Trade Liberalization and Prudential Regulation: The International Framework for Financial Services

Abstract

Beginning in the mid-1990s, international efforts to open and restructure markets for financial services and to ensure adequate regulation and supervision of fmancial firms have taken on a new prominence. The General Agreement on Trade in Services (GATS), which was negotiated in the Uruguay Round, marks the first time that services have been covered by a global trade agreement.² As a result, fmancial services liberalization now falls within the purview of the World Trade Organization, where the next set of negotiations on fmancial and other services is scheduled to begin in 2000. In 1’995, primarily in response to the Mexican fmancial crisis, the Group of Seven (G-7) economic summits initiated what has now become a well-established process of setting goals and giving mandates to other fora for work on strengthening prudential regulation and supervision.³ Previously, such issues had been dealt with almost exclusively in specialized fora such as the Basel Committee on Banking Supervision.⁴ More recently, with the onset of the Asian crisis in 1997, the ’conditionality’ of International Monetary Fund stabilization programs has been extended well beyond traditional macroeconomic policy measures to encompass the fmancial infrastructure, including both liberalization and prudential regulation.⁵