Reconceptualizing the Regulation of Global Finance

Abstract

The post-crisis reforms to the global financial system may serve us well if the next crisis is 2008 revisited. But it will not be. So instead of preparing to fight the last war, this paper analyses the five major changes in the global financial system in the past 40 years, and explores potential regulatory responses that could make the system more stable and resilient. These changes include (i) the globalisation of the global financial system; (ii) the legalisation of financial gambling; (iii) the rise in algorithmic and high frequency trading and in dark pools; (iv) the fundamental changes in banks and bankers; and (v) the rise in the role and power of ratings agencies. The potential responses to these changes include (i) a sovereign bankruptcy regime; (ii) higher mandated capital levels for banks; (iii) levies on banks; (iv) a financial transactions tax; (v) rigorous regulation of high frequency trading and dark pools; and (vi) removing the conflict in the role of the ratings agencies.