Combating Financial Crisis: Building Super-Structures of International Financial Regulation

Abstract

The architecture of international financial regulation consists of structures built through a number of crises. Subsequent to Bretton Woods, the world witnessed the globalization of finance which highlighted the increased risks which follow in cross-border financial activity. National regulators started to develop cooperative solutions to mitigate these cross-border risks. Nascent and informal regulatory structures were formed by organizations of national regulators and standard setters such as the Basel Committee on Banking Supervision. In the wake of the Latin American debt crisis and East Asian financial crisis of the 1990s, these structures started to take on a more Byzantine form. The various groupings of industrialized states such as the G-7, G-8, G-10 and G-20 and Financial Stability Forum, together with international organizations such as the International Monetary Fund and the World Bank started to play a larger role in international standard setting. The current financial crisis (the “Crisis”) provides another opportunity to reexamine existing structures of international financial regulation. It has provoked intensified calls for increased international cooperation in the regulation of international finance on a number of hierarchical levels and with respect to a variety of substantive issues. Broadly, this paper examines the prospects for such cooperation. First, it seeks to examine the structural aspects of international financial regulatory reform in the wake of the Crisis. It reviews ongoing efforts at constructing international financial regulatory structures in the form of the G-20 through the Financial Stability Board and in the EC. It argues that three distinct kinds of integration are taking place through these efforts: horizontal integration between various international financial institutions; cross-sectoral integration between different sectoral regulators having to collaborate to formulate cross-cutting norms; and vertical integration between actors of different hierarchies which set standards with different degrees of binding-ness and specificity. Second, this paper discusses the prospects for continued international cooperation in the wake of the Crisis. This section examines prevailing theories of international financial cooperation as well as political economy theories of economic crisis. It is argued that prospects for continued international cooperation rest on two factors. Foremost, the opportunity for international cooperation presented by the Crisis rests on whether domestic interest groups and coalitions have re-aligned themselves in favor of regulatory structures which are more stringent. If so, this re-alignment should point toward international cooperation to building structures of international financial regulation which provide higher standards of regulation and/or more enhanced enforcement or compliance mechanisms. Next, it is also argued that international financial reform is highly dependent on the domestic politics of dominant states. In other words, the viability of international cooperation is dependent on the extent in which domestic interest groups and coalitions in dominant states have re-aligned themselves in favor of higher standards of regulation. Third, this paper takes a closer look at the three kinds of integration that are taking place and examines their implications for international cooperation. Finally, this paper concludes by examining some policy options for the creation of structures of international financial regulation.