Trade liberalization and prudential regulation: The international framework for financial services

International Affairs

Volumn 75, Issue 1, 1999, Pages 61-75

  Key, Sydney J ^a  

^a NONE

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EID: 0040706810     PISSN: 00205850     EISSN: None     Source Type: Journal    
DOI: 10.1111/1468-2346.00060     Document Type: Article

References (54)

1. The Uruguay Round was concluded in December 1993, with the GATS and other Uruguay Round agreements entering into force at the beginning of 1995. However, financial services was one of several sectors for which negotiations on schedules of commitments were extended; final agreement on financial services commitments was not reached until December 1997.
2. The Group of Seven (G7) consists of Canada, France, Germany, Italy, Japan, the United Kingdom and the United States. Russia has been gradually integrated into the summit process, and the 1997 Denver summit meeting was referred to as the 'Summit of the Eight' (S8). In 1998 the Birmingham summit was officially designated as a meeting of the Group of Eight (G8). For financial matters, however, the original G7 still meets separately.
3. The Basle Committee on Banking Supervision (known as the Basle Supervisors Committee) was set up by the central bank governors of the Group of Ten (G10) countries in 1974 in the aftermath of the failure of Bankhaus Herstatt in then West Germany. The committee consists of representatives of the banking supervisory authorities of the G10 countries; its secretariat is provided by the Bank for International Settlements (BIS). The G10 actually consists of twelve countries: Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, the Netherlands, Sweden, Switzerland, the United Kingdom and the United States.
4. At present, the Asian countries with IMF stabilization programmes are Indonesia, South Korea and Thailand.
5. See Stanley Fischer, Richard N. Cooper, Rudiger Dornbusch, Peter M. Garber, Carlos Massad, Jacques J. Polak, Dani Rodrik and Savak S. Tarapore, Should the IMF pursue capital-account convertibility?. Essays in International Finance no. 207, Princeton University, May 1998; Alan Greenspan, Statement before the Committee on Banking and Financial Services, US House of Representatives, 16 September 1998; Paul Krugman, 'Saving Asia: it's time to get radical', Fortune, 7 September 1998; Jeffrey Sachs, 'Global capitalism: making it work', The Economist, 12 September 1998; Joseph E. Stiglitz, 'Boats, planes and capital flows', Financial Times, 25 March 1998; Lawrence H. Summers, 'Go with the flow', Financial Times, 11 March 1998, and 'Repairing and rebuilding emerging market financial systems', remarks at Federal Deposit Insurance Corporation International Conference on Deposit Insurance, Washington DC, 9 September 1998.
6. See Stanley Fischer, Richard N. Cooper, Rudiger Dornbusch, Peter M. Garber, Carlos Massad, Jacques J. Polak, Dani Rodrik and Savak S. Tarapore, Should the IMF pursue capital-account convertibility?. Essays in International Finance no. 207, Princeton University, May 1998; Alan Greenspan, Statement before the Committee on Banking and Financial Services, US House of Representatives, 16 September 1998; Paul Krugman, 'Saving Asia: it's time to get radical', Fortune, 7 September 1998; Jeffrey Sachs, 'Global capitalism: making it work', The Economist, 12 September 1998; Joseph E. Stiglitz, 'Boats, planes and capital flows', Financial Times, 25 March 1998; Lawrence H. Summers, 'Go with the flow', Financial Times, 11 March 1998, and 'Repairing and rebuilding emerging market financial systems', remarks at Federal Deposit Insurance Corporation International Conference on Deposit Insurance, Washington DC, 9 September 1998.
7. See Stanley Fischer, Richard N. Cooper, Rudiger Dornbusch, Peter M. Garber, Carlos Massad, Jacques J. Polak, Dani Rodrik and Savak S. Tarapore, Should the IMF pursue capital-account convertibility?. Essays in International Finance no. 207, Princeton University, May 1998; Alan Greenspan, Statement before the Committee on Banking and Financial Services, US House of Representatives, 16 September 1998; Paul Krugman, 'Saving Asia: it's time to get radical', Fortune, 7 September 1998; Jeffrey Sachs, 'Global capitalism: making it work', The Economist, 12 September 1998; Joseph E. Stiglitz, 'Boats, planes and capital flows', Financial Times, 25 March 1998; Lawrence H. Summers, 'Go with the flow', Financial Times, 11 March 1998, and 'Repairing and rebuilding emerging market financial systems', remarks at Federal Deposit Insurance Corporation International Conference on Deposit Insurance, Washington DC, 9 September 1998.
