Douglas W. Arner

Securitization in East Asia

Securitization offers a range of benefits for Asiaâs financial systems and economies as a mechanism to assist funding and investment. As a form of structured finance, reliable and efficient securitization can assist development by enabling financial systems to deepen and strengthenâthus contributing to overall economic growth and stability. It must be recognized, however, that there are both overt and more subtle risks in certain uses of securitization. The credit and liquidity crisis that began in the United States and spread to other developed financial systems in mid-2007 exposed the danger associated with securitization: excessive risk-taking or regulatory capital arbitrage rather than a tool to assist more conventional or conservative approaches to funding, risk management, or investment. Securitization has also been criticized for rendering financial markets opaque, while contributing to a growing emphasis in the global economy of credit intermediation conducted in capital markets rather than through banks. This study examines the institutional basis of these concerns by investigating the use of securitization in East Asia, questioning both the growth in regional activity since the 1997/98 Asian financial crisis, and the reasons for it remaining constrained. The paper concludes with a discussion of proposals to support proper development of securitization in the region, including institutional mechanisms that could better allow securitization to enhance development and financial stability. If East Asia begins to make fuller use of securitization, its motive will be to meet funding or investment needs in the real economy rather than balance sheet arbitrage of the kind that peaked elsewhere in 2007.

The Global Credit Crisis of 2008: Causes and Consequences

This paper discusses the global credit crisis and its implications for international finance and financial regulation. It begins with a discussion of the causes of the credit crisis, particularly the role of regulatory incentives underlying excessive international and domestic borrowing, lending and investment. From this basis, the paper looks to the international responses to the crisis, focusing on the Financial Stability Forum and the Group of Twenty. In this context, it considers issues relating to systemic risk and financial stability, with particular attention to possible regulatory changes and their implications for international finance.

Missing Links: Regional Reforms for Asia's Bond Markets

Asias debt capital markets are of limited use to many potential participants. They fail to induce issuance of sufficient depth and risk quality to satisfy investors, and provide little guard against financial shocks. The region may become less prone to contagion by reducing reliance on its banking sectors and improving the efficiency with which it deploys savings. Active bond markets will improve resource allocation by providing an unbiased, visible price mechanism, widen investor choice and diminish the contagion effects of market instability. This requires national and collaborative actions representing unprecedented economic cooperation and tests of regional and bilateral institutions.

The Eurozone Debt Crisis and the European Banking Union: A Cautionary Tale of Failure and Reform

The 2008 global financial crisis spread to most of the developed economies, including those of the European Union. Unfortunately, despite decades of effort to build a Single Financial Market, almost all EU jurisdictions lacked proper crisis resolution mechanisms, especially with respect to the cross-border dimensions of a global crisis. This led to a threat of widespread bank failures in EU countries and near collapse of their financial systems. Today, in the context of the Eurozone financial crisis, the EU is at a critical crossroads. It has to decide whether the road to recovery runs through closer integration of financial policies and of bank supervision and resolution, or whether to take the path of fragmentation with a gradual return to controlled forms of protectionism in the pursuit of narrow national interest, although the latter is bound to endanger the single market. Therefore, the policy dilemmas facing the EU and contemporary institution building within the Eurozone provide an important window into the future of both global and regional financial integration. The paper is in five parts. Following the present introduction, Part II provides an analytical overview of economic and institutional developments relating to the EU single market for financial services in the pre-crisis period. Part III discusses the evolution of the EU Single Financial Market and the causes of the Eurozone crisis. Part IV reviews the main tenets of the European Banking Union and considers how this new set of EU institutions will affect EU economic and political integration. Part V concludes with discussion of potential implications of EU experiences for the future of financial integration. ∗ Chair in International Banking Law and Finance, School of University of Edinburgh. Corresponding author. ∗ Professor and Head, Department of Law, University of Hong Kong. Corresponding author.

Asian Regulatory Responses to the Global Financial Crisis

The global financial and economic crisis marks an important turning point for finance and the Asian growth model. Regional consensus is now supporting economic rebalancing away from the dominant focus on exports to developed markets toward more and more balanced economic structure supported by domestic and regional financial development. In relation to finance, the crisis highlights the neces-sity of addressing a range of issues across the region. First, Asian approaches to financial liberalization, prudential regulation, and financial innovation are likely to be closely considered around the world. At the same time, while the region has not been at the center of the global crisis—in contrast to the Asian financial crisis of 1997–98—it nonetheless provides an important opportunity to strengthen domestic and regional financial regulations. Second, beyond the postcrisis issues, and the prevention of systemic risk in particular, finance must continue to play a central role in supporting economic development and poverty reduction across the region. While the global crisis has highlighted once again the risks of finance, a central objective, across Asia, must be financial sector development to support economic growth and development. Third, in addition to domestic reform, the crisis provides an opportunity to enhance the international financial architecture, not only to improve its efficacy, but also to enhance the role of empowered Asian economies in global fora and institutions. At the same time, weaknesses in the international financial architecture suggest the need for Asian regional alternatives to address liquidity, liberalization, regulation, and exchange rate volatility.

