International Finance RegulationThe Quest for Financial Stability
Wiley Finance 1. Aufl.
As the global market expands, the need for international regulation becomes urgent Since World War II, financial crises have been the result of macroeconomic instability until the fatidic week end of September 15 2008, when Lehman Brothers filed for bankruptcy. The financial system had become the source of its own instability through a combination of greed, lousy underwriting, fake ratings and regulatory negligence. From that date, governments tried to put together a new regulatory framework that would avoid using taxpayer money for bailout of banks. In an uncoordinated effort, they produced a series of vertical regulations that are disconnected from one another. That will not be sufficient to stop finance from being instable and the need for international and horizontal regulation is urgent. This challenge is the focus of Georges Ugeux’s book. International Finance Regulation: The Quest for Financial Stability focuses on the inspirations behind regulation, and examines the risks and consequences of fragmentation on a global scale. Author Georges Ugeux has four decades of experience in the legal and economic aspects of international business operations. He created and run the New York Stock Exchange’sinternational group in charge of developing the NYSE’s reach to non-US companies, including relationships with regulators and governments. Ugeux teaches European Banking and Finance of the Columbia University School of Law. Ugeux is uniquely positioned to provide recommendations and suggestions from the perspective of a top global authority. In the book, he explores international regulation with topics such as: • Laws, regulations, and risks of overregulation • Transformation of the U.S. market and creation of the Eurozone • Development of a global framework and stability of the banking system • In-depth examination of Basel III, the Dodd-Frank Act, the European Banking Union, and the Volcker Rule The book also contains case studies from real-world scenarios like Lehman, CDS, Greece, the London Whale, and Libor to illustrate the concepts presented. Finance consistently operates within an increasingly global paradigm, and an overarching regulation scheme is becoming more and more necessary for sustainable growth. International Finance Regulation: The Quest for Financial Stability presents an argument for collaboration toward a comprehensive global regulation strategy.
Preface xiii Is Finance in a Stage of Permanent Crisis? xiv Global Markets Are Interconnected xvi Regulating Finance in a World in Crisis xviii A Web of Institutional Complexity xix Will Global Financial Regulation Become Lex America? xx Applying Global Regulatory Convergence xxii Regulator and Regulated: The Infernal Couple xxiii Finance Cannot Be Left Unregulated xxiii Five Years after Lehman, Regulation Could Not Change the Culture xxiv A Culture of Outlaws xxv I Will Never Give Up xxvi Notes xxvii CHAPTER 1 The Multiple Objectives of Financial Regulation 1 Stop (Ab)using Taxpayer Money 2 Protect Retail and Small Investors and Depositors 3 Ensure Transparency of Markets and Institutions 5 Implement a Truly Risk-Adjusted Remuneration System 6 Protect Deposits from Trading 7 Notes 8 CHAPTER 2 A Quarter Century of Banking Crises and the Evolution of Financial Institutions 11 Banking Crises Are Not Exactly a Recent Phenomenon 12 The Two Main Emerging-Market Crises 13 Subprime Crisis 14 Lehman Crisis 16 European Sovereign Debt Crisis 17 European Banking Crisis 17 LIBOR Manipulation 19 Will the Foreign Exchange Market Be Next? 21 Notes 23 CHAPTER 3 The Lessons of the Recent Financial Crises: The Explosion of Balance Sheets 27 Structural Overbanking of Europe 28 Lack of Transparency of the Derivative Markets 33 Emergence of the Credit Default Swap (CDS) Market 34 The Regulatory Landscape Is Not Global but Largely National 35 Notes 35 CHAPTER 4 Global Financial Regulation: The Institutional Complexities 37 Group of 20 (G20) 39 Financial Stability Board (FSB) 41 Bank for International Settlements (BIS) and the Basel Committee (BCBS) 42 International Monetary Fund (IMF) 43 International Organization of Securities Commissions (IOSCO) 45 International Accounting Standard Board (IASB) 46 International Association of Insurance Supervisors (IAIS) 47 Notes 50 CHAPTER 5 Capital Adequacy, Liquidity, and Leverage Ratios: Sailing toward the Basel III Rules 53 Part I: Capital Adequacy 55 Part II: Liquidity 59 Part III: Leverage 62 Notes 66 CHAPTER 6 Assessing Likely Impacts of Regulation on the Real Economy 69 Notes 73 CHAPTER 7 Regulating the Derivatives Market 75 Origin of the Derivatives Market 77 Size of the Derivatives Markets 78 U.S. Regulation: Dodd-Frank Act 78 European Market Infrastructure Regulation (EMIR) 79 Transatlantic Divergences 80 Short Selling Is a Form of Derivative 81 JPMorgan Chase London Trading Losses 82 Notes 83 CHAPTER 8 The Structure of Banking: How Many Degrees of Separation? 