The financial collapse created by the 1930 crisis pushed national banks into a corner, a highly regulated space in order to limit banks’ operations and avoid their former excess greed. Banking regulation expanded worldwide, generalizing a highly restrictive financial scheme – which was later popularized by R. McKinnon as a ‘financial repressive’ model.

Thirty years later the deregulation movement ended with years of highly regulated but, on average, highly stable financial markets. Beginning in the late seventies, financial innovation matched market deregulation to generate a new but highly unstable environment. The traditional banks were being transformed into financial supermarkets, whereas the engineering of pooling and securitizing loans was beginning to transform banks’ balance sheets, the effectiveness of industry regulation, and the dictates of conventional monetary policy. This huge transformation in financial services intermediation also comprised the moving away from a largely domestic market to an increasingly internationalized space. The next paragraphs describe all the measures and instruments, and also all the regulatory challenges imposed by this new financial model. In the second part, the chapter explores the recent trend towards deregulation and the more recent aim to re- regulate financial markets. In particular, and basically aimed at understanding the problem posed by the financial trilemma, this subsection evaluates the challenges being imposed by the recent expansion in cross- border funding.

From Financial Repression to Global and Deregulated Markets

The neo-liberal wave coming after the arrival of Ronald Reagan and Margaret Thatcher resulted in the erosion of the financial regulatory model institutionalized in the aftermath of the Second World War. Countries in Latin America and Asia will soon embrace this dictate and dismantle the ‘repressive model’. Deregulatory measures were aimed at increasing the role of market forces in interest rate fixing and credit allocation.

Suddenly, the financial repressive model that was implemented became outdated, and developing countries were pushed to dismantle it. The slogan was certainly powerful among Latin American policymakers, with pundits along with IFIs recommending the immediate liberalization of interest rates along with advocating a greater role for markets in credit allocation.