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Global Financial Regulation: A Goal Many Espouse But Can It Be Done?

Police arrest an Occupy Wall Street protester near Zuccotti Park in New York City on October 14.
Police arrest an Occupy Wall Street protester near Zuccotti Park in New York City on October 14.
By Ron Synovitz
Calls for a more coordinated system of international financial regulation have been growing as the Occupy Wall Street protests in New York inspire similar demonstrations around the world.

Since activists in September began the Occupy Wall Street movement in New York's financial district, protesters have been calling attention to unfulfilled promises for tighter regulation of the financial institutions that they blame for the global economic crisis.

Indeed, many reforms pledged by politicians as the global economic crisis unfolded in 2008 have been blocked or delayed -- leaving only modest changes to the way the world's financial system is regulated.

Frustration with the authorities dragging their heels on reform has now made itself felt on the streets of New York and other U.S. cities.

"It's clear that people feel like the politicians have not been prioritizing the needs of working people," says Mark Bray, a spokesman for the Occupy Wall Street protest movement.

"Even if the political parties change, when the economic crash occurred and the Wall Street bankers speculated and gambled away people's lives, nevertheless, working people are the ones who suffer and the financial institutions are the ones that continue with business as usual."

Giving Voice To Frustrations

U.S. President Barack Obama recently claimed the Occupy Wall Street movement gave voice to broader frustrations about how financial sector lobbyists work to prevent more stringent regulation, despite the fact that the United States has just endured "the biggest financial crisis since the Great Depression."

"And yet you're still seeing some of the same folks who acted irresponsibly trying to fight efforts to crack down on abusive practices that got us into this problem in the first place," the president said.

On a global level, critics argue that international regulators have failed to keep pace with the globalization of financial markets. But calls for stronger global regulation raise the question of who should serve as the police and courts for international financial markets.

Masked protesters warm themselves at a fire after setting up camp in front of the European Central Bank in Frankfurt.
Masked protesters warm themselves at a fire after setting up camp in front of the European Central Bank in Frankfurt.
Many economists say the problem is not a lack of global institutions. Rather, they argue, there is neither a hierarchy between existing regulators nor a central power that has the authority to force urgent action.

In other words, when it comes to regulating global financial markets, no one is really in charge of anyone else -- not in the way, for example, that the World Trade Organization has the authority to regulate and enforce international law in trade disputes.

Indeed, the International Monetary Fund and the World Bank have oversight roles that allow them to monitor international finance. But neither is a financial regulator with the powers to do things like set minimum capital requirements for banks or draw up international accounting standards.

Compliance With Standards Is Voluntary

Such regulations are drawn up by the Basel Committee on Banking Supervision, which brings together central bankers from more than two dozen countries. But the Basel Committee works on the basis of consensus among its members. Compliance with its standards is voluntary.

The International Organization of Securities Commissions (IOSCO), which groups together financial regulators from more than 100 different countries, also works on the basis of consensus and voluntary compliance by its members.

Nobel Prize-wnning economist Joseph Stiglitz believes banking lobbyists are slowing down reform.
Nobel Prize-wnning economist Joseph Stiglitz believes banking lobbyists are slowing down reform.
In 2009, the Group of 20 (G20) established the Financial Stability Board to promote international financial stability and transparency. It brings together all of the G20 finance ministries and central bankers as well as international financial bodies.

But the IOSCO and the Basel Committee have been reluctant to take instructions from the Financial Stability Board or its predecessor, the Financial Stability Forum.

Even within regional economic groups, such as the eurozone, national governments have hesitated to surrender their sovereignty to a stronger central state in Brussels when it comes to fiscal federalism in Europe.

Lack Of Interaction

This is still the case despite the sovereign debt crisis in Europe and the pressures the euro currency has been under.

"What is lacking is really a more fundamental discussion about how economic institutions, economic policies, and political institutions interact in Europe -- and how we can move this interaction forward," says Anke Hassel, a professor of public policy at the Hertie School of Governance in Berlin.

"Obviously, the European economy is at a crisis point and at a turning point. And we need new ways of dealing with that."

Eddy Wymeersch, the former chairman of the Committee of European Securities Regulators, suggests that the global economic crisis has brought the world further from establishing some form of global financial authority.

The 2001 Nobel laureate for economics, former World Bank chief economist Joseph Stiglitz, believes that banking industry lobbyists have been responsible for slowing down the drive toward regulatory reform.

Underlying Problems

"There was a slight attempt [at reforming financial-sector regulation] after 2008 but it was beaten back by the banks," Stiglitz says. "A little bit happened, but for the most part it was beaten back. And we haven't dealt with the underlying problems.

"And in fact, some of those underlying problems have gotten worse -- [banks that are] too big to fail, inequality, all those things have actually been exacerbated by the crisis itself."

Britain is a case in point when it comes to financial-sector lobbyists and national interests conflicting with calls for global regulatory reforms.

At the start of the global economic crisis, the British government initially said its system of financial regulation was no longer suitable and needed to be replaced with a framework to promote "responsible and sustainable banking."

In a bid to bring banks back toward more traditional banking practices -- rather than acting as risk-taking hedge funds -- the British government proposed regulatory powers that would discourage risky bank lending.