87 Systemically Important Financial Institutions (SIFIs) 87 Universal Banking Model 89 Separation Models 90 United Kingdom 90 United States 90 European Union 91 Sw+itzerland 92 Volcker Rule and Proprietary Trading 92 Too Big to Fail (TBTF): Is Size the Problem? 95 Prohibit the Trading of Commodities by Banks 97 Notes 98 CHAPTER 9 Banking Resolution and Recovery 101 Moral Hazard 102 Can the Bail-In Concept Avoid Taxpayers’ Bailout? 103 Lessons from the Financial Crisis 104 Living Will, or How Banks Want to Be Treated if They Are Close to Collapsing 104 United States 105 The Citi Recovery Plan 106 Role of the Federal Deposit Insurance Corporation in the United States 107 United Kingdom 110 European Banking Resolution and Recovery Directive 111 Regulatory Technical Standards 112 Can Resolution Rules Be Effective? 112 An Impossible European Institutional Challenge 113 Who Will Decide to Put Companies Under Resolution Surveillance? 114 Notes 120 CHAPTER 10 Banking and Shadow Banking 125 Hedge Funds 125 United States 127 Europe 127 Other Types of Shadow Banking 127 Capital Markets and Securitization 128 Notes 129 CHAPTER 11 Rating Agencies and Auditors 131 Part I: The Rating Agencies 131 Part II: External Auditors 134 Part III: The Limits of Accountability 136 Notes 136 CHAPTER 12 Central Banks as Lenders of Last Resort Have a Conflict of Interest with Their Regulatory Role 139 Financial Stability 140 United States: Quantitative Easing 141 European Central Bank: The Long-Term Refinancing Operations (LTROs) 143 United Kingdom 144 Japan and Abenomics 145 Are Central Banks Balance Sheets Eternally Expandable? Have They Become Hedge Funds? 145 Is This Novation of Central Banks Legitimate or Legal? 147 Notes 147 CHAPTER 13 Financial Institution Governance (or Lack Thereof) 149 Risk Management 150 Dysfunctional Boards of Directors 151 Should the Chairperson Also Be the CEO? 152 Remuneration and Risks 153 Personal or Institutional Accountability 153 Notes 154 CHAPTER 14 Was It a Global Crisis? The Asian Perspective 157 Japan 158 China 160 India 161 Assessing the Asian Risk 162 Notes 163 CHAPTER 15 The Challenges of Global Regulation 165 Regulation, Policies, and Politics 167 Regulators and Sovereign Financing 169 European Central Bank Supervision: The E.U. Governance Challenges 169 The Risks of Regulatory Fragmentation 171 Bank Resolution: The Legal Nightmare 171 Basel III 172 Reemergence of Capital Markets 173 Restructuring Finance 173 Should Financial Communication Be Regulated? 174 Should Financial Media Respect a Code of Conduct? 175 Financial Education Is Key 176 Notes 178 CHAPTER 16 Regulation and Ethics 181 Management Integrity 182 Accountability 182 Transparency Is Key 183 A Principled Regulatory System Is Needed 183 Doing the Right Thing 184 Notes 186 CONCLUSION What Can We Expect? 189 A Few Books I Read and Found Helpful . . . 195 About the Author 197 Index 199
“Georges Ugeux draws on his experience as well as his training as an economist and lawyer to tackle a daunting topic: International Finance regulation: The Quest for Financial Stability (Wiley, 2014). (…) Backward-looking rules are only one problem with current financial regulation. Another is its fragmentation, especially across national borders. (…) Ugeux is not especially hopeful that we can resolve the problems that stand in the way of global financial stability. In fact, if the volcano model is apt, stability itself is a chimera.”—Brenda Jubin, Reading the markets, Investing.com
GEORGES UGEUX, a lawyer and economist by training, is the Chairman and CEO of Galileo Global Advisors. Prior to founding Galileo, Ugeux joined the New York Stock Exchange as Group Executive Vice President, International and Research. He created and ran the New York Stock Exchange’s international group in charge of developing the NYSE’s reach to non-US companies, including relationships with regulators and governments. Ugeux teaches European Banking and Finance at the Columbia University School of Law and has been publishing, speaking, and blogging on these issues, namely for Le Monde (France) and the Huffington Post.
