International Financial Regulation System - Essay Example

International Banking Regulation Student’s Name: Instructor’s Name: Course Code & Name: Date of Submission Question 3: The system ofinternational financial regulation has beencriticizedas illegitimate,obscure andunaccountable. Do you agree?Please provide adetailed analysis of the nature of this “system,”howitfits inas a “legal”system, and why itis vulnerable to the criticismdescribedatthe beginningofthis question. Introduction Legitimacy is often connected to the right of the decision makers to exercise power over their stakeholders and the general public while on the other hand, accountability is associated with the actual receptiveness of the decision makers to stakeholders and constituents in the policy making process (Brummer, 2012, p. 180). Brummer (2012, p. 180) noted that at the international level, the issues of legitimacy and accountability rotate around the extent to which the regulators undertake the primary role that they are mandated with of representing their local publics and whether international organizations like International Organization for Securities Commission, Financial Stability Board and Basel Committee exhibit their responsiveness and representation of specific special interests, interests at the national level as well as global welfare. The structure of the international financial regulation system is embedded with immense complexity. This is because unlike at the national level where the national regulators operate as agents of the national legislature which is under the direct election and scrutiny of the general public, at the international level, these national regulators carry on this mandate of serving the domestic publics and legislatures through the standard setting institutions of diverse organizational structures which have the principle role of disseminating the standards at the global level. The international financial systems have often been accused of being illegitimate, unaccountable and obscure.The subsequent analysis justifies this criticism based on rationale outline in the following section. In matters related to legitimacy, it has been pointed out that in most instances, the international financial law evades the political processes at the domestic level which are often central in accompanying and legitimizing more formal modes of international law. This is based on the backdrop that no approval procedure is required and therefore, unlike the actual sources of international law, the formal political legitimizing process of the international financial law can be evaded altogether. In this regard, no assenting votes of legislatures are prerequisite to the international policymaking or financial rule and even in majority of the cases, the authorization by heads of states. In actual sense, the agencies involved in international financial administration are largely only obliged to acknowledge or defend their policy arguments in some cases (Brummer, 2012, p. 188). This follows that the system which is involved in international financial regulation does not to a large extent require the formal authorization of the officials elected at the national level and it is against this background that it has been perceived as questionably illegitimate despite it possessing some qualities which are law-like, for instance coercive force and even compliance pull (188). The second criticism that has been hulled against the legitimacy of the international financial regulation system is linked to the deficiency of democracy in the process of standard setting. It is worth noting that majority of the standard setting bodies are endowed with extensive exclusivity whereby a number of the institutions comprise of clubs with members primarily derived from the developed countries. On the other hand, despite other organizations being celebrated for having a membership that has a universal outlook, they are usually under the exclusive direction of policy core. Consequently, it has been pointed out that this exclusivity poses grave legitimacy repercussions (188). This has been a widespread and ongoing criticism against the G-group based on their ‘Euro-American’ dominance. This criticism is justified and agreeable based on the fact that if at all this system is associated with international representation and its policies affect the financial set-up at the global scale, then it deductively follows that the participation and contribution by all the democratic countries ought to be upheld, in order to ensure that all the countries which are eventually affected by the set rules voice their opinions in the policy making process and influencing the eventual implementation of these policies. Against this background, the deficiency in universality in the structures of the international financial regulatory system has in the recent decades posed diabolical risks on its credibility, an instance which is best epitomized by the Basel Committee which has until recently been dominated by central bankers from the G-10. On the other hand, based on the differences between the lending preferences between the rich and the poor countries which has direct implications on the extent of risks associated with these practices, there has been extensive accusations of exclusion in the promulgation of the international standards. Thus, institutions like Basel committee have been perceived as unrepresentative and undemocratic systems which are engaged in will imposition against nonparticipating but often democratic governments. In this regard, the richer countries are usually perceived as pushing self-centered rules which solely serve extremely complex global financial markets in total disregard of the development needs of the poorer and smaller countries. This fact piles up the accusations of the illegitimacy of this system (Brummer, 2012, p. 189). Just like legitimacy, the accountability of the system of international financial regulation has been subjected to widespread criticism, most of which is related to transparency. Most of the censure has primarily focused on the deficiency of any significant obligation by the standard-setting bodies to undertake processes which chiefly promote and cultivate transparency in their operations (180). This is unlike in the domestic systems in diverse countries whereby there is usually promulgation of extensive rules concerning the administrative procedural requirements by the legislatures. This latter fact is supported by the Bank for International Settlements (2011, p. 17) which cited that transparency and clear communications to the general public in regard to the decision making process in policy formulation and implementation are principle tenets of accountability and have subsequently been embraced by diverse countries and regions in the