Redesigning the Architecture of the International Financial System

[Douglas P Arner is Director of the Asian Institute of International Financial Law, Director of the Duke–HKU Asia–America Institute in Transnational Law and a Professor of Law at the University of Hong Kong. Ross P Buckley is a Professor of International Finance Law at the University of New South Wales and a Fellow of the Asian Institute of International Financial Law]

During the great period of globalisation before the First World War, the international economy was based on global trade and global finance with monetary policy largely fixed under the gold standard. After the Second World War, a new international system was designed based upon global trade, fixed exchange rates and essentially domestic finance. This system did not include global financial regulation as finance was to be principally national. Starting in the 1960s however, capital markets began to globalise and in the early 1970s the fixed exchange rate system unravelled. The consequences have been a return to a level of financial and monetary instability not seen since the period following the First World War. The most dramatic example to date of this instability is the global financial crisis of 2007–10 (the GFC).

In our 2010 article in the Melbourne Journal of International Law, we analyse the responses to the GFC of the G20 group of nations, commencing in November 2008, followed by further meetings and measures in April and September 2009 and June 2010. Our assessment in broad terms is that the G20 acted effectively in the early stages of the crisis, and has lost momentum as the imminence of the threat to the global financial system has receded.

We argue there is a fundamental need to redesign the architecture of today’s global financial system to meet the requirements of this new reality. We explore possible new mechanisms and the changes to existing mechanisms that could be introduced to address economic coordination, macroeconomic and monetary management, development, and financial crisis prevention and resolution. In particular, we explore the potential for systemic measures such as bank levies, financial activities taxes, financial transaction taxes, and a sovereign bankruptcy regime.

The full article can be accessed here.