Balancing the Governance of the Modern Financial Ecosystem: A New Governance Perspective and Implications for Market Discipline

By Tsang, Cheng-Yun | Houston Journal of International Law, Spring 2018 | Go to article overview

Balancing the Governance of the Modern Financial Ecosystem: A New Governance Perspective and Implications for Market Discipline


Tsang, Cheng-Yun, Houston Journal of International Law


Abstract     I. Introduction   II. Brief Introduction to Post-Crisis Financial       Regulation       A. Efforts to Enhance Resilience and Rein in Excessive          Risk-Taking          1. "Ring-Fencing" Type Reforms          2. Short-term Wholesale Funding Reducing             Efforts      B. Efforts to Eliminate the "Too Big to Fail" Perception         and Improve the Resolvahility of Financial         Conglomerates         1. Regulatory Framework of SIFIs         2. Title I of Dodd-Frank: Living Wills and Others         3. Title II of Dodd-Frank: The Orderly            Liquidation Authority, Single Point of Entry,            and Bail-in Regime      C. Efforts to Regulate the Shadow Banking Systems      D. Efforts to Revive Prudence and Transform Cultures III. How Should the Financial Ecosystem be Governed?  IV. A More Balanced Approach Is Needed   V. Through the Lens of New Governance Scholarship      A. What is New Governance and Why We Need It      B. Features and Principles of New Governance         1. Common Features of New Governance         2. Key Elements of New Governance      C. New Governance in the Context of Financial         Regulation         1. New Governance and Financial Regulation         2. Limitations of New Governance in Financial            Regulation         3. Make New Governance More Workable in            Financial Regulation  VI. Implications for the Use of Market Discipline VII. Conclusion 

ABSTRACT

Governance in the contemporary financial ecosystem is very unbalanced. It is neither sincere about nor effective at seeking the collaboration of regulators and all market participants in the exertion of regulatory power, or in the channeling of market force. Nor does it aim to manage the system-wide complexity by balancing its less flexible, prescriptive regulations and the more adaptive, experimental measures. This article maintains that a more balanced governance regime is urgently needed for the modern financial system. It offers a brief but comprehensive review of post-Crisis financial regulations, then identifies the major insufficiencies or limitations of these reform efforts. It proceeds to explore the prospect of using New Governance scholarship to rethink the current regulatory regime, and analyzes how such exploration yields implications for the use of market discipline. It concludes that a well-crafted collaborative standards-setting process that effectively incorporates the New Governance elements of collaboration and experimentation will Bring a much-needed difference to the restoration of market discipline.

I. INTRODUCTION

Despite the several years that have passed since the onset of the Global Financial Crisis of 2008 ("the Crisis" or "the 2008 Crisis"), many of us have not really recovered from the traumatized economy. Every single agent in today's complex financial ecosystem, be it a retail consumer, banker, financial institution or even regulator, is in some way suffering from economic post-traumatic stress disorder. The ecosystem is itself weakened by this experience and has not yet developed sufficient resilience to sustain future unwelcome distress. The prevailing symptoms include a pervasive distrust of, and disgust with, "ruthless" bankers and "captured" regulators, hyper-arousal upon any potentially harmful financial activity or product, and collective emotional numbness towards, and detachment from, efforts and reforms to make the system healthier. Just like a suddenly-stretched-out slinky, the system responds by locking itself down to prevent any uncontrollable discharge of energy that may lead to another stretch-out. (1) The same situation pertains in today's post-traumatic financial market, where policymakers and reformers choose to respond to the crisis with complex and heightened regulations. We are somehow over-anxious about the occurrence of another catastrophic event, to the point that we would be willing even to overprotect market stability at the expense of market energy and vitality. …

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