Law, Trade and Finance
Edited by Ross P. Buckley, Richard Weixing Hu and Douglas W. Arner
Chapter 9: Global Financial Regulatory Reforms: Implications for East Asia
Douglas W. Arner and Cyn-Young Park INTRODUCTION The global financial and economic crisis that started in 2007 highlighted gaps and weaknesses in the current international financial architecture as well as national regulatory systems. Two major shortcomings in the modern global financial system have shaped an array of possible regulatory, supervisory, and prudential reforms. First, supervisors failed to limit excessive risk-taking and leverage by financial institutions. Market failures, due in part to rapid financial innovation, discredited the regulatory model that relied on transparency, disclosure, and market discipline to curb inordinate risk. Second, the absence of well-established crisis management mechanisms both locally and internationally – revealed in the failure to quickly address impaired financial institutions – sapped confidence in the system. Against this backdrop, the objective of global regulatory reform is to build a resilient global financial system that can withstand shocks and dampen, rather than amplify, their effects on the real economy. The goal is to ultimately support vibrant economic activity and growth.1 There is broad agreement on the key principles of reform – bolstering macroprudential supervision to reduce procyclicality and guard against a build-up of systemic risk, extending the regulatory perimeter to include all systemically important financial institutions, improving international financial standards, and strengthening crisis resolution mechanisms. Lessons drawn from the recent crisis have led to specific reform proposals with concrete implementation plans at the international level. Leaders 1 See G-20, The G-20 Toronto Summit Declaration (June 2010); G-20, Leaders’ Statement: The Pittsburgh Summit (September 2009); G-20, Leaders’ Statement – ‘The Global Plan for...
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