Financial Regulatory Harmonization and the Globalization of Finance

Abstract

Abstract:In the globalizing economy, national policymakers are often forced to accept the challenge of financial integration. Faced with the potentially destabilizing effects of international financial markets, they have to strengthen financial regulation, importing international best practices and aligning domestic with foreign regulation to avoid destabilizing phenomena of regulatory arbitrage. This paper explores the main features of the ongoing process of worldwide financial regulatory convergence and the role played by the global dissemination of financial standards and codes. It analyzes the reasons behind the generalized acceptance of international best practices and the limits of the standards and codes approach to financial regulatory harmonization. Convergence of financial regulation across jurisdictions has been considered, at times a precondition of market integration, at times a consequence, but always a key feature of financial integration. In the last decades the relationship between financial integration and regulatory harmonization, in its various guises, has changed as a result of the accelerating pace of financial globalization. Not only have capital flows increased enormously, but also the provision of financial services across different jurisdictions has grown as a result of the expansion of financial intermediaries internationally and of the direct supply of financial services to foreign entities, as in the case of foreign listings. It can be argued that the increased provision of financial services and products across national boundaries has already exercised a disciplining effect through stiffer competition. Still, the integration of financial products and services and that of financial regulatory frameworks represent two different aspects of the same process, the globalization of finance. They move together but often at different speeds. JEL classification numbers: G21, G28Although market forces can promote regulatory harmonization, regulatory developments should not be left to market forces alone. Market forces and self-regulatory agencies share well known problems. Coordination failures associated with market-led initiatives can generate negative systemic externalities, attracting capital toward less regulated systems and institutions or generating forms of competition in laxity that may undermine financial stability. In addition, the cost of financia l regulation and supervision may be too high for small countries a potentially critical issue in the development of sound standards in a world where the number of independent jurisdictions has almost trebled since World War II. Overall, welfare considerations related to the presence of systemic externalities and to the high cost of public goods suggest that regulatory harmonization should not be left to market forces alone.From the perspectives of the national policymaker and the analyst of international financial relations t he relevant question then becomes how financial regulatory harmonization should be pursued. How should a specific ...

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