We can have governance of the global financial system even though we do not have global government. Governance can mean legislation, regulation and the institutions of government. But it also encompasses broader frameworks of standards, norms and conventions, international organisations and agreements that fall short of hard law. Indeed, in a world of nation states and national legislatures and governments, it is on these broader frameworks that we need to depend for the governance of financial globalisation, and the management of cross border risk. This challenge is not of course confined to the financial sector. International governance structures are required in many economic and non-economic spheres. But since the liberation of global capital flows and liberalisation of international financial markets which began 50 years ago, financial authorities in multiple jurisdictions have sought together to build the necessary governance frameworks to enable the benefits of financial globalisation while managing the risks. The first Basel Banking Accords of the early 1980s were motivated by the need to ensure that banks involved in cross border services were made subject by their home authorities to minimum standards. In other words, to ensure that the benefits of cross border flows were accompanied by assurance on the risks that might be imported. Financial globalisation accelerated through the last decade of the last century and up until the great financial crisis. External financial assets and liabilities increased from 60% of GDP in the 1980s to 400% of GDP in 2008.
Governance of EU-UK Financial Interconnectedness And that brings me back to the subject of the governance of international finance – the way in which jurisdictions can gain the assurance about the import and export of financial sector risk necessary for their economies to benefit from the efficiency, opportunity and risk management offered by financial globalisation. For the last 30 years or so the governance for cross border financial activity within the EU has been increasingly provided by the legislation, regulation and institutions of the single market in financial services. For the UK, this will continue for another 11 months. But after that we will need new ways to provide the governance for the deep financial connections that will continue between us. The progress in stronger international governance frameworks that I have described provides the basis for that. The development of international standards, of the norms for cooperation, the machinery for scanning and assessing risks and for generating common approaches, provide for mutual assurance in a way that was not possible in the past. We will be able and will need to build on that basis. Some of this may come through the ‘equivalence’ regimes present in some EU legislation, regimes that will initially at any rate be mirrored in UK legislation as we start with the EU acquis on-shored into national law. But those regimes cover only a part of the cross border connections.