Global financial supervision system not immediate
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The proposal of a transnational super financial supervision law as a means to prevent financial risks is controversial. At every global economic summit, the establishment of a new global financial supervision mechanism is a hot topic.
In my opinion, the world economy has entered a more complicated post-crisis era and counting on a new transnational mechanism which could prevent financial risks is naïve.
During the recent Busan G20 Meeting, the financial ministers and central bank governors of 20 economies disagreed about whether to collect bank taxes. This illustrates how difficult setting up a global financial supervision mechanism is.
Since the outbreak of the global financial crisis, strengthening global financial supervision has been a constant refrain. And some supervision methods have already been adopted. After several consultations during the G20 meetings, the information sharing mechanism among states and financial reserves has improved. However, every economy has different demands about financial supervision.
When talking about global financial supervision, many ministers and experts mention the Glass-Steagall Act of 1933, which the U.S. developed in reaction to the 1929 economic crisis. The act was designed to fix the damages to the Federal Reserve System caused by commercial banks doing securities business. At the time, economists believed that the stock market crash, the closing of banks and the Great Depression stemmed from the mixed operation of banks and securities.
This act ended mixed operations. However, the U.S. abolished the act in the 1990s for two reasons. First, economists proved that the bankruptcy of banks does not have a direct relationship with mixed operations. Second, the revitalization of the US economy depends on the supervision of the financial industry being relaxed. Mixed operations in the banking industry reappeared in an innovative way, and the banks' involvement in securities was legalized.
Therefore, it seems that people's current appreciation of the Glass-Steagall Act is a reaction to having few other choices in the new crisis. They do not really want to go back to the Glass-Steagall Act. Financial innovation is still going on, and going back is not a good plan. Moreover, the establishment of Eurozone led to the establishment of regional financial supervision systems, but the crisis still broke out. So an integrated financial supervision system is not omnipotent.
Whether the mixed operations of the banking industry are the catalyst of crisis is not conclusive. However, financial innovation breaks the original rules. If preventing financial risks depends only on financial legislation or the establishment of a supervision system, the problem will never be solved.
The recent crisis in the Eurozone is different from the 2007 financial crisis. It's a reminder of the diversity of the crisis, which presents a new challenge for future global economic security.
It's fortunate that after several consultations during the summits the financial ministers agree that the solutions to the bank problem should be diversified. This is a compromise made by the states on the diversification of interests.
Strengthening global financial supervision is to systematically prevent financial risk. The purpose is to limit the impact of crisis to fewer countries or regions. However, the financial industry's adoption of high-tech methods means the adaptability of global financial supervision system is another important issue that can never be ignored.
(The post was first published in Chinese and translated by Chen Chen.)
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