(Inter)national Financial Architecture: The Role of (Self) Regulation

Abstract

The crises in Asia, Russia, and Brazil have shown the pitfalls of the international monetary system as well as financial sector weaknesses in the crisis economies. Many proposals to redesign the international financial architecture have been put forward in response to the worldwide crisis. They range from closing down the multilateral financial institutions to reshaping them as an international lender or last resort, and include imposing restrictions on capital inflows. This paper reviews recent evidence and concludes that the ultimate cause of financial crises lays within domestic economies and is unrelated to the process of financial integration and associated capital inflows. To deal with these prohlems countries should focus on strengthening their domestic financial institutions and the institutional framework in which they operate. However, this must be done using market-friendiy mechanisms and not old-fashioned inflexible rules. As a result self-regulation and market discipline will be enhanced and a more solid financial sector will emerge. The same principie applies to the institutions that comprise the new international financial architecture.