Financial Markets Regulation
Global financial markets are a strong indicator of the trend of globalisation in the world economy. The integration of the mass markets around the world has stepped up the level of challenges and potential risks facing these economies. These risks could cause extensive fiscal damage at an unprecedented speed. Hence, in order to combat these problems, financial regulation of markets has become indispensable in today’s modern world. Various international financial regulation agencies have been founded to ensure the normal functioning of the World economy. The chief objective of financial regulation is to usher growth and development by stimulating economic activities. To promote fair economic activities, financial regulation needs to be consistent and has to adhere to established standards. However, financial regulations should not be arbitrary and should be capable of constantly evolving, just like the markets they are designed to regulate.
Proper financial regulation would help improve the accumulation of capital investment and to maintain effective resource allocation. Care has to be taken to ensure that these objectives are accomplished, while maintaining a secure financial environment. However, all financial organisations round the globe do not function based on the same model. Hence, the same set of rules can not be imposed to effectively regulate all financial institutions. While applying these regulations, the sensitivities and specificities of the State need to be considered. This includes social, legislative, economic and historical factors that may hamper the effective enforcement of these financial regulators. Such factors are termed as Special Considerations.
Some of the principal regulators of international financial markets are BIS, World Bank, Financial Stability Forum, IAIS, IMF, IASB, IFA, FSF and IOSCO. The BIS is the Bank for International settlements. The members of the BIS include various central banks around the world. The BIS headquarters is one of the oldest finance regulating bodies, comprising of more than 140 members and 75 years of experience. It acts as an International stage to facilitate and encourage the analysis of financial policies among its member bodies. It performs almost the same role as that of the central banks, but does it on a global scale. It governs critical financial operations and transactions that take place in various countries.
However, the BIS does not cater to corporate businesses and individuals. It is also strongly committed towards identifying and averting fraudulent schemes that are launched by anti-social elements. It mainly provides advice to central banks to help manage foreign reserves. The BIS has a banking regulation body called the Basel Committee to supervise the operation of banks. The BIS also conducts research on international finance markets to study foreign exchange and reserve management. It chalks out statistics based on this research and educates the international audience about the same through conferences and seminars. The Financial Stability Institute (FSI), an integral part of the BIS, specialises in providing recommendations and training to the BIS members, in order to cope up with evolving global markets.
The IOSCO is one such organisation that deals with financial regulation. It stands for International Organisation of Securities Commissions. The principal aim of the organisation is to strive to accomplish fair and effective markets by regulating the issuance of securities. Security is a financial document that holds a monetary value; it is used by companies trading in the stock exchange to trade shares. A formal declaration that documents a fact of relevance to finance and investment; the holder has a right to receive interest or dividends It tries to accomplish this by bringing about standardization of market regulations. However, effective surveillance has to be in place to ensure that the standards set are belligerently followed; stringent laws also need to be enforced to penalize defaulters. The knowledge gained by the various members of the IOSCO is shared to boost the growth of domestic markets.
The International Monetary Fund (IMF) performs a status check on the various financial sectors across the globe to ascertain the quality of functioning. It also works for establishing transparency in the financial transactions carried out by the International community. The IMF also strives to find better tools to compute national balance sheets and evaluate debt sustainability. It has a separate International Capital Markets Department to assess risks and developments in the dynamically changing global market. As a result of this analysis, the IMF generates a Global Financial Stability Report. This report along with other computed financial data is instrumental in analysing potential spillovers on a real-time basis.
The World Bank along with the IMF provides timely and critical monetary assistance to struggling countries, especially during a social crisis or natural disaster. The International Accounting Standards Board (IASB) works in accordance with IMF to provide assistance on issue related to accounting. The IAIS is an International agency specializing in the supervision of insurance in global markets. The International Franchise Association (IFA) is an organisation helps out the IMF in matters pertaining to auditing International markets. The Financial Stability Forum (FSF) aims at improving the functioning of International markets by reducing systemic risks and promoting exchange of critical financial information. The forum acts as an observer of financial stability and co-ordinates between sector-specific regulators and committees of central bank experts.
The current system of International Finance regulation is diversified, with each of the aforementioned organisations playing a critical role regulating a particular aspect of Finance. This system has been quite successful in achieving some of its objectives. Over the years, each regulating body has been contributing in its own way to regulate various activities, in order to prevent fiscal crisis situations.
However, the decisions and recommendations made by majority of these organisations can not be immediately brought into effect and would not be considered as a law. Despite this, many of the decisions taken by Governments all over the world have respected the consensus reached by these International bodies. Although this can be considered as a reasonable success for this model of International regulation, criticism does not cease to exist.
Constant concerns have arose about the consistency of the current system in maintaining international standards that are critical for maintaining fiscal stability on a global scale. The non-supporters of the system strongly feel that the existing system is still quite informal and the decisions taken by the regulating bodies are not taken serious by many countries, since they are considered to be soft laws. On the other hand, imposing stringent hard laws could pressurise the nations, which may eventually lead to non-cooperation. There is also an opinion that the existing system is incapable of managing major crisis situations, as the lack of central co-ordination is often viewed as a weakness. Another major weakness in the system is the lack of representation of major standard-setters like the Basel Committee, which undermines the legitimacy of the decisions and proposed standards.
However, reforms do need to be made in the existing financial regulation system. The member organisations must be trained to understand the dynamic business needs of today. They must be equipped with effective resources to assess market risks better, so as to gain the confidence of financial services institutions. The structure of the existing system needs to be modified to promote better communication between member organisations. The regulating bodies will also have to focus on convergence to enhance co-operation.
A single and unified regulator would lead to the convergence of different financial sectors such as insurance and banking. It would be better equipped to perform effective resource allocation, thereby improving social justice. A unified regulator would have a higher degree of accountability; this would result in a higher level of transparency. It would also be in a better position to sort out conflicts and arrive at a consensus within a shorter timeframe. All these factors justify the need for a single and unified regulator for financial markets.
Bank of International Settlements. (2006). BIS Activities. Retrieved 2006, May 5, from http://www.bis.org/about/functions.htm.