Indirect Governance in Global Financial Regulation

Abstract

The global financial crisis led G20 states to conclude that stronger regulatory standards and improved compliance were needed to ensure global financial stability. To this end, the G20, as collective governor, granted an institutional intermediary, the Financial Stability Board (FSB), authority to develop and supervise financial market regulations. However, the G20 designed the FSB in ways that stymied its regulatory competence. Why did the G20 design the FSB in ways that were inadequate to meeting its own governance goal? Competence–control theory provides a compelling answer. The G20 faces a tradeoff between a competent intermediary and control over the intermediary; this tradeoff is exacerbated by the G20’s collective nature. While the G20 has a collective long-term interest in an intermediary with the expertise and capacity to promote stability-enhancing regulations, intense short-term distributive conflicts among member states yield strong incentives to control the intermediary. These internal distributive conflicts are more easily overcome during systemic economic crisis, when a competent intermediary is urgently needed. Once the crisis has passed, however, the governor reasserts control, again compromising the intermediary’s competence. The chapter illustrates this argument with an account of reforming the Financial Stability Forum into the FSB, and three case studies of policy reforms after the financial crisis.