Transnational Financial Regulation after the Crisis

Tony Porter, Tony Porter

• Publisher: Routledge
• Year: 2014
• ISBN:
  9781317816706
• Edition: 1
• Topic: Política y relaciones internacionales
• Subtopic: Política

The global financial crisis that began in 2007 was the most destructive since the 1930s. The rapid spread of the crisis across borders and the complexity of these cross-border linkages highlighted the importance for authorities of working together in responding to the crisis.

This book examines the transnational response that relied heavily on a set of relatively informal transnational regulatory groupings that had been constructed over previous decades. During the crisis these arrangements were made stronger and more inclusive, but they remain very complex. Thousands of pages of new rules have been created by various transnational bodies, and the implementation of these rules relies heavily on domestic law and regulation and private rules and practices. This book analyses this complex response, showing that its overly technical and incremental character, the persistence of tensions between transnational processes and state-centred politics, and the ongoing power of private actors, have made the regulatory response fall short of what is needed.

Transnational Financial Regulation after the Crisis provides new insights that are relevant for theory and practice, not only for transnational financial regulation, but for global governance more generally.

Part I

Introduction and overview

1 Introduction

Post-crisis transnational financial regulation and complexity in global governance

Tony Porter

The global financial crisis that began in 2007 was the most serious since the crisis that culminated in the depression of the 1930s. At its height it was not at all clear that the global financial system could avoid a catastrophic collapse. Output losses in the USA alone have been estimated as costing as much as US$10 trillion (US Government Accountability Office 2013: 15), or more than $30,000 per person. Output losses in the euro area were very high as well, perhaps three quarters as severe as the USA (Laeven and Valencia 2012: 22). The damage goes beyond these estimates, since crises can have much longer-term effects on personal wellbeing and social stability, including individual earnings, house values and health. More generally, transnational crises have been increasingly severe in the past quarter century, and have been especially destructive for developing countries. The fiscal costs to developing country governments of the financial crises of the 1980s and 1990s were roughly equal to the total amount of foreign aid they received between 1950 and 2001 (Barth et al. 2006: 2).

From the early days of the crisis, and recognizing its transnational character, policymakers and regulators from different countries began strengthening their joint efforts to respond to it. The most striking example was the upgrading to the leaders level of the systemically significant countries grouped in the G20, which previously had only involved finance ministers and central bankers. The G20 agreed to coordinate impressive stimulus packages, and to launch a reform of global financial regulation. The G20 called upon the transnational bodies that had been working on developing standards, codes and best practices for transnational financial governance to strengthen these significantly in order to stabilize the global financial system and prevent a recurrence of the crisis. The Financial Stability Forum (FSF), which had been at the centre of the standards and codes work since its creation in 1999, took a lead in coordinating these efforts, and was transformed itself into the Financial Stability Board (FSB), with a more formal structure, a new peer-review system of accountability, and the inclusion of G20 members who previously had been excluded.

How should we evaluate these transnational efforts? A big difficulty is that there is no agreement about whether the transnational bodies upon which they rely, including the G20 and the FSB, can themselves be effective, or how we could assess their effectiveness. Most of these bodies look nothing like the more familiar formal organizational structures that are associated with nation-states or more traditional intergovernmental organizations such as the International Monetary Fund (IMF). They rely heavily on informal procedures and rules, and on complex relationships with states, firms, other transnational bodies, and national regulators. Traditionally international economic rule making involved treaties, which were then ratified by states and implemented as needed in their domestic laws. Obligations were spelled out, and compliance could be assessed by comparing national practices and written commitments in treaties. Well-established national systems of accountability, such as elections and legislative hearings, were supposed to ensure that international commitments were consistent with the interests of citizens. Even if there were deficiencies in these traditional mechanisms, they were far more straightforward than those that are needed to assess the performance of the G20, the FSB, or the complex set of often informal institutions and commitments that they seek to coordinate.

Today there are sharp disagreements about whether complex and informal arrangements such as the ones that have been at the centre of the transnational regulatory response to the crisis are useful or useless. Some see such institutions as too weak to be effective, as undermining traditional mechanisms of democratic accountability, and perhaps giving undue influence to powerful states and private actors with the resources to operate effectively at the transnational level (Payne 2010; Soederberg 2010; Wade 2011). Others see such institutions as innovative, flexible, much better able than traditional mechanisms to respond to a rapidly changing world, and more open to a variety of inputs and choices as compared to more formal bureaucratic arrangements (de Búrca et al. 2013; Sabel and Zeitlin 2010; Braithwaite and Drahos 2000). It is difficult to assess the particular regulatory changes that have been put in place since the crisis began without addressing these types of fundamental disagreements over the effectiveness of these types of arrangements.

