Governments: Rethinking Regulation
The capital markets have fundamentally changed. Globalization has not been halted; indeed, it is likely to accelerate after this crisis. New York and London will lose their preeminence to Shanghai, Dubai, and Singapore. Investors previously seen as relatively unimportant — particularly sovereign wealth funds and investors from oil-rich countries — are now critical enablers of the recapitalization of the world’s companies and economies. The major financial institutions of the new economies have grown in relative strength through this crisis, and they have clear ambitions to become leading global financial players.
The financial systems of the future are changing as well. The amount of trading will decrease as the markets de-leverage and the derivative-enabled speculation and hedging markets diminish. The market will be inherently less profitable; it will no longer contribute as much to overall employment and GDP in most markets. Employees will look to other industries for jobs; governments will look more to Main Street than to Wall Street for tax revenues.
The role of government will also change. Policymakers and governments will take as much interest in managing investment flows as they do in managing global trade. They will harmonize tax regimes, regulate foreign investment, and involve themselves more in foreign ownership and capital flow. Their goal: to prevent future crises and oversee the funding that they have injected into the markets. International agreements will be based more on pragmatic “rules of thumb” and less on complicated analytical models. Regulators will be open to well-formulated proposals on the design of measures that will support the building of institutions in this new world.
The crisis will ultimately create a healthy call for change and improvements in the financial world, particularly in risk control, governance, and regulation. Financial-services companies that focus on restructuring their businesses, partnering constructively with regulators, and tightening risk controls and capital strength can play an active role in the redesign of the global industry. For many of them, it will represent a natural evolution from the role they have played in this crisis. Now they must apply the same skills and capabilities as they move from short-term triage to build the next long-term platform of a sustainable global financial-services regime.
Klaus-Peter Gushurst is a Booz & Company senior partner based in Munich, and a member of the firm’s global board of directors. He specializes in strategy, turnaround and restructuring, and corporate management, primarily in the financial-services and automotive industries.
Ivan de Souza is a Booz & Company senior partner. A member of the firm’s global board of directors, he oversees the firm’s Latin America business. He specializes in strategy, marketing, and organization services for financial institutions and conglomerates.
Vanessa Wallace is a Booz & Company partner and leads the financial-services practice in Asia, Australia, and New Zealand. She specializes in strategy, post-merger integration and restructing in retail banking, wealth management, insurance and the public sector.
Also contributing to this article were Booz & Company Partners Andrew Cainey and Charles Teschner.