Since World War II, financial crises have been the result of macroeconomic instability until the fatidic day of September 15, 2008 when Lehman Brothers filed for bankruptcy. The financial system had become the source of its own instability through a combination of greed, lousy underwriting, fake ratings, and regulatory negligence. From that date, governments tried to put together a new regulatory framework that would avoid using taxpayer money for bailout of banks. In an uncoordinated effort, they produced a series of vertical regulations that are disconnected from one another. That will not be sufficient to stop finance from being unstable, and the need for international and horizontal regulation is urgent. Effective financial regulation inspires market confidence, stability, consumer protection, and a reduction in financial misconduct and crime. International finance expert Georges Ugeux explains that while individual nations have reformed domestic regulations, these combined measures are still insufficient to prevent future financial crises. International Finance Regulation: The Quest for Financial Stability demonstrates that global financial stability is managed in a fragmented and incoherent manner, and offers a model for strategic international regulation. International Finance Regulation provides recommendations and suggestions from the perspective of a leading global authority with more than 40 years’ experience in the financial arena. Ugeux offers insights into the lessons learned from the recent financial crises, and shows why the current financial laws, rules, and risks are often seemingly overbearing. He also includes information on the transformation of the United States marketplace and the creation of the Euro, and histories of Latin American and Asian economic crises. Ugeux points to some of the complexities and inconsistencies of recent regulations—Basel III, the Dodd Frank Act, the European Banking Union—and their limited ability to ensure financial stability. He also addresses some of the controversies surrounding the Volcker Rule, too big to fail, shadow banking, credit default swaps, securitization, and hedge funds. The book is filled with illustrative case studies from real-world financial disasters such as the implosion of Lehman Brothers, the breakdown of the Greek economy, the enormous “London Whale” trading, and Libor interest rate scandal. These studies and other examples demonstrate how the global economic framework developed, and the inability (and unwillingness) of the international financial and banking systems to protect our economy. The proposals and recommendations outlined in International Finance Regulation offer the international financial community a new model for the transformation of our global economy.
Praise for International Finance Regulation “Building on his extensive experience as a market regulator, law professor, and internationalist, Georges Ugeux has produced an eminently readable exposition of the disparate threads that caused the recent breakdown of global financial systems, and the serious deficiencies permeating existing regulatory mechanisms that should—but are unable to—prevent future breakdowns. His analysis culminates in his carefully conceived outline of the necessary components of effective global financial regulatory reform. This is a must-read for regulators, market professionals, and anyone concerned about the future of financial regulation as well as those looking for creative approaches to restore global financial stability.” —Harvey L. Pitt, CEO, Kalorama Partners, LLC; Former SEC Chairman (2001–2003) “The great interest of Georges Ugeux’s book is that it puts together issues which are too often dealt with separately. Therefore, this well-documented book provides a more comprehensive view of what is needed to get a more stable financial world.” —Philippe Maystadt, special advisor to Commissioner Barnier, former president of the European Investment Bank “In a short book, Georges Ugeux has covered the waterfront, with fresh and incisive observations on a host of topics. You may not agree with every judgment that he reaches, but he will make you think and respond. As usual, he is stimulating, hard-nosed, and delightfully judgmental.” —John Coffee, Adolf A. Berle Professor of Law at Columbia University Law School; Director of the Columbia University Law School’s Center on Corporate Governance
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