global scale. Against this background, Brummer, (2012, p. 189) determined that systems of international financial regulations rarely demonstrates the level of transparency which is often desirable in the administrative processes of advanced countries at the domestic level. In addition, the participation of observers from outside is not usually allowed in majority of the standard-setting organizations. It has also been pointed out that in a historical perspective, these institutions have exclusively ignored the notice-and-comment system which entails the distribution of minutes from previous meetings as well as justification of policies through public deliberations. This obscurity is prevalent in majority of the international agenda-and standard setting bodies, but perhaps nowhere as more profound as in the processes of Basel I which is an example of an international financial regulatory institution (191). Nonetheless, despite the shortcomings which have been associated with the lack of transparency in this international financial regulation system, this has also served several beneficial ends, both towards the autonomy and decisiveness of the system. Brummer, (2012, p. 191) noted that by the financial regulators divorcing themselves from public scrutiny, they have successfully managed to cultivate close and cohesive working relationships with their colleagues from different countries as well as minimizing the detrimental forces of narrow issues which stem from domestic politics. In addition, through maintaining the confidential nature of their internal deliberations, the decision makers have been endowed with intensive capacity of strategic information manipulation as well as yielding compromises which would have been impossible based on the fact that they would have otherwise frustrate or dissatisfy special interests. Lastly, the limitations in transparency renders the understanding of the outsiders problematic in regard to the actual positions which were held during the negotiation processes, the dynamics in bargaining which culminated in compromises, and thus hard to hold the regulators who are usually the negotiators accountable for their activities. This lack of accountability usually poses similar corollaries in undermining the credibility of these organizations as with the same as legitimacy explored in the previous analysis. This is based on the fact that through the impositions of rules with inadequate participation of those who are directly affected by the rules results in lack of ownership by the stakeholders which raises questions over both the short and long-term sustainability of the implemented policies. This is founded on the fact that the absence of robust accountability systems weakens the extent of public faith in these institutions. However, Brummer, (2012, p. 191) revealed that despite the fact that the processes which are usually undertaken by these institutions are usually closed, this does not always insinuate to bad policies being developed. However, it is imperative to note that the mere exclusion of contributions from outside observers, affected stakeholders and other third party can result in the misperception and misrecognition of the unique challenges which affect distinct populations around the globe. Thus, the developed policies can fail to capture the projected persuasiveness and become unpopular among the stakeholders. It is thus apparent from the above discourse that most of the criticisms which have been directed towards the international financial regulation system in regard to legitimacy and accountability are based on concrete basis. However, it is paramount to be cognizant of the fact that the lack of these basic tenets does not only culminate in negative and retrogressive effects but is also endowed with some benefits, most notably the absence of political interference from the domestic realms. Alternative approach Brummer, (2012, p. 191) noted that the advent of the global economic slump in 2008 posed advanced effects on the design of the international institutions and the issues of accountability and legitimacy were exposed which necessitated the need for heightening the buy-in of large groups of international financial regulators which were economically relevant through permitting them to take part in the diverse deliberations affecting the global financial landscape. There are several approaches which have been undertaken to heighten the level of accountability and legitimacy in these institutions. Some of these interventions as well as their viability are explored in the subsequent analysis. In regard to legitimacy, Brummer, (2012, p. 191) determined that the international regulatory system has responded to the supposed deficits in two distinctive ways. Firstly, there has been the elevated politicization of the standard setting process through the G-20 and Financial Stability Board (FSB). These reforms have been prudent in the alteration of the political character of the financial mechanism. Against this background, the G-20 which is contemporarily perceived as being principle in the economic policy making process holds regular summits for leaders who entail heads of states from the member countries. In these meetings, the financial regulatory issues are addressed concurrently with the traditional issues related to monetary affairs. In this regard, the international bodies mandated with the role of standard-setting now report to the heads of states, albeit indirectly. This has had the effect of heightening the level of accountability mostly to the political actors. On the other hand, the reformation and elevation of the FSB provides a mechanism of direct political involvement in the processes of standard setting. This is based on the fact that the finance ministers from member countries are engaged in the coordination of agendas and standard formulation across an extensive variety of financial sectors. This approach is realistic since it not only elevates the level of accountability but also heightens the involvement of other stakeholders and outside observers who were traditionally excluded. This has been key in creating a sense of policy ownership which is primary in guaranteeing long-term sustainability. Secondly, the enormous expansion of the number of countries which participate in the standard setting processes has heightened a sense of universality in these financial systems. In this regard, institutions like FSB, Committee on Payment and Settlement Systems as well as the Basel Committee has a reflection of the G-20 expansion of membership through the incorporation of countries like South Africa and Brazil (194). This strategy is feasible since it will take into account the distinct development needs of different member countries, both from the developed and the developing