The Financial and Economic Crises

The Financial and Economic Crises

An International Perspective

Edited by Benton E. Gup

The 2007 financial and economic crisis that began in the United States and quickly spread around the world differed from earlier crises in a number of significant ways. This book examines the causes of these events in the US, and their impacts on North America, Europe, Asia and Australia.

Chapter 11: Hedge Funds and Offshore Financial Centers: New Challenges for the Regulation of Systemic Risks

Navin Beekarry

Subjects: business and management, corporate governance, economics and finance, corporate governance, financial economics and regulation, international economics

Extract

Navin Beekarry* 1 INTRODUCTION Since the 1980s, the dual forces of globalization – deregulation and liberalization of capital – led to a complete transformation of finance,1 with rapid and growing movement of capital across borders.2 This transformation, identified with innovative and highly complex and obscure financial instruments, resulted in a restructuring of the international financial system, raising concerns among policy makers and regulators, about financial stability.3 Hedge funds4 and offshore financial centers (OFCs) provide appropriate lenses for assessing stability issues linked with this spectacular financial evolution. In fact, both have recently resurfaced on the global governance agenda as a result of concerns linked with their potential for financial instability. The impressive growth and increasing proliferation of hedge funds,5 as a mainstream alternative investment vehicle, indicate that they are likely to constitute critical non-bank financial institutions although the implications for financial stability, of their role, activities, and impact on financial markets, remain relatively underexplored. In turn, this has triggered a debate about the need for more-stringent regulation seeking to forestall any future possibilities of financial instability and crisis. At the same time, OFCs have also witnessed surprising growth and importance6 against conventional wisdom that deregulation of financial systems would eventually undermine the competitive rationale for OFCs.7 Although stability issues related to OFCs have always been explained in terms of their weak, or absence of, regulatory frameworks and tax avoidance schemes, recent changes in their role and importance in the international capital markets have also given rise to new concerns about instability.8...

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