Resolving the regulator's dilemma: international coordination of banking regulations

Abstract

Since the early 1970s, bankers have developed a host of new financial instruments and practices. These innovations have altered the nature of banking, and this in turn has complicated the task of banking regulation. National regulations have become largely ineffective in monitoring the safety and soundness of global banks. The resulting market changes and the growth of knowledge about the risks facing the international financial system have prompted governments to hold multilateral discussions regarding banking regulation. However, the task of international regulation has been compromised by the desire of states to attract foreign and domestic investment to the financial sector. Since states wish to create or maintain competitive banking institutions, they have often deregulated in order to provide banks with a cost advantage in the international marketplace. This “competitive deregulation” undermines collaborative efforts.Under the leadership of the United States and Great Britain, a multilateral agreement on bank capital standards was reached in December 1987. This agreement suggests that the interplay of market factors, consensual knowledge, and leadership by powerful states can lead to international policy coordination. The article describes the multilateral negotiations that led to this banking accord.

The Comparative Political Economy Basel III in Europe

“…In this literature, policy makers' preferences are shaped by concerns for the competitiveness of national banks in international markets, and by the need to ensure financial stability domestically (Singer, 2004(Singer, , 2007. This is the 'dilemma' of financial regulators (Kapstein, 1989). This paper argues that, rather than a 'dilemma', regulators face a 'trilemma' in their policy making on financial regulation: financial stability, competiveness of financial industry and economic growth, because banks and banking rules have implications for credit to the real economy.…”

“…In the aftermath of the global financial crisis, financial regulation has become less insulated than in the past from politics and politicians (Helleiner and Pagliari, 2011) -it is no longer 'quiet politics' (Culpepper, 2011). Moreover, the few works that examine the BCBS (e.g., Kapstein, 1989;Simmons, 2001;Wood, 2005) rarely consider its actorness, but rather examine it as an international forum of national regulators, who act in the Committee as 'reluctant diplomats' (Slaughter, 2004). This is because, unlike for example the International Monetary Fund (IMF) or the World Bank (Chiewroth, 2007;Moschella, 2012), the BCBS has a skeletal structure of officials often seconded to Basel by national regulators and has a limited budget.…”

“…Capital requirements have traditionally been regarded as the main instruments to ensure the stability of the banking sector. In 1988, the Basel Committee on Banking Supervision (BCBS) issued the Basel I Accord on 'International convergence of capital measurement and capital standards' (Kapstein, 1989(Kapstein, , 1992Simmons, 2001), which was updated by the Basel II Accord in 2004 (Tsingou, 2008;Underhill and Zhang, 2008;Wood, requirements), the flow of credit to the real economy and ultimately economic growth. By explaining the trilemma, this research brings insights from Comparative Political Economy into a topic of research -banking prudential regulation -traditionally dominated by International Political Economy.…”

The ‘ebb and flow’ of transatlantic regulatory cooperation in banking

“…Hence they were particularly sensitive to the need to avoid competitive distortions internationally, and this could be achieved only through international standards. 86 Second, the US and (less) the UK have traditionally been very influential in the BCBS, as well as in other international regulatory fora in finance. 87 Third, since the Basel accords were not legally binding, they did not tie the hands of US regulators that enjoyed extensive regulatory powers domestically.…”

On the Interconnectedness of Regulatory Policy and Markets: Lessons from Banking

“…More generically, with reference to political and economic interests and power they have thus tried to explain when and why states succeed in imposing national and/or international regulation in open global markets where many observers expect fierce competition among firms to undermine regulatory efforts. Kapstein (1989Kapstein ( , 1992Kapstein ( , 1994 focuses on the influence of knowledge and power (see also Strange, 1998 andPorter, 1993).…”