worlds. In conclusion, despite these interventions, it is imperative to be cognizant of the fact that there issues still widespread issues connected to legitimacy and accountability that ought to be addressed. This will necessitate a holistic approach and the involvement of diverse stakeholders. Question 2: In light ofthe severe difficulties beingexperiencedbya number ofEuropean banks, particularlythose in Spain,ithas been proposedthata new regulatorshould be createdin Europe tosupervisedirectlythe biggestbanks. Taking into account the current frameworkforinternational financial regulation,andthe measures Europe has adoptedalready,wouldyou be in favorofthis recommendation? Introduction It is apparent that the severe problems being experienced by several banks in Europe necessitate the instigation of a new regulator to be created in the region to engage in direct supervision of the biggest banks. The rationale of this recommendation is founded on the distinct financial needs in different regions as mentioned in the preceding section as well as the presumed infeasibility of a world financial organization. It is imperative to highlight some of the chief bodies in the European Union banking sector. These are expounded in the subsequent framework. Figure 1.0: The key bodies in the EU banking sector-stability framework Source: Jackson, JK., 2010, Financial Market Supervision: European Perspectives, Congressional Research service, Washington D.C. All of these bodies act in holistic manner in the efforts to address some of the most robust challenges confronting the banking sector in the wider Europe which includes the large banking institutions which are central in this analysis. Against this backdrop, this analysis supports the recommendation of the establishment of a new regulator to directly supervise the largest banks in Europe. This is based on the rationale explored in the following analysis. It is worth noting that despite the fact that the apparent attraction of a global regulator, the viability of this kind of supranational authority is limited. This is based on several facts. Firstly, it is an apparent fact that different countries possess diverse development models preferences as mentioned in the preceding section. These developmental needs vary between the developed and the developing countries. The current framework for the international financial regulation, mostly with the expansion of the expansion of the G-20 to incorporate more membership in the post-2008 financial crisis epoch, there is bound to arise conflict of interests among the member states engaged in standard setting among other deliberation processes (Brummer, 2012, p. 189) This will be chiefly founded on the distinct development needs among the member states, either individually or collectively/regionally. Consequently, consensus on proposed financial policies at the international scale is bound to be limited which will in turn limit the level of cooperation and coordination in promulgating these policies. Nonetheless, to a large extent, the countries in the wider Europe possess homogeneous development needs which bring their financial policies preferences to a convergence, mostly among the large banks. In this regard, the recommendation for the development of a new regulator to directly supervise the largest banks in Europe is not intrinsically malformed but rather founded on profound rationalization. Apart from the distinct developmental needs among the states in the global scale, there are also inherent diversities in regulatory philosophies at the national level. This has continued to render cooperation at the global level somehow problematic which eventually culminates in the impediments in the delegation to an international regulatory authority. The singularity and uniformity of the regulation philosophy in the current international financial regulation is bound to degenerate and in the long-run, the level of cooperation will diminish (269). However, most of the member countries in the wider Europe are confronted by closely similar challenges among their largest banks which can culminate in the establishment of relatively similar regulation policies supervising these banks. This will ease the cooperation efforts between the member states in case of the formation of the recommended new regulator directly supervising the largest banks in Europe. In addition, it is highly unlikely that there would be sufficient support from all the member countries engaged in the process of forging the global laws culminating in the formation of a single global regulator which will be mandated with the role of relinquishing national autonomy and sovereignty. According to Brummer (2012, p. 269), the establishment of a global authority would necessitate authority to a supranational body delegation to the extent that the decisions which are arrived at by the authority would generate de facto changes in the member regulator’s domestic laws. Against this background, it is extremely unlikely that the national legislatures among the European countries would be willing to compromise their powers of governance and policymaking at the domestic level in the above manner, mostly when they touch large domestic firms and financial institutions (269). In this regard, the establishment of a new regulatorin Europe tosupervisedirectlythe biggestbanks is ideal, if at all it will be founded on principle which will incorporate either partial or full autonomy of the national legislations in relation to policies affecting the large banks in their jurisdiction. In this case, the level of compromise will be limited due to the relatively similar financial institutions and systems in this region, which will create some sense of harmony in the standard-setting process. This fact is supported by Brummer (2012, p. 269) who cited that even when the states have successfully centralized enormous strips of financial authority in a regional body which is best exemplified by the European Union, the power still continues being shared between the supranational and local authorities in diverse ways. Moreover, assuming that delegation to a central rulemaking authority is endowed with possibility, the merits associated with a singular decision maker is highly uncertain. Brummer (2012, p. 269) determined that this delegation will be detrimental in the sense that it will culminate in the homogenization of the international approaches, which will heighten the regulatory error costs. However, the establishment of this new regulator to supervise the largest banks in Europe will mean limited approach homogenization since most of the prospective member states possess relatively similar approaches to economic policies, mostly in these large banks. Lastly, based on the fact that most of the countries in Europe have relatively