Regulation of Global Financial Markets

Over the past couple of decades a large number of corporate failures have led to an increase in the intensity and demand for regulation within global markets. Regulators were brought in to try and reassure the public and improve public opinion of firms and increase consumer confidence.
The most recent scandal, manipulation of the Libor rate by leading banks, has called into question whether there is enough regulation within the financial market. The Libor rate is used as a benchmark interest rate for a range of financial deals and represents the price that a bank is willing to pay another for a currency.
This scandal occurred during the height of the financial crisis in 2008 and has, along with a number of other altercations, caused deep public distrust in the banking industry.
There are two models of regulation; national self or statutory regulation; and self-legitimation. The first of these models suggests that regulation follows a cyclical pattern by loosening regulation during periods when the economy is strong and regulations increase when a crisis occurs. As the Libor rate was manipulated as a result of the financial crisis in 2008 it could be said that the call for reform that followed the discovery of the scandal falls into this model of regulation.
The self-legitimation model suggests that at times of public distrust and lack of confidence in the market, companies will take whatever action required of them to improve their public image. This in itself acts as regulation without the force of the law.
The role of regulators, however, can be diluted by the impact of Government. For example, in the Libor case, the Government was accused of not doing enough to regulate the banking industry by not giving the Regulator the power they require to do their job effectively. The proposal was that regulators should be able to force a split between retail and investment banking operations of a bank if reforms were not taken up. The Government failed to provide the legal powers to regulators to do this because of fears of handing too much power to regulators. They also feared that it would make the Banks less competitive which would further threaten a recovering economy. As such it makes it more of an empty threat.
The theory of Regulatory capture is likely to play a role in future, as it has done in the past with cases such as Enron in the early 2000's. It suggests the idea that regulators can become too intertwined with the targets of their regulation. There is a fear that the regulations that that these targets are required to adhere to become a list of topics that require a "box-ticking" attitude. This theory may be a simple explanation for why the Government is unwilling to give the regulators in the Libor case too much power. In the future, this power may be a way to manipulate and control the activities and operations of banks and as such may damage the industry.
It would appear that regulation is self-defeating as it seems that corporations will suffer the new regulation put on them subsequent to a scandal or failure but then find a way to circumvent that same regulation before they themselves become the centre of a scandal. They may get away with it for a while but eventually more regulation will kick in a the process will start again.