International financial centre - Modern Banking

London is a leading international financial centre. It has also undergone major financial reforms twice in just over a decade. Big Bang, 1986, ushered in a period of functional but self-regulation, though the Bank of England was responsible for the prudential regulation of banks. However, by 1997 it was ‘‘all change’’ again: supervision was divorced from the central bank, and a monolithic single regulator created. Scrutiny of the British experience provides a unique insight into many of the debates on different types of financial regulation.

New York is a key international financial centre, but the approach to regulation (and the resulting structure) provides a stark contrast with the United Kingdom and many other countries. The world’s second largest economy underwent major financial reforms in the late 1990s, largely in response to a severe financial crisis. The situation in the European Union introduces a whole new set of issues. What is the optimal form of regulation in an economic union which, in 2004, will begin the process of admitting ten new diverse countries? As Europe struggles to integrate its banking and financial markets, American reforms make the emergence of nation-wide banking more likely. Why is it proving so difficult to achieve a single financial market, especially at the retail level, with a free flow of financial services across frontiers? There is also the question of the European Central Bank’s role in the event of financial crisis in one or several EU states, when prudential regulation is the responsibility of individual member states.

This also looks at how bank and other financial regulations have influenced bank structure, and vice versa. New trends appear to be emerging; such as the separation of responsibilities for monetary control and regulation, though the USA is an important notable exception. It is evident that no country has yet struck an optimal balance between the application of free market principles in the financial sector and protection of the public interest.

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