LLAW6093B Chap.9 Financial Globalization and International Regulation
Financial Globalization and International Regulation
A course aim about global governance
One of the course outcomes is to assess what global regulatory governance means for market integrity and financial stability, and the fifth seminar takes it up through the trilemma and the role of domestic authorities when international banks fail.
The readings supply the scale, the history and the transmission mechanisms.
How large and how connected
The first reading records that global holdings of debt and equity exceeded two hundred trillion dollars in 2010, several times world output, and traces integration to the removal of capital controls, communications technology and the internationalisation of the institutions themselves.
Companies list abroad to reach deeper markets and, on one view, to signal that they accept stricter rules.
An old story with new crises
The historical reading insists the present era resumes a pattern interrupted by war, depression and the post-war order, and that banking crises have become more frequent and severe as governments protect bank debts more.
It also frames every monetary order as a choice under the trilemma: a state cannot keep open capital markets, independent monetary policy and a fixed exchange rate all at once.
The gold standard, the post-war order and the floating era each gave up a different one, and export-led economies in Asia have made yet another choice.
Failure without a single authority
When a large investment bank was allowed to fail, clients abroad were trapped, markets repriced implicit guarantees, forced sales spread, lending dried up and governments borrowed to rescue their banks.
International responses rely on standards, assessments, the diffusion of supervisory methods and backstops such as swap lines and IMF lending, and those backstops reach states unevenly, according to their place in the hierarchy of money described in Chapter 2.
What this chapter covers
- 01
The scale of cross-border finance
- 02
Drivers of integration and cross-listing
- 03
Globalisation before 1914 and after 1973
- 04
The trilemma and the regimes that chose
- 05
How one failure crossed borders
- 06
Standards, assessments and diffusion
- 07
Backstops and the hierarchy of money
Worked example · free
Advise a home state on a failing bank
- 3Apply the trilemma to the rescue.
- 3Identify the cross-border channels at risk.
- 3Recommend and name the backstop needed.
Key terms
- Financial Trilemma
- The constraint that a state cannot at once maintain open capital markets, an independent monetary policy and a fixed exchange rate.
- Capital Controls
- Legal restrictions on moving money across borders, used under the post-war monetary order to preserve fixed rates and domestic policy.
- Cross-Listing
- The listing of a company's shares on a foreign exchange as well as at home, to reach wider investors or signal quality.
- Swap Line
- An arrangement under which one central bank provides its currency to another, used to restore access to key currencies in a crisis.
- Implicit Guarantee
- A market expectation that the state will support an institution, which lowers its funding costs until the expectation is tested.
Financial Globalization and International Regulation FAQ
What is the trilemma in international finance?
It is the constraint that a state cannot have open capital markets, an independent monetary policy and a fixed exchange rate at the same time. Every monetary order in the historical reading gave up one of the three, and the choice shapes how a state can respond to a banking crisis.
How did one bank's failure spread internationally?
The reading identifies five channels: foreign clients could not exit their positions, markets withdrew the discount they had given for implicit state support, institutions sold assets to meet their debts, credit to firms dried up, and governments borrowed to rescue their own banks.
Is Hong Kong subject to international financial assessments?
Yes. The reading on supervisory styles records that after the crisis the IMF made financial stability assessments mandatory for systemically important jurisdictions, and that the list produced in 2013 includes Hong Kong SAR.
Exam move
Pick one historical order from the reading and one current economy, and for each write which corner of the trilemma it gave up and what that meant for handling a banking crisis. The comparison is a ready-made paragraph for the analytical question.
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