Sudip Bandyopadhyay’s Blog

At the G20summit last month it was agreed that global growth will require sound new global regulation of financial markets. But what would it take to achieve such regulation? We argue that nothing less than a new global architecture for the regulation of banking and finance is required to ensure success. Such architecture comprises three elements: broad representation in the rule making process, proper monitoring and systematic enforcement. First, a better and more impartially informed process for setting the rules is required. Effective new regulation requires participation by a broader range of countries and stakeholders in rule-making. The recent crisis shows that some of the costs of poor regulation fall on emerging and other economies whose voice would add a different and balancing set of stakes into rule-making. Equally important is the range of agencies involved in rule-making.

A second requirement of a new architecture is robust monitoring of regulators and those they regulate. New global rules – once agreed upon need to be implemented and obeyed. Robust monitoring requires “watching the watchdog” bodies such as have emerged in environmental regulation, sometimes financed by public grants or compulsory fees paid by firms. Such “watching the watchdog” bodies at the national level must be complemented by global supervisory agencies. A proposal made during the G20 summit to establish international “supervisory colleges for all major cross-border financial institutions” is a step in the right direction.

A third essential element of the new architecture is the creation of an international judicial institution charged with assisting the enforcement of the new banking and financial rules, adjudicating disputes, and offering uniform authoritative interpretations of the rules. Such an institution should be made up of independent experts whose decisions would be subject to public scrutiny. This judicial body should be open to lawsuits by any affected individuals without governments acting as gatekeepers. The problem here may be that affected individuals are willing but not able to sue for lack of resources. They will need public or private support. One model is the Advisory Centre on World Trade Organisation law. Leading trading countries have funded the Advisory Centre which gives advice to developing countries on WTO law. It is clear now that an urgent need exists for a new architecture at the international level. This will not remedy all failings at the national level, but it would create powerful incentives for effective regulation within countries.