Regulatory Competition in Global Financial Markets

Regulatory Competition in Global Financial Markets: The Case for a Special Resolution Regime evaluates the power of market pressure on the way financial regulation is made. It argues that the phenomena of arbitrage and competition in financial rulemaking are potentially more problematic than elsewhere. This is linked to the ease of arbitrage on the one hand, and to the risks of deregulation for global financial stability of the other. This monograph demonstrates that regulatory competition in financial markets is a reality and evaluates its merits. Regulatory competition in financial markets as a response to market behaviour has many positive effects for the lawmaking process, but may at the same time pose a risk for and undermine global financial stability as a public good. The resulting dynamics may require regulatory intervention: the traditional response has been to promote international harmonization of legal rules with extraterritorial reach as a comparable unilateral response. In contrast to these traditional concepts, the author introduces the benefits that a special resolution regime for financial institutions can bring to the debate arguing that resolution regimes can help introduce market discipline and that threats to market stability can be eliminated where an effective and credible global framework is in place.

Section 2 gives an introduction to the notions of regulatory arbitrage and regulatory competition, and provides an analytical framework to analyse the subject matter of this paper. Section 3 takes the debate into the specific field of financial markets regulation and identifies the problems that it creates in this context. This allows Section 4 to discuss the various regulatory answers that regulators traditionally subscribe to. Section 5 then introduces the benefits that a resolution regime for financial institutions can produce if it is designed in the right way. Section 6 concludes.