The Challenges Facing International Financial Regulation

The financial crisis in the Fall of 1998 was the first post-World War II crisis in which events in emerging market economies seriously threatened the financial stability of the West, and where the origins of the crisis was clearly to be found in the workings of liberalised markets and private sector institutions. The spark was the financial crisis that overwhelmed many of the Asian economies in 1997, and spread to Russia in 1998, but the centre of the conflagration was the near failure of the hedge fund Long Term Capital Management. More than any of the other problems in the Fall of 1998, the threats that LTCM’s difficulties posed to financial stability throughout the world illustrated beyond all reasonable doubt that the international financial system had entered a new era. This was not a problem of sovereign debt, or macroeconomic imbalance, or a foreign exchange crisis. Instead it was the manifestation of the systemic risk created by the market driven decisions of a private firm, and of the behaviour of free financial markets. The potential economy-wide inefficiency of liberalised financial markets was indisputable.