Governing the Gaps in Global Banking
The global financial crisis of 2008-09 revealed a systemic deficit of financial regulation at the global level. This came as the result of the long process of "diffusion of power in favor of private actors" in the financial sector, as G. Underhill and X. Zhang put it. The power of the market and private interest became the major regulators at the global level, which made the system extremely unstable. The uncontrolled and disproportional growth of the financial sector led to the equally rapid increase in endogenous risks. What were these risks and how effectively did international institutions deal with them?
The main risks were the following:
- overleveraged banks that stimulated real estate bubbles and financial bubbles in general;
- ungrounded risks that bankers were systematically taking, making risk management strategies wrong;
- extremely inflated financiers' bonuses;
- new kinds of speculation due to blind spots in international financial legislation;
- insufficient connection between the financial sector and industries, together with distorted information about the demand and supply of money.
Most of these risks had a global origin but were dealt with on a national or regional level. The system was largely uncontrolled at the global level. Financial markets had long ago become transnational, while regulation and and supervision remained mostly national. Because of these gaps, the system became either unregulated or self-regulated, trends promoted by the liberalization of financial markets by states, using liberalization as a tool to attract investment. For this reason, the need for global financial governance was felt more than ever. Yet attempts to create a truly independent global supervisory body encountered the opposition of lobbyists from nation-states, regional organizations and financial institutions. Being interested in 'carte blanche' and the preservation of the existing gaps between national laws,they were unlikely to let an effective system of global financial governance be established.
As in any other area, better global financial governance means setting up a system of legitimate institutions; using adequate and effective instruments and measures; relying on efficient systems of monitoring and control over the financial networks and last, but not least - ensuring that the interest and the will of the actors complies with the adopted set of requirements. This Chapter analyzes these aspects to provide the ground for assessing the emerging system's relative efficiency.