Challenge of International Cooperation and Institutional Design in Financial Supervision: Beyond Transgovernmental Networks
42 Pages Posted: 21 Apr 2010 Last revised: 13 Aug 2010
Date Written: April 20, 2010
This paper explores the case for a global financial regulator. It first identifies two problems with how legal scholars viewed the international financial architecture before the financial crisis. International law scholars mistakenly thought that informal transgovernmental networks could serve as the heart of an international regulatory framework. In fact, the international financial architecture proved incapable of preventing or managing the causes and effects of the recent financial crisis. The reason why is the second problem. Financial law scholars did not speak out more strongly before the crisis about the limitations of the international financial architecture. They focused their attention on the coordination and harmonization of rules and standards in areas of accounting, securities, and bank capital adequacy, but did not resolve the problems of prudential supervision of cross-border financial institutions and systemic risk regulation. The failure of states to provide for an international legal regime capable of conducting prudential supervision of cross-border financial institutions proved to be one reason why the international financial architecture could not address the spread of financial instability.
This paper sets forth an international administrative law model for international financial regulation. It advocates the creation of an international body that has the power and resources to supervise cross-border financial institutions, demand action by national supervisors, promulgate supervisory standards, conduct inspections, and initiate enforcement proceedings. Acknowledging possible objections to an international administrative law model, particularly those related to the protection of state sovereignty and democratic accountability, this paper argues that an international administrative agency is the best solution to the problem of global financial regulation.
Keywords: international finance, financial regulation, international administrative law, transgovernmental networks, prudential supervision, Basel
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By Eric J. Pan