From FinTech to TechFin: The Regulatory Challenges of Data-Driven Finance

Financial technology (‘FinTech’) is transforming finance and challenging its regulation at an unprecedented rate. Two major trends stand out in the current period of FinTech development. The first is the speed of change driven by the commoditization of technology, Big Data analytics, machine learning and artificial intelligence. The second is the increasing number and variety of new entrants into the financial sector, including pre-existing technology and e-commerce companies. This paper considers the impact of these new entrants with their typically large pre-existing non-financial services customer bases. These firms (loosely termed ‘TechFins’) may be characterised by their capacity to leverage the data gathered in their primary business into financial services. In other words, TechFins represent an Uber moment in finance. This shift from financial intermediary (FinTech) to data intermediary (TechFin) raises implications for incumbent financial services firms, FinTech startups and regulators. This seachange calls for analysis to underpin regulatory approaches with a view to balancing the competing interests of innovation, development, financial stability and consumer protection.

Development of Capital Markets, Stock Exchanges and Securities Regulation in Transition Economies

Since 1989, the formerly centrally planned economies of Central and Eastern Europe and the CIS (‘transition economies’) have made substantial progress in the process of transition from centrally planned economies to market economies. This transformation, however, has progressed at different rates and along different paths across the region. Most importantly, while the results have been impressive so far, much remains to be done before these countries are fully integrated into the international financial system.1

International Standards and the Transitional Economies

The importance of law and law reform to the process of transition and development has been underlined by the recent financial crises in Mexico in 1994, in East Asia in 1997–98, and in Russia in August 1998.1 One generally agreed conclusion of the many analyses that have followed on these events is that an underlying cause of these crises, or at least an exacerbating factor, was weaknesses in domestic financial sectors and improper sequencing of the liberalization of international capital flows.2 This is especially significant in the context of transition economies, where development of a functioning financial sector has been (and continues to be) one of the greatest challenges. In this respect, attention to legal reform is essential to financial stability in transitional economies in that it not only underlies efforts to develop financial systems but moreover can strengthen such systems in order to reduce potential vulnerabilities to financial crises. Legal reform can also help countries resist possible international economic contagion (pressure stemming from adverse investor ‘herd’ behaviour) from financial crises elsewhere which can be extremely dangerous to the development of fledgling financial systems, including those in transition economies.

Three Major Financial Crises: What Have We Learned

Few experts predicted the Asian Financial Crisis of 1997-1998, or the Global Financial Crisis of 2008 and its close companion the Eurozone Debt Crisis of 2010, and we certainly do not pretend to be able to predict the next one. Yet history teaches there will be another crisis and probably sooner rather than later, and, of course, in the decade since the start of the Global Financial Crisis, the Eurozone crisis has been ongoing in many of its dimensions. Fragility that periodically erupts into a full blown financial crisis appears to be an integral feature of market-based financial systems in spite of the advent of sophisticated risk management tools and regulatory systems. If anything the increased frequency of modern crises since the collapse of the Bretton Woods international monetary system and the period of financial internationalization and globalization which has followed, underscores how difficult it is to prevent and deal with systemic risk. We thus seek to compare and contrast these three major crises both to distill the lessons to be learned, and to identify what more can be done to strengthen our financial systems. The following sections will provide an overview of each crisis in turn, considering in particular (i) its causes; (ii) the effectiveness of policy responses; and (iii) the lessons. In the conclusion we seek to draw some common themes from these experiences going forward.

Regulating FinTech in China: From Permissive to Balanced

This chapter analyzes the evolution of FinTech and related regulation in China. Thanks to the supportive economic and policy environment, the growth of digital financial services (“DFS”) in China over the past decade has been phenomenal, making China now one of the worlds largest DFS markets. In the meantime, the digital finance boom has created serious concerns and challenges for Chinese regulators in relation to issues such as financial stability, consumer protection, illegal financial activities, etc. To address these issues, the Chinese government has committed to develop a comprehensive framework for the regulation and supervision of DFS and has taken a balanced approach whereby the promotion of DFS will continue under such a framework so as to ensure the sustainable development of DFS. The major challenges ahead are to ensure the regulatory framework has the potential to deal with new forms of DFS and new problems associated with DFS, and to balance the regulation of DFS with its healthy growth.