page 471
2.5 A global resolution authority......Page 475
2.6 Other advantages of the proposed governance system......Page 478
3. Conclusion......Page 481
INDEX
......Page 484