Corporate Governance

Overview There are critical holes in the existing regulatory framework for handling large complex financial institutions that become impaired. This uncertainty makes it difficult for regulators to know the best way to restructure a financial institution or, indeed, whether restructuring is even feasible without enormous disruption. This Working Paper, the seventh in the Squam Lake Working Group series distributed by the Center for Geoeconomic Studies, endorses legislation that would give authorities the necessary powers to effect an orderly resolution of large complex financial institutions. As part of this authority, every such institution should be required to create its own rapid resolution plans, which would be subject to periodic regulatory scrutiny. These “living wills” would help authorities address the difficulties that might arise in a resolution.

The Asian financial crisis of 1997-98 involved, among other things, a failure of regulation. Some believe this failure is endemic to global capitalism, and others believe it was profoundly local and idiosyncratic, emanating from regulatory flaws in the affected countries, stretching an arc from Thailand and Indonesia to Korea and Japan. There is also a debate about the nature of the regulation that failed. Some argue that the crisis emanated from a surfeit of nettlesome regulations and endemic industrial policy; others claim it happened for want of effective regulations and (even) industrial policy. Across the hypotenuse of these disagreements, however, stretches a universal recognition that regulatory infrastructure and institutions do matter and that they must play a major role in the way we think about economic development. After the miracle years in East Asia, "good governance" has become the Spirit of the Age.