Ensuring Equitable Reform in Global Financial Governance: Lessons from Recent History

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Abstract

In the five years since the outbreak of the global economic crisis, policymakers have made extensive efforts to strengthen the regulation and supervision of the international financial system. Despite the strong political will behind these efforts, however, global financial rules continue to favour the very same large private-sector institutions whose reckless behaviour was at the heart of the crisis. This policy brief asks: How can policymakers ensure that reform of the international financial architecture is equitable – that is, it reflects the interests of a wide range of public and private stakeholders? In addition to large financial institutions, key stakeholders include consumer groups, national regulatory bodies, international organizations, and – often overlooked – competing private-sector actors such as community lenders and emerging market banks. Equitable reform is not only desirable from a normative perspective. As the crisis has powerfully illustrated, regulation that solely reflects the interests of a narrow range of private-sector interests is unlikely to provide the basis for a robust and resilient global financial system. Drawing on lessons from recent regulatory history, both before and after the crisis, I propose four key principles for designing governance structures in global finance that produce equitable distributional outcomes: 

  1. Governance structures should ensure a clear distance between regulators and financial institutions to prevent the formation of strong informal social links between them. 
  2. Governance structures should minimize information asymmetries between stakeholders regarding the international regulatory agenda. 
  3. Governance structures should prohibit the delegation of key regulatory functions, such as the drafting of provisions, to stakeholders. 
  4. Governance structures should include robust oversight mechanisms that enable stakeholders to hold regulators to account for producing inequitable rules. 

Author Bio

Ranjit Lall is a Predoctoral Fellow at GEG and a doctoral candidate in international political economy at Harvard University.