International capital flows
The global economic crisis: systemic failures and multilateral remedies
Building up cushions to avoid draining liquidity during periods of crisis
Authors:
; UNCTAD Secretariat Task Force on Systemic Issues and Economic Cooperation
Publisher:
United Nations [UN] Conference on Trade and Development , 2009
The current global financial crisis arose amidst the failure of the international community to give the globalised economy credible global rules. This is true especially with regard to international financial relations and macroeconomic policies. This paper believes that the crisis has made it all too clear that globalisation of trade and finance calls for global cooperation and global regulation. The paper emphasises that resolving this crisis and avoiding similar events in the future has implications beyond the realm of banking and financial regulation. Indeed, the solution should go to the heart of the question of how to revive and extend multilateralism in a globalising world.
The paper figures that a new start in financial market regulation needs to recognise inescapable lessons from the crisis, such as:
- financial efficiency should be defined as the sector’s ability to stimulate long-term economic growth
- regulatory arbitrage can only be avoided if regulators are able to cover the whole financial system
- micro-prudential regulation must be complemented with macro-prudential policies aimed at building up cushions to avoid draining liquidity during periods of crisis
- developing countries can increase their resilience to external shocks by maintaining a competitive exchange rate and limiting currency mismatches
- regulators based in different countries should share information and avoid races to the bottom in financial regulation
- comprehensive trading data reporting is needed in order to monitor information about sizeable transactions in look-alike contracts
- effective regulatory reform should also close the swap dealer loophole
- renewed efforts are needed to design a global institutional arrangement supported by all concerned nations, consisting of a minimum physical grain reserve as well as an intervention mechanism