8. See Stanley Fischer, Richard N. Cooper, Rudiger Dornbusch, Peter M. Garber, Carlos Massad, Jacques J. Polak, Dani Rodrik and Savak S. Tarapore, Should the IMF pursue capital-account convertibility?. Essays in International Finance no. 207, Princeton University, May 1998; Alan Greenspan, Statement before the Committee on Banking and Financial Services, US House of Representatives, 16 September 1998; Paul Krugman, 'Saving Asia: it's time to get radical', Fortune, 7 September 1998; Jeffrey Sachs, 'Global capitalism: making it work', The Economist, 12 September 1998; Joseph E. Stiglitz, 'Boats, planes and capital flows', Financial Times, 25 March 1998; Lawrence H. Summers, 'Go with the flow', Financial Times, 11 March 1998, and 'Repairing and rebuilding emerging market financial systems', remarks at Federal Deposit Insurance Corporation International Conference on Deposit Insurance, Washington DC, 9 September 1998.
9. See Stanley Fischer, Richard N. Cooper, Rudiger Dornbusch, Peter M. Garber, Carlos Massad, Jacques J. Polak, Dani Rodrik and Savak S. Tarapore, Should the IMF pursue capital-account convertibility?. Essays in International Finance no. 207, Princeton University, May 1998; Alan Greenspan, Statement before the Committee on Banking and Financial Services, US House of Representatives, 16 September 1998; Paul Krugman, 'Saving Asia: it's time to get radical', Fortune, 7 September 1998; Jeffrey Sachs, 'Global capitalism: making it work', The Economist, 12 September 1998; Joseph E. Stiglitz, 'Boats, planes and capital flows', Financial Times, 25 March 1998; Lawrence H. Summers, 'Go with the flow', Financial Times, 11 March 1998, and 'Repairing and rebuilding emerging market financial systems', remarks at Federal Deposit Insurance Corporation International Conference on Deposit Insurance, Washington DC, 9 September 1998.
10. See Stanley Fischer, Richard N. Cooper, Rudiger Dornbusch, Peter M. Garber, Carlos Massad, Jacques J. Polak, Dani Rodrik and Savak S. Tarapore, Should the IMF pursue capital-account convertibility?. Essays in International Finance no. 207, Princeton University, May 1998; Alan Greenspan, Statement before the Committee on Banking and Financial Services, US House of Representatives, 16 September 1998; Paul Krugman, 'Saving Asia: it's time to get radical', Fortune, 7 September 1998; Jeffrey Sachs, 'Global capitalism: making it work', The Economist, 12 September 1998; Joseph E. Stiglitz, 'Boats, planes and capital flows', Financial Times, 25 March 1998; Lawrence H. Summers, 'Go with the flow', Financial Times, 11 March 1998, and 'Repairing and rebuilding emerging market financial systems', remarks at Federal Deposit Insurance Corporation International Conference on Deposit Insurance, Washington DC, 9 September 1998.
11. See Stanley Fischer, Richard N. Cooper, Rudiger Dornbusch, Peter M. Garber, Carlos Massad, Jacques J. Polak, Dani Rodrik and Savak S. Tarapore, Should the IMF pursue capital-account convertibility?. Essays in International Finance no. 207, Princeton University, May 1998; Alan Greenspan, Statement before the Committee on Banking and Financial Services, US House of Representatives, 16 September 1998; Paul Krugman, 'Saving Asia: it's time to get radical', Fortune, 7 September 1998; Jeffrey Sachs, 'Global capitalism: making it work', The Economist, 12 September 1998; Joseph E. Stiglitz, 'Boats, planes and capital flows', Financial Times, 25 March 1998; Lawrence H. Summers, 'Go with the flow', Financial Times, 11 March 1998, and 'Repairing and rebuilding emerging market financial systems', remarks at Federal Deposit Insurance Corporation International Conference on Deposit Insurance, Washington DC, 9 September 1998.
