The locus of financial regulation: home versus host

Abstract

If the G's are the world's steering committee, the step from G7 to G20 deepened the democratic legitimacy of this committee. However, it also shifted influence to a group that share little else other than economic power: they have diverse experiences, challenges, cultural perspectives and starting points. This is particularly the case in the field of financial regulation, where action across these countries in recent months—despite all the language of global regulation—is increasingly local. The prospect of the new global being quite local has dismayed some. But it need not. This article challenges the dichotomy of more global versus more local. It argues that financial internationalism—greater cooperation by nations for the benefit of all—is better served by institutions that help to integrate diverse systems than those which try to enforce one‐size‐fits‐all approach to very different economies. International banks persuaded regulators of the benefits of home country regulation and a level playing field for bankers. But the benefits accrued largely to the banks in the boom and proved an avenue for contagion during the crash. Host country regulation may prove a safer way to regulate financial systems, in particular by allowing regulation to be more responsive to national economic conditions and cycles. It is likely that a shift back to host country regulation will act as a drag on international capital flows. The instinct of economists is that the cost of this is uncertain, suspect and conditional, especially when compared to the costs of financial crashes. Host country regulation does not mean there is no role for international institutions, such as the newly minted Financial Stability Board. Instead, it suggests a more nuanced role, potentially encompassing the policing of international market infrastructure, financial protectionism, information free flow between regulators and the convergence of regulatory principles and the consolidation of regulatory instruments. An informed and collegiate process of integrating different financial systems will be a more resilient system than one which tries to apply a single rule book across inherently different countries.

Is resilience enough? The macroprudential reform agenda and the lack of smoothing of the cycle

“…They confirm once more the different macroprudential stances between the US and Europe noted in the literature, with the US focus on resilience and too big to fail (Persaud ; Helleiner ) in contrast to the very European concern regarding the pro‐cyclical character of finance (Baker , p. 183). However, reconstructing their views and arguments will reveal deeper‐seated issues as to why they embraced or rejected it, linking the timid take‐up of the technocratic project of anti‐cyclical policies to reputational concerns over the legitimacy of central bank action and institutional constraints.…”

The New Political Economy of the Macroprudential Ideational Shift

“…Such arguments essentially critiqued the exclusively microprudential approach, which involved home country regulators supervising individual institutions but not jurisdictions or systems in their entirety (Persaud, 2010). Consequently, the macroprudential perspective argues that regulators needed to take a system wide view and implement top down requirementsa macro approach.…”

On the National Production of Global Elites: The Rise of a French Trained Global Elite in Financial Derivatives

“…The number of derivatives contracts traded on all global exchanges rose by 60% in the 2007–2011 period (data from the Futures Industry Association, FIA). It is common to hear that global finance has undergone dramatic change since the GFC, and some argue convincingly that we are witnessing a return to national‐level financial activity and regulations (Persaud ). However, if this argument held, the global derivatives trade would by now be dampened; instead, the overall size of the derivatives market is unchanged.…”

“…Notional Value Gross Value change since the GFC, and some argue convincingly that we are witnessing a return to national-level financial activity and regulations (Persaud 2010). However, if this argument held, the global derivatives trade would by now be dampened; instead, the overall size of the derivatives market is unchanged.…”