The speed and breadth of contagion from the U.S. financial crisis have dramatically demonstrated the degree to which national economies, developed and developing alike, are intertwined. Initially a problem confined to the U.S. housing market, the rapid spillover of the crisis to the rest of the U.S. financial system and then to the global economy left financial institutions in other advanced economies reeling. The crisis has generated momentum on substantive regulatory reforms geared toward ensuring the integrity and resilience of financial systems in the advanced economies.

The macroeconomic consequences of the crisis have also affected emerging markets and other developing economies, even though this group has rebounded more quickly and sharply from the crisis (see Kose and Prasad, 2010). These shared ramifications have brought into even sharper relief the centrality of sound financial systems for emerging markets as well as low-income developing economies. Efficient and stable financial systems are essential for both emerging markets and low-income developing economies to achieve long-term balanced development and to absorb various types of shocks. It is striking that the crisis emanated from the United States and hit particularly hard a group of economies, including that of the United Kingdom, that were once believed to have the most sophisticated and robust financial systems.

These developments have led to a reevaluation of basic principles of financial regulation. Clearly, a reconfiguration and strengthening of existing regulatory models and frameworks would improve financial stability. The necessary paradigms are still evolving although there appears to be a general consensus on some key principles that will be central to a major redesign of financial regulation