Introduction

The Bretton Woods Conference delineated a new macroeconomic framework, which accompanied the embedded liberal framework that appeared at the end of the Second World War. This framework would become characterized by a system of fixed exchange rates and the regulation of capital flows permitting participating countries to maintain their monetary autonomy, whereas local financial markets remained highly restricted to foreigners. Somehow, but perhaps not unexpectedly, in the mid- 1960s the consensus on the post- war economic system began to wane. And, by the early 1970s leading advanced countries began to call for the opening of capital accounts and financial liberalization.

After 40 years of continuous liberalization the world has become, no doubt, more financially integrated. Highly integrated financial markets, however, tend to lead to greater instability as a way of constraining sovereign states’ policy options. As noted in Chapter 2, a highly integrated country can become subject to important restrictions on the macroeconomic front, leaving almost no policy room for those in charge of monetary issues. Chapter 3 discussed the vast array of common practices and restrictions a highly globalized financial system imposes on sovereign countries, as (cross- border) funds are intermediated by global banks. The present chapter introduces an institutional analysis of both sets of constraints imposed by this phenomenon: global financial markets are constantly confronting sovereign states with the constraints imposed by international legal norms, an institutional setting envisioned at both the multilateral (GATS commitments) and the bilateral level (FTAs or BITs).

This chapter discusses the rationality behind the introduction of both capital account regulations (CARs) and macro- prudential policies (MPPs), including those regulatory tools associated with OTC derivatives. In addition, it considers the rationale behind the presence of cross- border regulation, whose institutional setting can be thought as a third practical tool for regulating global capital flows. In sum, this chapter analyses the main institutional constraints impeding the regulation of international capital flows, either originating at the multilateral level (World Trade Organization; WTO) or being imposed by investment agreements (BITs and FTAs). In doing so, we distinguish between those constraints preventing the sovereign state from regulating cross- border financial flows (“mode 1” in WTO parlance) and those that reduce sovereign states’ capability to regulate financial market structure – global banks’ entrance or establishment phase (“mode 3” in WTO parlance).