Two topics of discussion making the rounds today are the issues of capital controls and bank size. Why capital controls? Well, some have argued that in the wake of the financial crisis, developing economies sought to accumulate invulnerable foreign exchange reserves to as to protect themselves from capital flight in the event of crisis. These reserves have been judged to have contributed to the global savings glut that fueled bubbles around the world. And of course, capital flight has damaged economies in this crisis, from Iceland to central and eastern Europe.

Why bank size? Well, one concern is that large banks become too big to fail. I don’t know if that’s the right concern, however. It’s not that problem banks are too big to fail, it’s that 1) there’s no orderly procedure for winding down such complex financial institutions and 2) other financial insitutions were tightly linked to the fate of the at risk banks. Size is not the main issue, then. It’s structure and exposure to risk. Better regulations, particularly thosed focused on capital requirements and leverage, could address these problems best. But another concern is that too big banks have too much influence. Now making it easier for financial institutions to fail through regulatory changes would limit this influence by reducing the ability of big banks to hold the government hostage. Still, the amount of resources at the command of a big bank give it power in Washington. Banks can be regulated now, in the wake of crisis, but if they remain large and powerful, then they can exert influence over government officials later in weakening those regulations and oversight.

What’s interesting to me is that in both cases, there are commitment problems that limit the effectiveness of measures taken at the national level. A strong, credible international financial backstop could limit the threat of capital flight, while also providing a commitment mechanism to national governments needing to make unpopular policy decisions to address whatever underlying conditions helped generate panic in the first place. Meanwhile, an international financial regulator could play the role the WTO does on trade in committing national governments to adhere to certain rules that they would struggle to maintain through political changes on their own.

Basically, finance has become tremendously large and powerful, and it has outgrown the underdeveloped international framework that applies to it. I think an improvement in international financial rules and institutions would go a long way toward solving many of problems we’re currently puzzling over.