Chapter 1 introduces the reader to macro-prudential policy and exposes the reader to the problem of persistently instable financial markets, which raise the question of if and how far the macro-prudential regulatory program post-crisis had any effect. In contrast to binary paradigm shift views, which see no to little change, I introduce a multidimensional view of regulatory change that can detect massive change in the economic ideas underlying financial regulation, while pointing to the administrative and political limitations that prevent these ideas from becoming fully performative. Pointing to these contradictions, the chapter introduces the analytical framework and the main contributions of the book, followed by an outline of the different chapters.

Economic growth slowed down as the reforms after the crisis introduced a less aggressive system. Banks lent money to households rather than firms as household loans were liberalized. The current account turned into a surplus, but it failed to produce the equivalent increase in net foreign assets because of the large net capital losses. The country now held more international reserves, but it was for self-insurance purposes after throwing open the capital market. The country failed to avoid a currency crisis in 2008, which was resolved through currency swap agreements. The growth rate fell further with the ensuing Great Recession, and the country faced a deflation threat in 2013, but it was slow to use fiscal policy to cope with it. South Korea fought the pandemic in 2020 well but is currently having difficulties with its disinflation policy as it has to heed the risks in international as well as domestic financial markets.

As scholars and activists seek to define and promote greater corporate political responsibility (CPR), they will benefit from understanding practitioner perspectives and how executives are responding to rising scrutiny of their political influences, reputational risk and pressure from employees, customers and investors to get involved in civic, political, and societal issues. This chapter draws on firsthand conversations with practitioners, including executives in government affairs; sustainability; senior leadership; and diversity, equity and inclusion, during the launch of a university-based CPR initiative. I summarize practitioner motivations, interests, barriers and challenges related to engaging in conversations about CPR, as well as committing or acting to improve CPR. Following the summary, I present implications for further research and several possible paths forward, including leveraging practitioners’ value on accountability, sustaining external calls for transparency, strengthening awareness of systems, and reframing CPR as part of a larger dialogue around society’s “social contract.”

Since the 1960s, finance has undergone a long process of digital transformation and is today probably the most globalised segment of the world’s economy and among the most digitised and datafied. This process is evident across four major axes: the emergence of global wholesale markets, an explosion of financial technology (FinTech) start-ups since 2008, an unprecedented digital financial transformation in developing countries (particularly China), and the increasing role of large technology companies (BigTechs) in financial services. This process of digital financial transformation brings structural changes with both benefits and risks. This chapter considers new risks, particularly new systemic risks which have emerged, focusing on cybersecurity and data.

Macroprudential policy involves regulation and supervision of financial institutions to safeguard stability in the financial system as a whole. The system can become vulnerable to loss contagion even when institutions on an individual basis maintain strong balance sheets. Examples of macroprudential policy instruments include capital and liquidity requirements; limits on credit and leverage; regulation pertaining to borrowers, for example loan-to-value ratios; and special requirements for systemically important financial institutions. Systemic risk tends to build in boom times and subside in busts. These fluctuations tend to be amplified in the Emerging East Asia setting by global capital flows. Macroprudential policy aims at moderating the fluctuations. Analysis is complicated by the diversity of instruments available and the complexity of the regulation involved. Korea’s relatively long history of experience offers opportunity for study.

During the 2008–9 global financial crisis, credit default swaps created conduits in the financial system which facilitated the transmission of systemic risk. In response, the Financial Stability Board recommended over-the-counter derivative clearing through a central clearing counterparty. Although the Securities and Futures Commission is the designated supervisor and resolution authority for Hong Kong’s central clearing counterparty, OTC Clear, its supervisory ambit, capacity, and powers are insufficient to mitigate systemic risk and manage financial stability. This chapter argues that a securities supervisor is not the optimal supervisor or resolution authority for OTC Clear. Central clearing counterparties require credit and liquidity risk management which aligns more with banking supervision and central banking. This is supported by the dominance of foreign exchange and interest rate derivatives being traded in Hong Kong. The optimal resolution authority for OTC Clear is the Hong Kong Monetary Authority, being the resolution authority for systemically important banks, having monetary authority expertise that aligns with foreign exchange and interest rate risks, experience in mitigating credit and liquidity risks, and being designed to manage financial stability.

