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5 Law & Fin. Mkt. Rev. 1 (2011)

handle is hein.journals/lawfinancmr5 and id is 1 raw text is: Editorial Signing on It is a pleasure and an honour for me to take over from Roger McCormick as general editor. As founding editor Roger has overseen the development of the Review from its establish- ment four years ago to its current position as a recognised forum for debate covering the whole range of legal and regu- latory issues that are relevant to financial markets. I hope to continue with the practitioner engagement that has been a feature of the Review and to expand its role as an outlet for peer-reviewed academic articles. I would like in particular to invite contributions that cover geographic areas and topics that have not to date featured prominently in the Review: developments in the Asia/Pacific and Latin American regions and in the insurance and asset management markets spring to mind most obviously in this context. In the light of that objective and also of the international focus of the journal, I am pleased to welcome to the editorial board Professor Douglas Arner of the University of Hong Kong, who will already be known to many readers as a prolific author and consultant on financial law. Equally, I would like to stress that the Review continues to encourage the submission of shorter practitioner-style articles since a flow of informed comment from participants and advisers in the markets is crucial if the Review is remain in touch with market trends and practices. Regulatory reform: the next phase As we enter the third year since the full-blown financial crisis that started with the collapse of Lehman Brothers, regula- tory reform is moving into a third phase. The first phase was marked by crisis management and the introduction of reso- lution regimes that would enable the authorities to handle failing institutions with systemic significance. The second phase was characterised primarily by changes to institutional structure that were intended to give greater priority to finan- cial stability as a regulatory objective. The third phase, already begun and likely to extend far into the future, is the process of implementation of changes in institutional structure and regulatory rules. While it may be tempting to view the third phase as less problematic or contentious than the first two, there are a number of reasons why such a sanguine view may be misplaced. The first problem lies in disagreement over the basic direction of regulatory reform in the banking sector. While there does appear to be a broadly based consensus among G20 leaders and regulators that the Basel III reforms rep- resent an adequate response to the crisis, that view is not universally accepted. A recent letter in the Financial Times (Healthy Banking System is the Goal, not Profitable Banks', 9 November 2010) from a group of prominent economists drew attention to the failure of the proposals to eliminate key structural flaws in the system. They pointed in particular to: the incentives provided by tax codes to banks to borrow as opposed to raise equity; the incentives created by risk weighting of assets to encourage financial innovation that undermines capital regulation; and the disciplinary effect of even higher equity requirements on lending decisions. Although it cannot be doubted that Basel III does increase bank capital very considerably, serious doubts do therefore remain as to whether that is enough. Of course, it does remain within the capability of national regulators who subscribe to that view to engage in gold-plating of the Basel standards (along the lines proposed in Switzerland) but unilateral action is inevitably limited by fears over competitive disadvantage. Thus, the unilateral route is likely to prove more often than not to be a dead-end. Linked with that issue are risks associated with the imple- mentation phase of regulatory reform. In the case of Basel III, the extended implementation timetable (running from January 2013 to the end of 2018) opens up the possibility of significant dilution in the framework. It already seems clear that as each incremental stage of capital strengthening takes effect, a case will be made for some relaxation on the basis that the supply of credit is being unduly constrained and that there will be a knock-on effect in terms of lower economic growth.While the Basel Committee's own study of this issue casts doubt over some of the bolder claims that have been made about the capacity of higher capital requirements to constrain economic growth, that is unlikely to be the end of the matter. Moreover, the capacity of regulatory arbitrage to become a significant factor during this phase should not be underestimated. As capital requirements move higher, it cer- tainly seems feasible that threats voiced by major institutions about moving to jurisdictions that adopt a less strict approach may become more intense and exert some form of restraint on the system as whole. In that sense, successful implemen- tation of Basel III is dependent on the co-operation of a coalition whose Member States may not see their interests to be as clearly aligned in the post-crisis phase as they were at the peak of the crisis. Recent developments in the UK relating to the disclo- sure of remuneration in banks provide a good example of the dynamics of regulatory reform. Sir David Walker had originally proposed in his review of corporate governance in UK banks that there be should be a significant expansion in disclosure of remuneration so as to encompass executives below board level who are not within the scope of the exist- ing regulatory framework. The rationale was to inform and empower institutional investors to exert control over remu- neration in banks, both by reference to its scale and its link with risk-taking. More recently, following clarification from Sir David that it would be mistaken for the British govern- ment to act in the absence of closely aligned similar incentives elsewhere in Europe and, above all, in the US, (reported in Law and Financial Markets Review January 2011 1

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