12. Prior to the crisis, a number of Asian countries had been gradually lifting capital controls; subsequently, in August 1998, Malaysia reimposed extensive capital controls. The October 1998 communiqué of the IMF interim committee endorsed the overall principle of free movement of capital, although it asked the IMF board to review experience with the use of certain temporary controls. The communiqué emphasized the need for appropriate sequencing of capital account liberalization and reiterated the importance of sound macroeconomic policies, strong domestic financial systems, and effective prudential regulation and supervision. See Board of Governors of the International Monetary Fund, Communiqué of the Interim Committee, 4 October 1998; also Group of Seven, Chairman's statement, Birmingham Economic Summit, May 1998; Strengthening the architecture of the global financial system, Report of G7 finance ministers to G7 heads of state or government, Birmingham economic summit, May 1998; and G7 Leaders' statement on the world economy and Declaration of G7 finance ministers and central bank governors, 30 October 1998.
13. Prior to the crisis, a number of Asian countries had been gradually lifting capital controls; subsequently, in August 1998, Malaysia reimposed extensive capital controls. The October 1998 communiqué of the IMF interim committee endorsed the overall principle of free movement of capital, although it asked the IMF board to review experience with the use of certain temporary controls. The communiqué emphasized the need for appropriate sequencing of capital account liberalization and reiterated the importance of sound macroeconomic policies, strong domestic financial systems, and effective prudential regulation and supervision. See Board of Governors of the International Monetary Fund, Communiqué of the Interim Committee, 4 October 1998; also Group of Seven, Chairman's statement, Birmingham Economic Summit, May 1998; Strengthening the architecture of the global financial system, Report of G7 finance ministers to G7 heads of state or government, Birmingham economic summit, May 1998; and G7 Leaders' statement on the world economy and Declaration of G7 finance ministers and central bank governors, 30 October 1998.
14. The issue of short-term interbank flows provides an example of the difficulties in drawing the line between liberalization - in this case, of capital flows - and prudential regulation. Overall restrictions on the quantity of such flows could be viewed as unnecessary barriers to the free movement of capital. However, measures aimed at ensuring that banks take into account the riskiness of short-term interbank flows would generally be viewed as legitimate prudential regulation. For example, home countries might apply higher capital requirements that more accurately take into account the risk of such lending. Similarly, host countries might impose measures aimed at ensuring that a bank's reliance on foreign-currency-denominated interbank funding is commensurate with the rest of its balance sheet from a prudential viewpoint.
15. See Sydney J. Key, Financial services in the Uruguay Round and the WTO, Occasional Papers 54 (Washington DC: Group of Thirty, 1997); and Masamichi Kono et al., Opening markets in financial services and the role of the GATS, Special Studies (Geneva: World Trade Organization, 1997).
16. See Sydney J. Key, Financial services in the Uruguay Round and the WTO, Occasional Papers 54 (Washington DC: Group of Thirty, 1997); and Masamichi Kono et al., Opening markets in financial services and the role of the GATS, Special Studies (Geneva: World Trade Organization, 1997).
17. All WTO members are parties to the GATS. The reason is that, as part of the so-called 'single undertaking' of the Uruguay Round, WTO members must be parties to all of the multilateral Uruguay Round agreements: (1) the GATT and other multilateral agreements on trade in goods; (2) the GATS; and (3) the Agreement on Trade-related Aspects of International Property Rights (TRIPS).
18. See Aaditya Mattoo, 'Financial services and the GATS: liberalization in developing and transition economies', preliminary draft, 1998; Roger Kampf, 'Financial services in the WTO: third time lucky', International Trade Law and Regulation 4: 3, July 1998.
19. See Aaditya Mattoo, 'Financial services and the GATS: liberalization in developing and transition economies', preliminary draft, 1998; Roger Kampf, 'Financial services in the WTO: third time lucky', International Trade Law and Regulation 4: 3, July 1998.