This introductory chapter sets the stage for an analysis of these institutions and their effectiveness by surveying the varying ways that these new types of transnational governance arrangements have been understood as a whole and in various policy fields other than finance. The word transnational itself signifies actors and institutions that extend across borders (Djelic and Sahlin-Andersson 2007). These actors and institutions may be located primarily within a particular state’s borders and yet be intensely connected with actors and institutions in other countries. This contrasts with international, which suggests a narrower set of interactions between sovereign states. It also contrasts with global, which can imply a worldwide space that operates above states. All these meanings are loose, and these distinctions are not critical for the purposes of this book’s analysis, but it is useful in analyzing complexity to emphasize that this includes interactions across borders and scales and not just more traditional interstate relations.

The chapter then provides background to the current role of these transnational institutions in finance by sketching out their development over the past half century and how they have been analysed. The informal and technical character of much of current transnational governance in finance means that these institutions do not often appear in news headlines, or even in many scholarly analyses of global finance. It therefore is not surprising that their past history is often not recognized. This lack of recognition can lead to the impression that these arrangements are more ad hoc than is the case. The longevity of the transnational regulatory institutions and policymakers’ heavy reliance on them in all recent global financial crises suggests a degree of path dependence. This path dependence by itself certainly does not imply these institutions are effective, since they could lock in weak responses and prevent more useful ones. However, it does suggest that they play a more significant role than if they had only been created recently.

This book is organized around a central proposition that addresses the significance of transformations in governance for the regulatory response to the global financial crisis. This proposition is that the experience of transnational regulatory reform after the crisis indicates that the trends of the past three decades, which have involved a growth in transnational interdependence in financial transactions and governance, is continuing rather than reversing. Further, the strongest elements in the reform are those that build on and make use of the complexity that has become characteristic of global governance, such as soft law, private governance mechanisms, transnational regulatory autonomy and overlapping national/global rule domains, while elements of the reform that build on simpler or more conventional national mechanisms have been weaker. Stronger and weaker here refer to whether the reform element will have any effect on financial transactions or governance.

The book’s chapters both support and criticize this proposition, clarifying the issues at stake and the contradictory forces at work in the governance of global finance. All the chapters focus on aspects of the regulatory reform that reveal the complexity discussed above, and they assess the degree to which the claims of this proposition are evident or not in the key areas of reform that the chapters discuss. In doing so, they move us closer to understanding the significance of these changes in transnational governance for financial reform and for world politics more generally. This is crucial for understanding whether future financial crises are best prevented by building on the existing complexity or reducing it, for instance by returning to simpler state-based national regulatory arrangements. The question of whether to add complexity or to rely on simpler measures has been debated in the reform effort itself (Haldane 2012), and is evident in the addition of a simple leverage ratio to Basel III, the centrepiece of the international banking reform, in an attempt to offset the daunting complexity of its other provisions.

Complex global governance

Since the 1990s there has been widespread recognition that global governance is displaying a series of interrelated epochal changes. One marker of this recognition was the publication in 1995 of the report of the United Nations (UN)-sponsored Commission on Global Governance. While some of its recommendations were quite traditional, it also highlighted the growing complexity of governance and boosted the profile of the word “governance” itself. In contrast to government, governance can refer to systems of formal or informal rules that are public or private, and which can operate at and across a great many scales. These changes were evident in various governance settings, and often were identified by researchers with the assistance of distinctive labels and theories. However, the simultaneous and pervasive presence of these changes across all settings, and their obvious similarities to changes occurring in domestic political economies and daily life, reinforced the degree to which the changes were connected in some way to our present historical period. They evidently were not just resulting from the choices of a particular set of actors or the idiosyncratic properties of a particular institution.

