Competing or Complementary? Government-Regulation and Self-Regulation in the Global Financial Sector

Abstract

This study offers insights into the complex global regulatory environment by exploring the nature of the relationship between government-regulation and voluntary self-regulation within the context of the global financial sector. We specifically examine the extent to which financial sector government-regulation and self-regulation are complementary or substitutive, how they compare in their responses to a global financial crisis, and the extent to which changes in self-regulation may precede changes in government regulation (which is a widely held belief). Using a panel dataset of banking regulations across 71 countries during the years 2001-2015, we are able to reveal additional insights into the nature of the global financial regulatory system. Our empirical analysis indicates an overall substitutive relationship between industry government regulation and self-regulation. Additionally, we find that government regulation strengthens while self-regulation weakens in response to a financial crisis. Lastly, we find empirical support for the presumption that governments may take regulatory cues from private industry actors over time; however, government-regulation tends to respond in the opposite direction to changes in self-regulation.