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Prioritising the Implementation of International Financial Regulation

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The global financial crisis of 2007–08 triggered a plethora of regulatory reforms under the auspices of international bodies such as the G20 and Financial Stability Board. Yet the implementation of these reforms remains a task for individual countries.

This paper presents a risk-based framework for implementing international financial regulation within national economies, in particular in small states. It shows how these countries can navigate the standard setting processes used by the relevant international bodies. It includes case studies to illustrate how the framework can be integrated with standard setting processes to improve outcomes for small states.

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Setting Priorities in Implementation of International Financial Regulation

To articulate priorities for implementation of financial regulation, it is necessary first to assess what is at stake. For this reason, we review in this chapter the goals of financial regulation. A well-functioning financial system facilitates payments, mobilises savings from individual investors, and selects and monitors investment projects which will yield good returns (Merton and Bodie 1995). These functions are, in turn, of vital importance to the functioning of the real economy. Well-functioning financial systems help to facilitate economic growth by, amongst other things, supplying funds for investment and making effective selection of good projects. The converse is also true: failures in the financial system can retard the real economy. The early work of Ben Bernanke, latterly Chairman of the US Federal Reserve Board of Governors, as an academic economist identified the channels through which banking collapse in the USA during the Great Depression of the 1930s led to economic contraction (Bernanke 1983; see also Friedman and Schwartz 1963). Similarly, there were contractions in investment and growth in Asian countries following the Asian financial crisis in the late 1990s (see, for example, Barro 2002), and in the USA and EU following the financial crisis of 2007–08 (see Campello et al. 2010; Becker and Ivashina 2014; Kahle and Stulz 2013). The effects of banking crises in particular are especially strong on developing countries, which typically rely more heavily on bank, rather than market, finance (Dell’Ariccia et al. 2008).

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