Supervisory models evolve with financial markets. To address the evolution of financial markets and institutions, new supervisory structures have been developed. This chapter analyzes systemic supervision under the integrated, functional, and Twin Peaks models, and systemic composite bodies to elucidate their strengths and weaknesses when managing financial stability. Models examined cover those in Hong Kong, Mainland China, the United States, United Kingdom, Singapore, Australia, South Africa, and the Netherlands. Systemic oversight between traditional central banks and integrated micro-prudential supervisors is subject to supervisory underlap. This was the core weakness of the United Kingdom’s integrated model and is a regulatory flaw inherent to the institutional, sectoral, and functional models. Composite systemic bodies are imperative for supervisory models consisting of central banks that are not unified with prudential supervisors or divided among multiple supervisors. The Twin Peaks model does not need a composite systemic body because this is the role of the systemic peak supervisor. Neither does a unified fully integrated supervisor because the role is internalized. However, competing objectives within a fully integrated supervisor can produce bias and conflicts, eroding systemic supervision and financial stability.

In the wake of the 2008–9 global financial crisis, the G20 devised a framework for a sustainable recovery based on international cooperation. An agreement was reached to ensure that inter alia macro-prudential and regulatory policies would support sustainable economies by preventing credit and asset price cycles from becoming forces for financial destabilization. The G20 recognized the importance of striking a balance between micro- and macro-prudential regulation to control risks, and to develop tools to monitor the build-up of systemic risk in the financial system. This chapter argues that the design of the supervisory structure is instrumental in striking the appropriate balance between these regulatory disciplines. Clear mandates and supervisory judgement are necessary to control this interdependent relationship. Regulatory underlap, gaps, and arbitrage can surface when the supervisory structure does not harmonize with legal infrastructure. To mitigate these regulatory flaws causing financial instability and producing unsustainable economies, supervisors must have sufficient capacity, expertise, awareness, and discretion. Attaining financial stability and a sustainable economy requires the supervisory structure or model, and the supervisor’s capacity and expertise to be harmonized with the legal infrastructure.

Banks fail when an illiquidity event depletes capital reserves. Liquidity is sourced from assets that can readily be transformed into cash or from wholesale funding markets and central banks. Basel III strengthens bank balance sheets by allowing supervisors to release capital and liquidity reserves during times of market liquidity stress. This chapter analyzes the implementation of the Basel III capital and liquidity reforms in Hong Kong, banking sector stability during the 2008–9 global financial crisis and the Covid-19 pandemic, and systemic supervision. Hong Kong is a unique international financial centre because it is overwhelmingly populated by domestic systemically important banks. Universal banking and Basel III compel banking sector supervision of Hong Kong’s securities and insurance sectors, despite falling outside the supervisory design of the Hong Kong Monetary Authority. This chapter argues that different supervisory structures and models affect the regulation and supervision of financial stability in Hong Kong’s banking sector. Insurance and wealth management products in the banking industry can produce systemic risks that might be overlooked by the Hong Kong Monetary Authority. Supervisory bias towards the banking sector in conjunction with cross-sectoral underlap could cause financial instability and a systemic banking crisis in Hong Kong.

Prior to the 2008–9 global financial crisis, regulatory and supervisory frameworks were not designed to manage the orderly failure of systemically important financial institutions. Governments were compelled to bail out these institutions to mitigate a deeper financial and economic crisis from developing. In response, the Financial Stability Board formulated an internationally endorsed financial institution resolution framework. The regulatory attributes of the Hong Kong Monetary Authority strengthen its role as the lead resolution authority in the banking sector. This chapter argues that supervisory gaps and underlap undermine the effectiveness of the resolution regime and the Hong Kong Monetary Authority acting as a resolution authority. Cross-border resolutions pivot on coordination and intent between jurisdictions. During a banking crisis, multiple bank subsidiaries entering into resolution will severely stretch the resources of Hong Kong’s resolution authorities. Moreover, small credit institutions, are not captured by the regime. Historically, small credit institutions have caused several systemic banking crises in Hong Kong. Moneylending markets have grown exponentially over the past decade with the emergence of FinTechs and TechFins. Consequently, Hong Kong’s moneylending market is becoming a financial stability risk because a substantial portion are inadequately regulated and fall outside the resolution regime.

