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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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