The following post comes to us from Pierre-Hugues Verdier
, Associate Professor of Law at University of Virginia.
In my paper, The Political Economy of International Financial Regulation, forthcoming in the Indiana Law Journal, I examine the current system of international financial regulation (IFR) from a historical and political perspective. In contrast with conventional theories of IFR, which see the current system of informal regulatory networks and non-binding standards as overall rational and efficient, I argue that historical path dependence and political economy play a major role in shaping outcomes in IFR. As a result, it produces mixed results—while it adequately addresses some international regulatory challenges, it is relatively ineffective at others, and avoids some altogether. This state of affairs has several important implications; perhaps most worrisome, it raises doubts that IFR can live up to the G-20’s ambitious post-crisis promises to address the international dimensions of systemic risk and moral hazard.
As readers of this blog will no doubt appreciate, there are substantial difficulties involved in developing a general account of IFR. The field is deeply fragmented, as international standards address a broad range of issues: accounting and disclosure rules, fraud, capital adequacy, prudential supervision, and cross-border resolution, to name but a few. All of these areas present different challenges and outcomes vary substantially across them. This being said, one recurrent feature of IFR is its informality. Instead of legally binding treaty obligations and formal international organizations, IFR relies almost exclusively on non-binding standards developed by networks of national regulators, such as the Basel Committee, IOSCO and IAIS. This feature is striking in comparison with many other areas of international governance where more formal mechanisms loom larger, such as trade, investment and the environment.
…continue reading: The Political Economy of International Financial Regulation