The Internationalization of Financial Markets and the Regulatory Response

Abstract

Domestic and international finance — markets, institutions, and practices — is undergoing a major transformation in response to changes in economic and technological conditions. Markets have expanded through the increased securitization of the liabilities of non-financial entities, through the increased internationalization of participants, and through the globalization of trading in certain securities. Changes in the relative importance of various activities (both on- and off-balance sheet), and the emergence of new activities, is transforming the industrial organization of financial firms. Finally, and perhaps most important has been the institutionalization of innovation in financial products and practices. Financial engineering, in the form of new products and practices, and financial entrepreneurship, in the form of restructuring of the balance sheets of non-financial firms through mergers, acquisition, leveraged buy-outs, and divestitures, has become institutionalized with the growth of new-products departments and merchant-banking departments alongside the traditional departments in financial institutions. These on-going developments, more advanced in some countries than in others, have made fundamental modification necessary, and in some instances a complete redesign, of national and international financial supervisory and regulatory policy. Some countries, most notable the United Kingdom, have successfully implemented such a complete restructuring of their supervisory and regulatory policy, while others have taken a more gradualist approach.

The author has benefited from comments of other authors at the symposium and from comments by the discussant, Professor N.K.A. Läufer. The views expressed here are those of the author and should not be taken as reflecting the views of the International Monetary Fund.