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Global Financial Regulation: The Essential Guide

Howard Davies and David Green, Polity Press, 2008, 264 pages, £15.99.

If your eyes glaze over at the mention of financial regulation, but you know you should have a better understanding of it, then this is the book for you. Howard Davies and David Green take us step by step through the development of the existing system of international financial regulation and follow up with a set of proposals for its reform.

Both authors are experts in their field having worked inside the regulatory system at both national and international level for many years. Howard Davies was the first Chairman of the UK’s Financial Services Authority, the financial sector regulator. David Green was Head of International Affairs at the FSA after 30 years at the Bank of England and is now advising the Financial Reporting Council.

Their ability to cut through the myriad of information and arguments on topics like Basel II and present the ‘essentials’ makes it a lively and easy read. That doesn’t mean that it is simplistic, and even those who are closely involved in regulation will find it offers some fascinating insights.

The first chapter covers the arguments for and against financial regulation including what kind of intervention is justified and the rationale for standardisation across markets. None of the arguments are new, but they provide a useful reminder of the historical debates and how these have shaped the regulatory bureaucracy. It also demonstrates why regulation has mushroomed in a piecemeal fashion in response to the increasing complexity of the international financial markets, new instruments, new players and changes in intermediation.

I was astounded by the proliferation of committees and organisations illustrated in the charts in Chapter 2, and they only showed the major organisations on the international side. Year after year new committees and working groups are added both nationally and internationally and few ever die. After every financial crisis there are calls for regulation to be ratcheted up. As we know from the current credit crunch these initiatives have been far from successful in creating financial stability.

The chapter by chapter exposition of the regulatory structures starts with the international financial institutions, works through the European Union and then the regulatory structures in individual countries. It sheds light on the power struggles and difficulties of reaching agreements in the international forums when decision making is based on consensus and then having to rely on the best endeavours of individual members to implement the agreed standards domestically. Perhaps one disappoint-ment was how little was said about China given its growing importance in global financial markets.

In the final chapter the authors argue for simplification and reorganisation and even offer some candidates for the regulatory morgue. They believe that new leadership is required but that the political appetite for change is limited, and no consensus on the international architecture is emerging. A disappointing conclusion, but not a surprising one.

Most of the book was drafted in the first half of 2007, but there is an Afterword chapter written in January 2008 which takes account of the first phase of the credit crunch. The conclusions in the final chapter still mostly stand, but the Afterword highlights some particular areas of regulatory weakness shown up by the credit crunch. These include the lack of attention paid by regulators to liquidity supervision, insolvency arrangements, the role played by sovereign wealth funds and the need to produce globalised standards for financial reporting. It is a useful addition but the strength of this book lies in explaining the myriad of Byzantine and complex institutional structures.

Bronwyn Curtis

Head of Global Research, HSBC

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