The Flaws of Fragmented Financial Standard Setting

Abstract

In the half decade following the 2007 financial crisis, the reform of global financial governance was driven by two separate policy debates: one on the substantive content of regulations, the other on the organizational architecture of their governance. The separation of the two debates among policymakers has been mirrored in academia, where postcrisis analyses of financial governance have remained detached from reinvigorated discussions about the nature of financial markets. We argue that this separation is deeply flawed. Presenting an analysis of interactions between standards for banking, credit rating, accounting, and derivatives trading, this article demonstrates why the appropriateness of the organizational architecture of global financial governance is necessarily contingent upon one’s understanding of how financial markets work. In particular, if financial markets are not anchored to external “economic fundamentals” but instead exhibit reflexivity, then the reciprocal interactions between different regulatory arenas demand considerably more organizational coordination than presently exists.

The auxiliary paradigm change and club-based governance model in global banking regulation

“…25 Since capital adequacy ratios were calculated by dividing total capital by risk-weighted assets, risk assessments significantly influenced the level of capital requirements. 26 Basel II provided banks with "a choice between two broad methodologies for calculating their capital requirements for credit risk." The "standardized" approach involved assessment by external credit assessment institutions.…”

Epistemic contestation and interagency conflict: The challenge of regulating investment funds

“…A second explanation considers the institutional framework for global financial regulation, highlighting the problematic nature of reform where regulatory authority is shared across multiple levels (Mügge & Perry, 2014; Newman & Posner, 2018; Thiemann, 2018). This is compounded by the fact that responsibility for shadow banking regulation is not the exclusive competence of any single domestic agency or international body (Knaack & Gruin, 2020).…”

“…There is a vast and varied literature on the politics of regulating global finance (for instance, see Moschella & Tsingou, 2013). Explanations of the development (or not) of global standards frequently point to the importance of market power and the regulatory capacity of key jurisdictions (Drezner, 2007; Helleiner, 2014), the fragmented institutional architecture of international regulation (Mügge & Perry, 2014; Newman & Posner, 2018; Thiemann, 2018), and the structural and instrumental power of the transnational financial industry (Braun, 2020; Culpepper, 2011; Woll, 2014). Recent scholarship also focuses on bureaucratic politics, pointing to divergent preferences and rivalry between different regulatory agencies (Knill & Bauer, 2016; Stone & Ladi, 2015; Trondal et al, 2013).…”

Why are international standards not set? Explaining “weak” cases in shadow banking regulation

“…Standard-setting is particularly consequential in finance given its global reach and systemic implications for the economy. The post-2008 crisis literature on the international governance of finance (for some representative works, see Helleiner 2014;Helleiner et al 2018;Moschella and Tsingou 2013;Mügge and Perry 2014;Newman and Posner 2018) has mainly investigated the issuing of new rules after the crisis (for example, Brummer 2015;Gabor 2016;Knaack and Gruin 2020;Quaglia 2020;Young 2012;Rixen 2013;Thiemann 2018;Zaring 2020). The few works that have considered weak cases of global standard-setting have tended to deal with a single set of rules.…”