How to Proceed with Reforming Financial Markets
"Global coordination, like global governance, sounds good. But the practical reality is that it cannot deliver the tough regulations, closely tailored to domestic economic and political requirements, which financial markets badly need in the aftermath of the worst financial upheaval the world economy has experienced since the Great Depression.
All that then is required is that the national law-making processes be extricated from the grip of national financial institutions.
In a world of divided political sovereignty and diverse national preferences, the push for international harmonisation is a recipe for weak and ineffective rules. That is one reason why international bankers love international coordination.
Many scholars of international relations consider the Basel Committee on Banking Supervision, the international body of regulators charged with devising a new set of global standards, as the apogee of international rule-making. Yet it is surely telling that this will be the third version of its guidelines in as many decades.
The last big idea the Basel committee had was that large banks should calibrate their capital requirement based on their own internal risk models. But the dangers of permitting banks to police themselves were made amply clear in the latest crisis.
When financial regulations are devised by a coterie of global regulators in distant venues, it is bankers and technocrats who gain the upper hand. Returning the process to national capitals would shift the balance of power to domestic legislatures and national stakeholders. Bankers and their economist allies may rue this, but it is as it should be. Politicisation is the necessary antidote to technocrats’ tendency to be captured by banks. Democratic accountability is our only safeguard against a return to light regulation.
Democratic accountability would also result in regulatory diversity — different countries doing their own thing — and that is not a bad thing, either. If the US wants to place size limits and tighter capital requirements on banks, it should be free to do so. If Europe wants to devise its own rules for credit-rating agencies and hedge funds, it should simply go ahead."