Varieties of Regulation: How States Pursue and Set International Financial Standards

Abstract

What explains the form and substance of international financial standards? I propose a novel theory and present original evidence to test two central claims. First, the structure of domestic institutions and strategic interaction within a state incentivizes an actor from that state to prefer and pursue a certain form of international standard: legally or non-legally binding. Second, the type of decision-making rule used in international bargaining — not the market power or other characteristics of key players — explains the substance of the final standard. More restrictive decision-making rules, which use majority or supermajority voting, lead to greater change than open rules, which are based on consensus or unanimity voting.

Domestic and international institutional settings provide enduring opportunities and constraints for key players in global finance. Supported by domestic collaboration between regulators and industry, French officials set a legally binding and deep de facto international standard for hedge fund managers over the vigorous objections of the City of London. The lack of international insurance regulation is due not to the lack of effort by the UK Financial Services Authority and its European partners, but to open decision-making rules that allow US state regulators, albeit fragmented and under-resourced, to protect the international status quo.

Keywords: international law, international finance, regulation

JEL Classification: G28, F3, K2, K33, P16