The New Global Financial Regulatory Order: Can Macroprudential Regulation Prevent Another Global Financial Disaster?

Authors

Behzad Gohari, American University Washington College of LawFollow
Karen E. Woody, Washington and Lee University School of LawFollow

Document Type

Article

Publication Title

Journal of Corporation Law

Publication Date

2015

Abstract

This Article posits that the success of macroprudential regulation will depend on four factors. First, the economic philosophy of the central banker in charge of the domestic institution with jurisdiction over macroprudential regulation will prove crucial in the implementation of adopted regulation. If, like Chairman Greenspan, the banker is averse to the exercise of the Central Bank's regulatory oversight authority, then no amount or volume of policy or regulation will prevent or mitigate systemic risks and the accompanying shocks. Second, a sufficiently deep level of international cooperation is required to mitigate regulatory arbitrage, without being so broad that the ensuing harmonization of regulatory regimes will result in a homogenized global regulatory system that will possibly give rise to a productization of risk and therefore a far more rapid spread of systemic risk and shock. Third, the acceptance of macroprudential regulation by disparate domestic regulators will require a new guiding philosophy for the financial industry that will allow the macroprudential regulator the opportunity to meet its mandate and provide a foundation for system-wide success. Fourth, there needs to be a sufficient level of political willpower on the part of domestic legislatures and regulators in the face of what may be fierce opposition to macroprudential regulation by the largest and most politically powerful institutions the policy aims to supervise. To counter this, macroprudential regulation is primarily under the purview of the Central Bank, and therefore less prone to regulatory or political turbulence.

To explore the present and possible future impact of macroprudential regulation, one must recognize the possible implications of the current regulatory proposals. One way to ascertain such information is to examine the strengths and weaknesses of macroprudential regulation as it is currently proposed and implemented. As such, this Article considers the possible opportunities and threats that lay ahead within a policy and regulatory framework that considers the economic, political, and international implications of macroprudential regulation proposals.

Recommended Citation

Behzad Gohari & Karen E. Woody, The New Global Financial Regulatory Order: Can Macroprudential Regulation Prevent Another Global Financial Disaster, 40 J. Corp. L. 403 (2015).