I recently bought two shirts which were called iron-free. After they came out of the dryer, they had more wrinkles than a young Shar-Pei.

I have to come up with a decision about my Master-Thesis. I want to write about Global Governance in the financial markets, but I have to be more specific. Financial markets are very interesting. It takes some time to understand the basic mechanisms, but analysing financial markets can be fun. It’s a weird combination of economics, math, psychology, gambling, political science and business studies.

When I started my MPhil in Cambridge, I thought that the financial markets were mainly regulated through the bodies created by the G7/G8 throughout the years.

My supervisor John Forsyth made me aware of the BIS as a main coordinating body of Central Banks. Then I read “Central Bank Coordination at the Bank of International Settlements, 1930-1973” by Prof. Toniolo and Piet Clement from the BIS.

The book is great for understanding economic history. It also shows that there was considerable bargaining to create cooperation of the regulators of Financial Markets. Since the BIS acted as a clearing house and deposit bank for the Central Banks, it created its own income, was fairly independent from the governments and provided technical expertise when creating the Basel System of Banking Supervision.

In the 1970ies a new actor emerged on the field of financial regulation: the Library Group of the Finance Ministers which later became the G7-System. The G7 often created policy responses to financial crises and established several bodies, like the Financial Action Task Force.

There are three main ideas that I have:

• What did the Central Bank governors think about the emergent coordination between finance ministers and later head of governments in the field of finance? Was there general support or skepticism? Recently, the Archives of the BIS opened until 1977 and this might be the opportunity to research on a topic that no one had the chance to explore yet.
• I would suspect that the cooperation between G7/G8 and BIS was quite cooperative in many cases throughout the years and an intricate network of coordinating bodies evolved. Mapping that network would also provide an interesting research project.
• Learning from history, it is likely to expect new regulation in the field of financial markets after this financial crisis. It might be an interesting research to see which regulation is planned and who takes the regulatory initiative - BIS or G8.

I pretty much have to make a decision of going into an historic analysis or trying to research a contempary issue. The first topic is certainly more focused, the second and third topic bring along a high degree of uncertainty. Hmm….

Today, I had to give a presentation about the Basel System. Due to recent events, I discussed the origins of the subprime crisis and how is it related to a certain deficiency in Basel II. I explained how the cooperation of Central Banks to regulate Banking Supervision was a result of banking failures in the 70ies and 80ies which speculated heavily in the currency markets.

I showed how Basel I introduced risk-weighted minimal capital requirements to have a global standard for assessing the risks banks were taking in the increasingly global financial markets. Prof. Kuczynski explained how Basel I indirectly brought about the Asian crisis because Interbank-Lending was given zero risk weight despite considerable real risks taken by some of the Asian commercial banks. I also brought forward the argument (raised here) that Basel II made banks rely too much on rated securities which made them fall into the subprime trap.

The handout from my presentation can be downloaded here.

Jérôme Kerviel, who has alleviated Societé General of about 5 billion pounds, has a Facebook profile and a group searching for him. Difficult to hide these days…

… are the Black Swan, the Tipping Point, the Wisdom of the Crowd, and the Paradox of Choice. Philosophy of Science could be so much more interesting.