20. A country may, however, strengthen its GATS commitments at any time without waiting for another negotiating round.
21. The GATS does, however, contain a balance-of-payments safeguard that allows a WTO member to impose temporary restrictions that suspend its commitments in the event of 'serious balance-of-payments and external financial difficulties or threat therof.' Besides being temporary, such restrictions must adhere to the most-favoured nation (MFN) principle, be consistent with the IMF Articles of Agreement, be no more stringent than necessary, and avoid unnecessary damage to the economies of other WTO members.
22. Letter of Intent, with Memorandum on the Economic Programme, from the government of Korea to the International Monetary Fund, 7 February 1998 (http://www.imf.org/external/np/loi/020798.html). Korea also announced in the WTO its intention to improve its GATS financial services commitments.
23. The most favoured nation (MFN) principle precludes a country from discriminating among different foreign countries. Literally, no foreign country can be accorded treatment less favourable than that accorded to the most favoured nation. However, parties to an economic integration agreement, such as the treaty establishing the European Community or the NAFTA, are not required by the GATS to extend its benefits to non-participants, provided that the agreement meets the stringent standards set out in the GATS.
24. This section and the following section on the prudential carve-out draw upon the author's study, Financial services in the Uruguay Round and the WTO.
25. National treatment means that foreign services and service suppliers may be treated no less favourably than their domestic counterparts with respect to entry and operation in a host-country market. Market access, as used in the GATS, deals with barriers - regardless of whether they are overtly discriminatory -that are typically used to keep foreign firms from entering a host-country market. In the GATS, national treatment and market access do not apply across the board to all services sectors; instead, they apply only to sectors, subsectors or activities that a country lists in its schedule of commitments. This is widely regarded as a structural weakness of the GATS. See Key, Financial services in the Uruguay Round and the WTO, pp. 10-11, 14-17.
26. See Edward M. Graham and Robert Z. Lawrence, 'Measuring the international contestability of markets: a conceptual approach', Journal of World Trade 30: 5, 1996, pp. 5-20; Americo Beviglia Zampetti and Pierrs Sauvé, 'Onwards to Singapore: the international contestability of markets and the new trade agenda', The World Economy 19: 3, 1996, pp. 333-42; and Robert Z. Lawrence, 'Towards globally contestable markets', in Market access after the Uruguay Round: investment, competition, and technology perspectives (Paris: OECD, 1996).
27. See Edward M. Graham and Robert Z. Lawrence, 'Measuring the international contestability of markets: a conceptual approach', Journal of World Trade 30: 5, 1996, pp. 5-20; Americo Beviglia Zampetti and Pierrs Sauvé, 'Onwards to Singapore: the international contestability of markets and the new trade agenda', The World Economy 19: 3, 1996, pp. 333-42; and Robert Z. Lawrence, 'Towards globally contestable markets', in Market access after the Uruguay Round: investment, competition, and technology perspectives (Paris: OECD, 1996).
28. See Edward M. Graham and Robert Z. Lawrence, 'Measuring the international contestability of markets: a conceptual approach', Journal of World Trade 30: 5, 1996, pp. 5-20; Americo Beviglia Zampetti and Pierrs Sauvé, 'Onwards to Singapore: the international contestability of markets and the new trade agenda', The World Economy 19: 3, 1996, pp. 333-42; and Robert Z. Lawrence, 'Towards globally contestable markets', in Market access after the Uruguay Round: investment, competition, and technology perspectives (Paris: OECD, 1996).
29. The supranational European Community - together with the European Coal and Steel Community (ECSC) and European Atomic Energy Community (Euratom) - forms the first of the so-called three pillars on which the European Union is founded. The two other pillars - common foreign and security policy ('second pillar') and police and judicial cooperation in criminal matters ('third pillar') - are intergovernmental.
30. To date, work under this mandate has led to adoption of non-binding guidelines for WTO members to use in negotiating mutual recognition of qualifications for accountancy services.
