Question

Discuss the view that the globalization of financial services is likely to increase the complexity of banking regulation.

Answer 1

Over the years, banking and financial institutions have widened their scope globally and savers, and people who need capital from different parts of the world are able to interact now in a better way than before. Globalization of banks increased considerably till the Global Financial Crisis and then decreased slightly after that. Laws like Volcker rule have prevented banks from manipulating markets and have tried to bring more regulation in the financial industry.

We see that despite some disadvantages, the markets and the people who interact in the markets have benefitted greatly because of this increase in globalization. At present, and even more so in the next few years, regulatory harmonization on a worldwide scale is crucial if we are to avoid financial institutions having comparative advantages depending on their country of origin and in order to ensure freedom of establishment without one business model being favored over another, irrespective of banks’ organizational structure. Regulations like the Basel norm have to be in place in order to provide a level-playing field to all the banks and in order to protect those people who need the services of these banks and invest in these banks. We observe that with changing times and needs, the Basel regulations have also changed considerably and currently we are using the third version of the Basel norms. It's very important to adapt with the dynamic nature of the markets and the needs of its participants. More important than this is to have these changes brought about globally so that there is no comparative advantage of the banks from a specific place or with the backing of some institution.

Changing technology, needs of the markets and its participants and changes in the legal framework have to be kept in mind while devising new regulations for banking. Other variables like conflict with countries' existing laws, conflict of interest between two countries and the inertia in some countries to change these regulations because of the global scenario are also the factors making regulation more complex.