The Next Step in Global Financial Regulation: Global Regulation of Interconnectedness: A response to 'Global Financial Regulation after the Credit Crisis' by Howard Davies

This article gives an overview of the efforts, worldwide and on a regional, that is, European, basis for introducing more effective and better harmonised financial regulation. Recent initiatives, especially the work of the G20 and the creation of the Financial Stability Board (FSB), indicate greater interest in worldwide coordination of financial regulatory intervention. The financial crisis has however dealt a serious blow to the previously existing international dialogue, and a fear exists that the main regulators may withdraw to their national battlefields.

Asia was not directly or significantly hurt through financial channels by the global financial crisis, but rather was hurt through trade channels. This article reviews the current regulatory reforms of global financial markets and how these affect Asia. The current crisis has exposed many weaknesses in the existing financial architecture, including the fragmentation of regulatory jurisdiction at the national and institutional levels. What is required is a system-wide and global view of market behaviour. The article uses a network perspective to analyse the issues and to propose solutions.

Recent events have once again highlighted weaknesses in the global regulatory system. The highly complex network of bodies overseeing different parts of the financial markets failed to identify or respond to the macro trends that led to the crisis. There was too little capital in the banking system. There is also a serious accountability gap, with regulatory bodies free to work to their own timetables. And the links between macroeconomic policy makers in finance ministries and central banks, on the one hand, and regulators on the other, have been too weak.