The Politics of Competition in International Financial Regulation
62 Pages Posted: 16 Jun 2008
Policy coordination between diverse regulatory regimes in financial services ranks highly on the international political agenda, because regulatory differences create impediments to growing financial activity. Efficiency-oriented theories fail to explain why coordination was achieved in some domains but not in others, while arguments linking coordination to similarities or differences in states' substantive policy goals cannot account for coordination progress in spite of vast differences in prior domestic regimes. I argue that coordination success or failure depends on the interaction of two variables: whether strong competitors to U.S. firms and markets challenge U.S. dominance and whether activity is centralized at a main facility in a single jurisdiction, such as a stock exchange, or diffused around many separate jurisdictions. Strong U.S. dominance attracts more foreigners to U.S. centralized markets, who voluntarily adopt U.S. laws and lobby their governments for policy coordination; yet in dispersed markets, policy coordination offers limited benefits to either the United States or to foreign countries when U.S. dominance is strong. When a competitor challenges U.S. dominance in a centralized market, U.S. policymakers will maintain regulatory barriers to prevent U.S. investors from migrating to competitors. In dispersed markets, on the other hand, the United States will promote policy coordination because it can eliminate its competitors' advantages across all national markets. Four case studies in areas with varying degrees of U.S. dominance and market centralization support this theoretical framework: the accounting standards (U.S. GAAP-IFRS) convergence, the SEC's refusal to authorize the establishment of European exchanges' trading screens in the United States, the regulation of audit firms under the U.S. Sarbanes-Oxley Act, and the 1988 Basel Accord. This paper makes two contributions: it generalizes across cases to draw broad conclusions about the field of finance as a whole, and it highlights the role of politics in financial regulation, refining the concept of power, clarifying mechanisms, and providing a theory of how increased competition might shape diverse fields.
Keywords: international finance, regulatory competition, banks, stock exchanges
JEL Classification: G20, G24, G28, K22, K23
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