similar socio-economic and political advancements, the establishment of this new regulator to supervise the largest banks in this region will mean that there will be extensive checks and balances in the operations of this body, dominance of key positions as well as mandating the chief implementers of the policies which have been deliberated upon. This will be fundamental in elevating the levels of accountability and legitimacy in the new authority, which will thus evade majority of the criticisms hulled upon the international financial regulatory system. In regard to the financial measures which have already been adopted in Europe, the establishment of this recommended new regulator to govern the large banks in Europe will be beneficial in different ways. Jackson (2010, p. 1) noted that the European Union has undertaken several initiatives aimed at enhancing the level of financial supervision among its members which include but not limited to adopting regulations on credit rating agencies, considering a measure geared towards the registration of hedge funds, reinforcement of the responsibilities of advisory committees in the realms of banking, insurance regulators and securities; and offering funding in backing of international accounting standards. In regard to the adoption and eventual modification of the regulations on credit rating agencies, the establishment of the new regulator to directly supervise the largest banks in Europe will ensure collaborative risk rating for investors and financial authorities to be put into utility in assessing the risks for regulatory and investment purposes. This will ensure that careful attention will be paid to any undertakings which might affect the quality of the ratings. Moreover, the prospective development of cohesive principles will be chief in protecting the integrity of the rating process which will be central in ensuring that the investors are provided with high-quality and timely rating (Brummer, 2012, p. 219) On the other hand, Brummer (2012, p. 219) noted that the international accounting standards are aimed at helping the investors gain comprehensive understanding the stability and health of the financial firms. With the EU supporting and funding this body, the benefits of this undertaking will spill over to the proposed new regulator supervising the large banks in the sense that the investors will be better informed about the stability of various banks across Europe which will be key in heightening the level of calculated investments thus minimizing the level of risks associated with some investments decisions. In addition, there was the adoption of a proposal by the European Union to have European System of Financial Supervisors and a European Systematic Risk Council. Both of these were to act as advisors to the European Commission members in offering advice in both macro and micro practical supervision. Structuring the regulator There are some rudimentary tenets that ought to be embraced in the structuring of this body, mostly geared towards addressing some of the criticisms cited against the system of international financial regulation. At the apex of this structure, the regulator ought to entail membership from all the states in Europe which will be key in enhancing the level of legitimacy in this authority. This is because all the policies which will be deliberated upon will involve the contribution and participation of all the members, thus cultivating a sense of ownership. This will be fundamental in the promulgation of these policies at the national levels. In addition, the operations of this authority ought to be subjected to limited public scrutiny as well as legislative bodies in individual states which will be paramount in enhancing the level of accountability in the processes being undertaken by this body. The role of the European Union and the ministries of finance from different countries ought to be incorporated in the efforts to entrench consideration of both regional and public interests from specific countries in the policy making process. The middle of the structure should be constituted of different regional organizations mandated with financial regulations. These includes but not limited to European Banking Committee, Economic and Finance Committee and European Central bank. These institutions will be chief in coordinating the operations of this regulatory body as well as conducting monitoring and evaluation on diverse policies being implemented by the new regulator both at the regional and national levels. Participation of all the member countries in these organizations is also paramount in ensuring representation of particular national interests. The lowest echelon of this structure ought to be constituted of the national central banks and national supervisors. These will be primarily mandated with policy implementation and appraisal at the national level. The above structure will create comprehensive and watertight representation of both the regional and national interests. Principles of regulation There are some basic principles of regulation which ought to be applied in the operations of this regulator. Firstly, the regulator ought to review and assess the internal capital adequacy evaluations of these large banks. This should spill over to their capacity in monitoring and make sure that they comply with the regulatory capital ratios. In case of ineffectiveness by the banks to undertake this process, the regulator ought to take swift and decisive action without any external manipulation. Secondly, the regulator should make extensive efforts to engage early interventions to inhibit the falling of capital below the agreed upon minimum levels which is prerequisite to supporting the risk characteristics of the specific large banks in Europe. Lastly, the banks ought to have a well-defined and developed process of monitoring credit relationships. All these principles among other ought to function in harmony in order to ensure coordination and cooperation among the member states. In conclusion, it is apparent that this regulator will play a fundamental role in cultivating high level of cooperation between the member states. In this regard, the financial interests of the individual banks in different countries will be well represented at the regional level which will promote cohesive economic development and collaboration. References Bank for International Settlements, 2011, Macroprudential Policy Tools and Frameworks; Progress Report to G20, Bank for International Settlements, Basel, Switzerland. Brummer, C., 2012, Soft Law and the Global Financial System: Rule Making in the 21st Century, Cambridge University Press, Cambridge. Jackson, JK., 2010, Financial Market Supervision: European Perspectives, Congressional Research service, Washington D.C. Read More