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2019 | Buch

The Failure of Financial Regulation

Why a Major Crisis Could Happen Again

herausgegeben von: Anil Hira, Norbert Gaillard, Theodore H. Cohn

Verlag: Springer International Publishing

Buchreihe : International Political Economy Series


Über dieses Buch

“This publication could not be more timely. Little more than a decade after the global financial crisis of 2008, governments are once again loosening the reins over financial markets. The authors of this volume explain why that is a mistake and could invite yet another major crisis.”
—Benjamin Cohen, University of California, Santa Barbara, USA

“Leading political scientists from several generations here offer historical depth, as well as sensible suggestions about what reforms are needed now.”
—John Kirton, University of Toronto, Canada, and Co-founder of the G7 Research Group

“A valuable antidote to complacency for policy-makers, scholars and students.”
—Timothy J. Sinclair, University of Warwick, UK

This book examines the long-term, previously underappreciated breakdowns in financial regulation that fed into the 2008 global financial crash. While most related literature focuses on short-term factors such as the housing bubble, low interest rates, the breakdown of credit rating services and the emergence of new financial instruments, the authors of this volume contend that the larger trends in finance which continue today are most relevant to understanding the crash. Their analysis focuses on regulatory capture, moral hazard and the reflexive challenges of regulatory intervention in order to demonstrate that financial regulation suffers from long-standing, unaddressed and fundamental weaknesses.


Chapter 1. Persistent Issues with Financial Regulation
Persistent issues with financial regulation preceded and continue after the 2008 global financial crisis. Immediate reactions to restore liquidity and provide fiscal stimulus rescued Western economies. However, they did not address root causes of the crash. We demonstrate that issues such as regulatory capture and moral hazard were recognised in the US banking system as far back as the late nineteenth century, and that ensuing reforms were inadequate and sometimes reversed. Financial innovation and globalisation have led to evolving and complex capital markets, leaving regulation behind. Financial instability helps to foster anti-globalisation, populist, and protectionist movements. This chapter advocates that adequate financial reforms are needed to address persistent issues, restore liberal capitalism, and reduce nationalism.
Anil Hira, Norbert Gaillard, Theodore H. Cohn
Chapter 2. Financial Regulation and Monetary PolicyMonetary policy: The Spectre of Government Failure
This chapter provides a supportive account of the hypothesis advanced by “Austrian economists” that the crisis was the outcome of “malinvestment,” that is, overinvestment in the housing sector in response to ill-considered regulatory measures adopted by the US government. In other words, it was less a case of a “market failure” than a “government failure.” Not only a lack of regulation but also misregulation can distort markets. The problem stems from the “knowledge problem” first analysed by F.A. Hayek: policy makers often fail to estimate the complexity of the market processes they attempt to control. However, appearing to ignore a problem, for example, by allowing “too big to fail” (TBTF) entities to fail, is politically unfeasible. Hence the cycle of conflicting policy goals and contested regulatory reforms that continue to produce uncertainty in the Western world. This chapter concludes by underlining the risks involved in paying too little attention to the complexities inherent in financial markets.
Laurent Dobuzinskis
Chapter 3. The Effects of Regulatory Capture on Banking Regulations: A Level-of-Analysis Approach
This chapter assesses the validity of a hypothesis associated with regulatory capture theory—that capture resulted in banking deregulation which was a major factor contributing to the 2008 financial crisis. Capture occurs when regulators and politicians consistently give preference to regulated banking interests over the public interest. Whereas most research focuses on capture at the national and global levels, this chapter fills a gap in the literature by also focusing on the individual level. Looking at all three levels provides a better assessment of the evidence for capture, and the conditions under which it occurs. The chapter finds compelling evidence that capture had, and continues to have, a major effect on banking deregulatory decisions. The conclusion also includes recommendations for limiting regulatory capture in banking.
Theodore H. Cohn
Chapter 4. How and Why Moral HazardMoral hazard Has Distorted Financial Regulation
This chapter argues that, since the 1980s, moral hazard has encouraged excessive indebtedness and contributed to greater leniency from regulators and financial gatekeepers towards systemic banks. Examining the rise of the “too big to fail” (TBTF) banking behemoths, we question how moral hazard came to dominate banking culture and how the developing financial innovation in and after the 1980s combined with that culture to accelerate the growth and pre-eminence of the mega-bank. We explore how financial gatekeepers—US regulators, credit rating agencies (CRAs), and the Federal Reserve—became “lenient partners” (or “sweeteners”) that enabled and accelerated the growth of the financial services sector. We propose various reforms dealing with TBTF banks, CRAs, US regulators, and the indebtedness of American citizens.
Norbert Gaillard, Richard J. Michalek
Chapter 5. Remittances, Regulation, and Financial Development in Sub-Saharan Africa
This chapter critically examines the financial regulations needed to leverage remittances into positive sustainable development outcomes in sub-Saharan Africa. Although remittances have been the fastest growing, most stable, resilient, and reliable source of private capital flows to the region since the 2008 financial crisis, regulations have not kept pace with their increased importance. Noting the context-dependent nature of the remittance-development relationship, the chapter focuses on financial development as a key context. Leveraging remittances into positive development outcomes requires a financial regulatory system that enhances complementarities along the remittance transfer chain. Regulations are needed to expand market access and competition, reduce financial exclusion, facilitate technological innovations in financial services, reduce high transaction costs and informal transfers, enhance accuracy in remittance reporting, and curb illicit financial flows.
James Busumtwi-Sam
Chapter 6. Regulatory Mayhem in OffshoreOffshore financial havens Finance: What the Panama PapersPanama Papers Reveal
This chapter discusses the worrying increase in offshore financial flows resulting in tax evasion in the global economy. We demonstrate that offshore financial tax evasion is nothing new; it has been tolerated for decades, and its increasing scope portends a role in future crashes. The Panama and Paradise Papers reveal how individuals, multinational firms, terrorists, and criminals increasingly use offshore financial centres to hide wealth and evade taxes. While the various government and international entities have devoted considerable attention to the issue, reform efforts fail to address the fundamental drivers of offshore finance: a lack of transparency, information sharing, and tax competition. The failure of governments to work together has important implications, including creating a disproportionate burden on individual taxpayers, exacerbating inequality, raising questions of fairness, constraints on fiscal policy, and increasing resort to debt by governments. Our suggestions for reform focus on ways towards consensus, transparency, coordination, and enforcement in global financial regulation around taxation.
Anil Hira, Brian Murata, Shea Monson
Chapter 7. Concluding Remarks
We discuss the implications of our analysis. Persistent regulatory issues continue after the 2008 crash, threaten the stability of financial flows and the world economy, and undermine our democratic societies. The global nature of these issues requires serious efforts to harmonise regulation, create consensus, and promote transparency and enforcement. Our analysis reveals that financial lobbying groups block meaningful reforms through regulatory capture, moral hazard, and unregulated financial flows. The result is that global financial systems continue to be over-leveraged, suffer from unrealistic risk assessments, and operate in the shadows of domestic regulation, while still relying on domestic regulators to bail them out—thus frustrating taxpayers and spurring populism. In short, there is every reason to believe that a crash might happen again.
Anil Hira, Norbert Gaillard, Theodore H. Cohn
The Failure of Financial Regulation
herausgegeben von
Anil Hira
Norbert Gaillard
Theodore H. Cohn
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