Financial crises have a tendency to expose the financial system’s inability to absorb large systemic shocks, the critical role of liquidity channels, and financial institutions with fragile balance sheets. Pinpointing the causes of systemic risk challenges supervisors because the range of risks are virtually unlimited. This chapter argues that the definition of financial stability must be revisited to enhance the efficacy of financial supervision by drawing upon the lessons learnt from the 2008–9 global financial crisis. Defining systemic risk requires a real-time perspective of risk transmissions between the financial system components. Supervisors should appreciate financial agglomeration, the interconnectedness of the financial system, and behavioural economics when regulating systemic risk. Liquidity mismatches that destabilize financial institutions’ balance sheets and the capacity to raise funding can cause financial instability. The inability of the Hong Kong Monetary Authority to control monetary policy constrains its power to fully manage these liquidity risks. Mitigating financial instability caused by systemic liquidity risks requires an understanding of prudential regulation and the management of monetary policy to stabilize bank balance sheets. Financial architecture must be properly utilized by supervisors to restore the orderly and rational functioning of the financial system.

Hong Kong is Mainland China’s international financial centre and capital market gateway, being home to the largest offshore renminbi hub. Cross-boundary connect schemes have significantly boosted capital flows between Hong Kong and the Mainland. Hong Kong’s role in the internationalization of the renminbi and offshore investment is supported by cross-boundary financial market infrastructure and complicated by the dual supervisory and regulatory systems in each jurisdiction. Hong Kong and the Mainland operate under the sectoral model with some key design differences. This chapter argues these differences produce cross-boundary macro-prudential and systemic supervisory underlap across the renminbi and connect scheme infrastructure. To overcome design flaws inherent to the sectoral model, both jurisdictions have created composite systemic supervisors. Cross-boundary underlap constricts these composite systemic supervisors from mitigating systemic risk outside their home jurisdiction. Moreover, Hong Kong and the Mainland have begun adopting regulatory technology to enhance financial market supervision. However, technology does not change the functionality of financial market infrastructure nor the cross-boundary supervisory functions. Technology risks are introduced that expand rather than change the supervisory roles. Cross-boundary supervisors should not reduce risk management requirements merely because technology automates compliance requirements or supposedly eliminates orthodox financial risks.

A taxonomy is a classification system. In this chapter, we present a risk taxonomy, by which we mean that we shall categorize and describe all the major risks that may be faced by a firm or institution. We will describe risks that arise from outside the organization (external risks) and those that come from within the organization (internal risks). External risks are further categorized into economic, political, and environmental categories, while internal risks include operational and strategic risks. Reputational risk may be internally or externally generated. We describe some examples of how risks have arisen in several high-profile cases, showing the intersectionality of the different risk categories – that is, how the different risk types can all be driven by a single risk event.

The progressive globalization of finance over the last forty years has been a blessing and a curse for national financial systems. On the one hand, financial institutions, investors, and consumers benefitted from increased opportunities of credit and investment. On the other hand, financial interconnectedness and the reduction of barriers to capital flows have increased exponentially the risk of global financial crises. Regulatory cooperation among financial regulators through the various Transnational Regulatory Networks has decreased the risk of regulatory loopholes and avoided races to the bottom in financial policymaking. Yet, the global financial crisis of 2008 and the European Sovereign Debt crisis have shown that the current approach to global financial governance presents various flaws. The absence of a binding international legal framework for financial cooperation, coupled with the inherent pressure towards financial nationalism faced by national regulators often leads to failures of cooperation and, ultimately, to international crises. This chapter discusses how public international law and the doctrine of Common Concern can help in addressing the inefficiencies of the current system.

One of the potential disadvantages of recent innovations in trading technology is that the markets now move with lightning speed in both good times and bad. With trading in futures and securities regularly counted in milliseconds (i.e., one thousandth of a second) and even microseconds (i.e., one millionth of a second), market crashes and rallies now also can occur – and, indeed, have occurred – at breakneck speeds that make human reaction times seem tortoise-like. The same algorithmic trading technologies that have enabled the markets for futures, securities, and options to incorporate information into the prices of financial instruments more quickly than ever before also have resulted in occasional high-speed crashes and rallies whose causes have, at times, confounded market participants and experts.