Part VII International Securities, Including Markets and Clearing Systems, 18 The Architecture of International Financial Regulation

This chapter examines the term “international financial architecture”, which is of fairly recent origin and has been used only occasionally prior to the Asian crisis. It explains how international financial architecture provides a somewhat misleading impression of the nature of the process by which the institutions and policies that shape the global financial system came into being. It also describes international financial architecture as more of the outcome of an evolutionary process than the product of intelligent design. This chapter highlights changes in the international financial and monetary systems and in the arrangements for providing meaningful and cohesive oversight in response to changes in the world economy and in the political environment. It also analyses the development of a body of normative texts referred to as international financial regulation.

International Financial Regulation: Why It Still Falls Short

While recent reforms are welcome in many ways, there are still significant reasons to doubt that the post-crisis tightening of international financial regulation guarantees future financial and economic stability. The most important reason is that the reforms have focused too narrowly on ensuring that an unstable financial sector will not aggravate downturns by restricting the supply of credit. More attention needs to be paid to ensuring that an overly exuberant financial system does not weaken other parts of the economy by encouraging a rapid buildup of debt during upturns. Some combination of time-varying monetary and regulatory policies (a macrofinancial stability framework) will be required to do this. In addition, many of the individual regulatory measures taken to date, both macroprudential and microprudential, have shortcomings. Their coherence as a package has also been questioned.