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Introduction to the special issue: new perspectives on regulating banks after the global financial crisis

Understanding the multiple causes of the global financial crisis (GFC) from 2008 – which led to the Great Recession – remains a formidable challenge to economists and policy-makers. Worryingly, most economists did not see this coming, with Stiglitz (2002) being the most commonly cited economist to buck this trend and correctly predict a crisis. The severity of the financial crisis and the depth and length of the subsequent economic downturn in the western world has led to an intense debate on rethinking banking regulation. This debate focuses on the motivation to prevent – and manage – future potential crises (and also to make sure that taxpayers will not bear the full cost of future bank bailouts). The crisis demonstrated that existing financial supervision was woefully inadequate in the context of globalisation and the increased interconnection of banks and other financial firms. It also questioned the assumption underlining the previous model of financial regulation, prioritising self-regulation (“soft law”) over legal intervention (“hard law”). Before the crisis, many policy-makers assumed that financial entities had sufficient incentives to protect their own reputation through sound financial practices, and market discipline would further buttress these incentives. However, skewed risktaking incentives, other abuses and opportunistic behaviour ensued proving that selfregulation was fatally inappropriate. Policy-makers recognised that banking systems needed to have their stability restored and risk-taking propensity reduced. This involved the introduction of tougher capital and liquidity requirements, restricting banks from taking on excessively risky business, reforming governance rules relating to executive pay, and changing other areas of the financial system believed to have caused problems (namely reregulating rating agencies and over-the-counter [OTC] derivatives markets). In addition, other measures were required to restore consumer confidence. From 2008, we have witnessed efforts to restructure regulation of the financial system at the international, regional and national levels, as well as the introduction of new norms and recommendations across much of the banking system. One major trend was that voluntary codes and recommendations gave way to significant legal changes, as reflected in developments such as Basel III (at the international level), the “Markets in Financial Instruments Directive” (MiFID II) in the European Union, and national initiatives, such as the US Dodd–Frank Act. Some scholars suggest this new regulation has serious consequences for the performance of the banking industry, even “straitjacketing” its potential (Molyneux 2017). Other scholars are more critical, contrasting the original strong rhetoric on reigning-in the banks through stricter regulation, while the implemented new rules have been diluted compared to their original intentions, giving banks more “wiggle” room (see Burns, Clifton, and Quaglia forthcoming).