One way of identifying these changes is to list a series of dimensions across which they are occurring. These include the shifts from national to global; from public to private; from formal to informal; from an orientation towards tradition to an orientation towards the future; from places to flows; from manufacturing to services; from labour-intensive production to the knowledge economy; from homogenous to hybrid identities; and from hierarchy to networks, among others (Beck et al. 1994; Castells 2000; Harvey 1989). Another way is to focus more specifically on transformations in governance, which includes a shift from “command and control” to control at a distance, through the use of mechanisms such as promoting competition and then rewarding those who achieve particular benchmarks. In the academic field of public administration this was associated with the “new public management” (Pal 2008), while in critical social theory influenced by Foucault it was associated with a shift from discipline to “governmentality”—with the latter concept referring to decentralized modes of power in which subordinate actors regulate their own conduct to bring it into alignment with the imperatives of power more generally (Larner and Walters 2004). Elsewhere these governance changes were apparent, for instance, in the shift from hierarchical, nationally based corporate structures to flatter and more complex transnational production networks, or in the alteration of personal life narratives from predictable stable trajectories through careers and family dictated by one’s background, to volatile precarious and mobile lives fashioned by negotiating multiple identities in which individuals are responsible to govern their own fate through continual self-transformation (Beck et al. 1994).

While various causes of this transformation have been identified as most important, it is likely that all these causes played a part, often reinforcing one another. Indeed, to some extent these causes are just facets of a single macro-historical transformation. These causes include technological change, which has brought the world closer together and offered new ways of organizing human interactions. They include the growing knowledge and competence of individuals, which makes possible and desirable new decentralized modes of organization. They include the expansion of capitalism, which erodes formal or community structures and replaces them with market relations, driven either by self-interest or by some structural property of the system as a whole. They also include globalization, which can be viewed as an inherent drive to explore outward and make new connections with formerly distant places and processes.

In scholarly studies of global governance there have been a great many ways that these changes have been studied theoretically, including why rational actors choose soft law instead of hard law (Abbott and Snidal 2000), or how they take advantage of this complexity (Alter and Meunier 2009), the dialectic of control and autonomy between principals and agents (Hawkins et al. 2006), the growing competence of individuals (Rosenau 1990), the shift towards regulatory capitalism (Levi-Faur 2005) or experimentalist governance (Sabel and Zeitlin 2010), the way networks or frames shape governance (Slaughter 2004a, 2004b; Djelic and Sahlin-Andersson 2007), the role of ideological practices in soliciting the consent needed for hegemony (Gill 2003), the role of risk in shifting the orientation of rules from the past to the future (Amoore and de Goede 2008), problems of democracy, legitimacy and accountability (Porter and Ronit 2010; Ebrahim and Weisband 2007), the value of concepts such as governmentality (Larner and Walters 2004) or assemblages (McKeen-Edwards and Porter 2013; Ong and Collier 2005; Sassen 2006) in understanding the operations of power in disparate and disaggregated practices, and concepts such as orchestration (Abbott and Snidal 2009), or metagovernance (Jessop and Sum 2006: 268) in understanding how this complexity might be coordinated. Impressive empirical research has highlighted this complexity, while emphasizing the persistence of more traditional institutional and power relationships (Braithwaite and Drahos 2000).

The emergence of complexity in global financial governance

A distinctive feature of the transnational regulatory response to the global financial crisis was the degree to which it relied on existing institutions. These institutions display the type of complexity discussed above. Even the most dramatic initiatives, such as the upgrading of the G20 to the leaders level or the conversion of the Financial Stability Forum into a more formal Financial Stability Board and the expansion of its membership to match that of the G20, built incrementally on existing institutions. The most important transnational initiative in bank regulation, “Basel III”, built on a long history of work in the Basel Committee on Banking Supervision (BCBS), going back to its establishment in 1975. All other areas of transnational regulatory reform similarly built on existing transnational bodies and rules. This section reviews the history of increasing complexity in the governance of global finance.

Because of the technical character of transnational regulatory arrangements, their roles and histories are often not well recognized. It is not possible to recount in detail here the history of these arrangements, but it is useful to sketch out its main features.¹ These arrangements can be traced back to the worries of the G10 governments about the rapid growth of the Euromarkets, which resulted in the establishment of the relatively informal Eurocurrency Standing Committee at the Bank for International Settlements (BIS) in 1971, to monitor this growth. This committee, renamed the Committee on the Global Financial System (CGFS) in 1999, continues to function today.

Subsequent to the 1971 establishment of this committee, many more similar informal committees were created, mostly also based at the BIS. One of the most prominent ones has been the Basel Committee on Banking Supervision, created in 1975 to bring together central bankers and regulators from the G10 countries plus Luxe...