Global Governance and Regulatory Failure

The politics of state compliance with international “soft law” in finance

“…The financial industry mobilizes to influence financial regulation in line with its (at times different) preferences (Young, ), which derive from the specific business model of banks and the configuration of the national banking system (Goldbach, ; Howarth & Quaglia, ). The financial interest groups that lobby on international standard setting are primarily large, internationally active banks (Lall, ; Young, ), rather than domestic banks, consumer groups, or nonfinancial companies.…”

“…The making of Basel II was mainly driven by U.S. regulators, in particular those in the Federal Reserve (Tarullo, , p. 90). Beginning in 1998, the chairman of the Federal Reserve, Alan Greenspan, and, subsequently, other high‐level Fed officials, repeatedly pointed out that Basel I rules failed to capture the increasingly complex operations of the largest banks (Goldbach, ; Singer, ). Consequently, a revision of those rules was needed.…”

“…Large banks that had complex risk management models in place mobilized in earnest to convince regulators that this should be taken into account in the revision of Basel I. This later became known as the “internal ratings‐based” (IRB) approach (Goldbach, ; Lall, ; Young, ). The Institute of International Finance (IIF), which represents internationally active financial institutions, mobilized in a timely and sustained way concerning Basel II (see IIF, ).…”

“…Most of these standards are issued by transgovernmental networks of national regulators (see, inter alia, Bach & Newman, ; Büthe & Mattli, ; Drezner, ; Mattli & Woods, ) and become legally binding only if they are implemented by individual jurisdictions according to their domestic rule‐making processes. Compliance with international soft law is particularly important in finance because many new (or substantially revised) standards were adopted by transgovernmental networks after the international financial crisis (Fioretos, ; Goldbach, ; Lall, ; Quaglia & Spendzharova, ; Tsingou, ; Young, ). Yet, if jurisdictions do not comply with these standards, they become a dead letter.…”