31. See Fischer et al., Should the IMF pursue capital-account convertibility?
32. Even within the EU, the European Central Bank (ECB) is provided with only advisory and consultative powers in bank regulation and supervision. An enabling clause in the treaty would allow other powers to be transferred to the ECB, but such a transfer would require a unanimous decision by the Council of Economic and Finance Ministers (ECOFIN). See Johannes Priesemann, 'Policy options for prudential supervision in stage three of monetary union', and Sydney J. Key, 'Comments', in Paul J. J.Welfens and Holger C. Wolf, eds, Banking, international capital flows, and growth in Europe (Berlin: Springer-Verlag, 1997); ECU Institute, Banking supervision in the European Community: institutional aspects, report of a working group chaired by Jean-Victor Louis (Brussels: Institute of European Studies, University of Brussels, 1995); and Karel Lannoo, From 1992 to EMU: the implications for prudential supervision, CEPS Research Report no. 23 (Brussels: Centre for European Policy Studies, May 1998).
33. Even within the EU, the European Central Bank (ECB) is provided with only advisory and consultative powers in bank regulation and supervision. An enabling clause in the treaty would allow other powers to be transferred to the ECB, but such a transfer would require a unanimous decision by the Council of Economic and Finance Ministers (ECOFIN). See Johannes Priesemann, 'Policy options for prudential supervision in stage three of monetary union', and Sydney J. Key, 'Comments', in Paul J. J.Welfens and Holger C. Wolf, eds, Banking, international capital flows, and growth in Europe (Berlin: Springer-Verlag, 1997); ECU Institute, Banking supervision in the European Community: institutional aspects, report of a working group chaired by Jean-Victor Louis (Brussels: Institute of European Studies, University of Brussels, 1995); and Karel Lannoo, From 1992 to EMU: the implications for prudential supervision, CEPS Research Report no. 23 (Brussels: Centre for European Policy Studies, May 1998).
34. Even within the EU, the European Central Bank (ECB) is provided with only advisory and consultative powers in bank regulation and supervision. An enabling clause in the treaty would allow other powers to be transferred to the ECB, but such a transfer would require a unanimous decision by the Council of Economic and Finance Ministers (ECOFIN). See Johannes Priesemann, 'Policy options for prudential supervision in stage three of monetary union', and Sydney J. Key, 'Comments', in Paul J. J.Welfens and Holger C. Wolf, eds, Banking, international capital flows, and growth in Europe (Berlin: Springer-Verlag, 1997); ECU Institute, Banking supervision in the European Community: institutional aspects, report of a working group chaired by Jean-Victor Louis (Brussels: Institute of European Studies, University of Brussels, 1995); and Karel Lannoo, From 1992 to EMU: the implications for prudential supervision, CEPS Research Report no. 23 (Brussels: Centre for European Policy Studies, May 1998).
35. Even within the EU, the European Central Bank (ECB) is provided with only advisory and consultative powers in bank regulation and supervision. An enabling clause in the treaty would allow other powers to be transferred to the ECB, but such a transfer would require a unanimous decision by the Council of Economic and Finance Ministers (ECOFIN). See Johannes Priesemann, 'Policy options for prudential supervision in stage three of monetary union', and Sydney J. Key, 'Comments', in Paul J. J.Welfens and Holger C. Wolf, eds, Banking, international capital flows, and growth in Europe (Berlin: Springer-Verlag, 1997); ECU Institute, Banking supervision in the European Community: institutional aspects, report of a working group chaired by Jean-Victor Louis (Brussels: Institute of European Studies, University of Brussels, 1995); and Karel Lannoo, From 1992 to EMU: the implications for prudential supervision, CEPS Research Report no. 23 (Brussels: Centre for European Policy Studies, May 1998).
36. See note 3 above. See William R. White, 'Promoting financial stability: the role of the BIS', paper prepared for a conference on 'Coping with financial crises in developing and transition countries: regulatory and supervisory challenges in a new era of global finance', De Nederlandsche Bank, Amsterdam, 16-17 March 1998.