The British Treasury also argued that banks that pose a bigger risk to the financial system as a whole -- either because of their size or interconnections with other banks -- should face greater regulation.

But in the end, many of the proposed reforms stalled amid arguments from figures within the financial sector that tighter regulation could cost Britain its role as a financial hub for Europe.

EU proposals for tighter hedge-fund regulation were resisted by London as "anticompetitive."

The British government concluded that regulation must be agreed at a global level so that firms don't simply migrate to countries with less stringent regulations.
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Comment Sorting
Comments
     
by: Cathy Henry from: USA
October 23, 2011 12:48
The problem is that business and industry buy the votes of politicians. For example, Virginia's Attorney General Cuccinelli is persecuting the climate scientist Dr. Michael Mann. It turns out that Cuccinelli's father is a lobbyist for the gas industry. The father's firm, Quest Fore, gave 96,000 dollars to Cuccinelli's campaign, according to an Internet site that tracks financial contributions. Cuccinelli is a political gangster who has hijacked the office of Attorney General, in my opinion.
The father's consulting/marketing company probably has lots of gas company clients because they give money to politicians who persecute scientists.
Cuccinelli's suit against the EPA even cited an RIA Novosti article based on a Kommersant article that trashed climate scientists. Kommersant is owned by Alisher Usmanov, an operative for Gazprom. Since when is Kommersant considered a peer-reviewed science periodical? It's just propaganda for the moneyed-class.
The powerful businesses have capitalism for their profits but the public pays for their failures. I believe in capitalism, but these wealthy businesses just buy politicians so they don't have any rules. I used to be a Republican, but now I really hate the Republicans because of their lies and greed. Banks that want government insurance should have government rules that protect the public.
Cuccinelli made me see that the politicians only work to protect the profits of the fossil-fuel industry, not to protect the public.
In Response

by: Eugenio from: Vienna
October 23, 2011 18:36
You are saying: "I believe in capitalism". Is capitalism some kind of church or something? Or you have some factual grounds to "believe" in it?

by: Ray F. from: Lawrence, KS
October 23, 2011 17:32
I spent about a year trying to figure out how the global economy works. Don’t have all the answers, but did discover that the US Fed Reserve keeps two sets of books. Since the US dollar serves as the global reserve currency, the Fed has been basically exporting inflation for the past half century. The game works as long as there are global suckers still willing to invest in US treasuries. I suspect that after running the American-dollar presses 24/7 for the past decade, the jig (Ponzi scheme) might be close to collapse. Once the oil barons and pirates start asking that their loot be exchanged in something other than dollars, the occupy Wall Street demonstrations will go viral. This country has yet to confront a genuine fiscal day of reckoning .

by: John Zwiers from: nz
October 24, 2011 09:21
Those whom protest, and argue for tougher financial governance. are by their very act asking the same existing governors, whom were suppose to ensure financial protection in the first place .The reality is its to late the horse has bolted!
Financial regulators need to stop bloating the economy. True capitalism has failed, as a result of regulators whom, did not obey the very rule's that capitalism dictate's by not over meddling by supposed financial genies's and their financial instruments. Capitalism will rejuvenate its self and will be the stronger, this will take time.

by: Jean-Claude Forget from: Budapest/Hungary
October 25, 2011 14:18
Mr. Ron Synovitz, you say: " the Occupy Wall Street protests in New York inspire similar demonstrations around the world". With all due respect: No, this is not correct. I invite you to read relevant and informed English language and other foreign newspapers/links. The world is not the USA only, is-it.

The chronology of events is as follows: the "Indignados" movement popped up in Spain during the 2011 Summer, against the background of the failed "Green Movement" of July 2009 in Iran, followed by the successful Tunisian revolution in January 2011. Soon after took place the series of Arab springs in the North Africa and Middle east regions. All were triggered by natives' legitimate calls for first and foremost employment opportunities, legitimate states of law, fair judiciaries, respect and dignity.

As to the very substance of your article: what EFFECTIVELY started in the US was the subprime crisis....in 2008 with its nasty effects in the US and then, swifly exported in Europe.

Until not too long ago as you rightly pointed out 'the banking industry lobbyists could slow down the drive toward regulatory reforms. They even managed to block such reforms, leaving only modest changes to the way the world's financial system is regulated. They may no longer misbehave that way.
Right now by end of Oct. 2011 the financial, banking and economic environment in the eurozone may soon collapse if not adequately remedied. But it wouldn't be an isolated disaster. Global economy being what we know today, there would be - no doubt - a financial and banking tsunami world wide... with unpredictable economical and societal effects and an in-depth reshaffling of geopolitical maps...

Anything there in the short/medium term that you can read as being in the best interest of the western/industralized countries' banking system ??

As earlier recommended by the 2001 Nobel laureate for economics, former World Bank chief economist Joseph Stiglitz, national governments in the eurozone have no further room for hesitation: they have no alternative but to surrender huge segments of their sovereignty to a stronger EU entity in Brussels when it comes to banking and fiscal matters.

Ironically for the US$ to remain an international monetary working tool world wide the US (Rep. or Dem.) Administration will have no great alternatives but to support such changes though the latter will - highly likely/inevitably - have an impact on its overall economy... and its position as the 'gendarme' of the world.

Greetings !

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