37. Because it is an informal agreement among supervisors, the Basle Risk-based Capital Accord does not create any obligations in international law. The capital standards are based on broad categories of risk classification of bank assets. In 1996 the accord was amended to establish capital requirements for the market risk associated with banks' securities activities.The Basle Committee has begun work on another revision of the accord. For example, there is now general agreement that it does not adequately distinguish between different categories of risks.
38. See White, 'Promoting financial stability'.
39. The Core Principles were issued together with a compendium of rules and recommendations on banking supervision that represents the previous two decades of work of the Basle Supervisors Committee. All of the documents produced by the Basle Supervisors Committee are available on the BIS website (http:// www.bis.org/publ/bcbs).
40. IOSCO was created in 1983 and has its headquarters in Montreal.
41. In part to facilitate contacts with the Basle Supervisors Committee, the IAIS has established its headquarters in the Bank for International Settlements (BIS) building in Basle.
42. See OECD, Corporate governance: improving competitiveness and access to capital in global markets, Report of the Business Sector Advisory Group (Paris: OECD, 2 April 1998).
43. Canada, for example, has proposed an international supervisory surveillance secretariat. See Canadian Department of Finance press release, no. 98-039, 15 April 1998. The United Kingdom has suggested that consideration be given to establishing a standing committee for global financial regulation that would bring together the IMF, the World Bank, the Basle Supervisors Committee and other groups. See Gordon Brown, 'Steering a course for stability,' speech to the Annual Meetings of the IMF and the World Bank, Washington DC, 6 October 1998.
44. See G22, Report of the Working Group on Strengthening Financial Systems, October 1998. The G22 is an ad hoc group of the G7 countries, other major industrial countries, and a number of emerging market economies. Three working groups (the other two dealt with transparency and international financial crises) were established in April 1998 at a meeting of the finance ministers and central bank governors of the 22 countries in Washington DC. The reports of the working groups can be found on the IMF web site: http://www.imf.org
45. Declaration of G7 finance ministers and central bank governors, 30 October 1998.
46. See International Banking Act of 1978, as amended by the Foreign Bank Supervision Enhancement Act of 1991, Section 7, 12 U.S.C. §3105.
47. See G7 Leaders' statement on the world economy and Declaration of G7 finance ministers and central bank governors, 30 October 1998; G22, Report of the Working Group on Transparency and Accountability, Report of the Working Group on Strengthening Financial Systems and Report of the Working Group on International Financial Crises; also Strengthening the architecture of the global financial system, Report of G7 finance ministers to G7 heads of state or government.
48. See G7 Leaders' statement on the world economy and Declaration of G7 finance ministers and central bank governors, 30 October 1998; G22, Report of the Working Group on Transparency and Accountability, Report of the Working Group on Strengthening Financial Systems and Report of the Working Group on International Financial Crises; also Strengthening the architecture of the global financial system, Report of G7 finance ministers to G7 heads of state or government.
49. See G7 Leaders' statement on the world economy and Declaration of G7 finance ministers and central bank governors, 30 October 1998; G22, Report of the Working Group on Transparency and Accountability, Report of the Working Group on Strengthening Financial Systems and Report of the Working Group on International Financial Crises; also Strengthening the architecture of the global financial system, Report of G7 finance ministers to G7 heads of state or government.
50. 53ee G22, Report of the Working Group on Transparency and Accountability; Declaration of G7 finance ministers and central bank governors, 30 October 1998.
51. See G22, Report of the Working Group on Strengthening Financial Systems and Report of the Working Group on International Financial Crises; Declaration of G7 finance ministers and central bank governors, 30 October 1998.
52. Regarding 'European Union' and 'European Community', see note 17 above.
53. See Joint statement by the heads of the IMF, the World Bank and the WTO, 16 October 1998.
54. The IMF is not a supranational institution; in terms of strict legality, a country could walk away from IMF assistance and its associated conditionality. By contrast, the European Community has a supranational legislative process involving the Council (with weighted majority voting in many areas) and Parliament; a supranational court of justice and, now, a central bank; and an executive body which is responsible for proposing legislation and monitoring its implementation and which has extensive administrative authority in certain areas such as competition policy.