Global Governance and Regulatory Failure: The Political Economy of Banking (International Political Economy Series)

Does global governance contribute to regulatory failure and financial crises? And, if it does, should we enhance global cooperation to prevent future crises or confine our focus on the national level? Roman Goldbach reveals that, while global cooperation of bank regulators should minimise the emergence of financial crises, it actually contributes to the build-up of financial bubbles and the resulting turmoil. Underlying this regulatory failure is the transnational regulatory regime that globalises the governance structure and policy process of regulating banks. It entrenches asymmetric influence in a manner that raises the possibilities of national and transnational firms integrating their preferences into global regulatory standards, while at the same time decreasing the incentives for, and capacities of, politicians and regulators to protect the public good of systemic stability. Moreover, Goldbach argues that the underlying governance structure remains intact to date, which promises comparable future regulatory failure. The book provides both a theoretical framework of the global political economy of banking regulation and a detailed analysis of the policies and politics of the Basel Committee on Banking Supervision and its two most recent global standards- the Basel II and Basel III frameworks. Goldbach's innovative analysis, which integrates all actors and institutions of the global political economy and builds on new empirical material from national, transnational, and international processes, demonstrates how global governance has contributed to the onset of the "Great Recession" and how it continues to increase the likelihood of future global financial crises. Global Governance and Regulatory Failure: The Political Economy of Banking 4 Contents 8 List of Figures 10 List of Tables 11 Acknowledgements 12 List of Abbreviations 13 1 The Great Recession, Regulatory Failure and Global Governance 16 1.1 Global governance and financial crisis 16 1.2 Transgovernmental governance and regulatory failure 17 1.3 Interdependence and the collision of competition state and global governance 20 1.4 Transnational layering and the New Interdependence Approach 23 1.5 Eclecticism in the study of world politics 27 1.6 The argument: the transnational regulatory regime and regulatory failure 28 1.7 Plan of the book 31 2 Global Financial Instability and the Evolution of Global Banking Regulation 35 2.1 Financial stability and banking regulation 35 2.2 Evolution of the Basel Committee 40 Evolution and functions 41 Organisation, decision-making and transnational diffusion 48 Organisation 49 Effect of BCBS decisions 54 Policy process and hybrid interaction mode 56 3 Theory: Influence in Global Banking Regulation and the Transnational Regulatory Regime 60 3.1 Influence in global banking regulation 62 The BCBS as transgovernmental network organisation 62 Capture: transnational banks’ influence in regulatory standard-setting 63 The G7/20 as global political principal of the BCBS 64 The domestic regulatory regime and divided authority: political principals and regulatory agents 64 Domestic–transnational feedback processes 66 3.2 Competition state and opportunity structures of the regulatory regime 67 Delegation and dispersion of regulatory authority 69 The electorate’s inability to assess and affect banking regulation 74 Capture by nationally and transnationally oriented banks 75 Political principals and competition state concerns 77 Regulatory agents and competition state concerns 78 3.3 Global governance and opportunity structures of the transnational regulatory regime 81 Global political principal and ex post crisis stabilisation 81 The transgovernmental network and the hybridity of the first transnational layer 82 Transnational capture and the transnational harmonisation coalition 88 4 Global Banking Regulation Before the Great Recession: The Dynamics of Basel II 91 4.1 An approach to assess influence in the global political economy 92 4.2 Basel II policy analysis 102 The effect on national adoption: optionality and framework character 102 The Three pillar structure 104 Scope of application 105 Pillar one: credit risk measurement 106 Three options, the standardised approach and external credit ratings 106 Internal ratings based (IRB) approaches 107 Small and medium-sized enterprise credits and retail portfolios 108 Level of minimum capital requirements 109 Pillar two: bank internal risk management and qualitative supervisory review 110 Pillar three: disclosure requirements and market transparency 111 Operational risk 111 Securitisation 112 Credit risk mitigation techniques 113 Summary 114 4.3 The global politics of the Basel II process 115 Episode 1, June 1997–June 1999: inception and first consultative paper 116 Political process 117 Policy outcomes and influential actors 121 Episode 2, June 1999–January 2001: negotiating the second consultative paper 127 Political process 127 Policy outcomes and influential actors 132 Episode 3, January 2001–April 2003: process up to the third consultative paper 137 Political process 138 Policy outcomes and influential actors 152 Episode 4, April 2003–December 2008: from CP-3 to the revised framework and national adoption 158 Political process 159 Policy outcomes and influential actors 171 4.4 Summary: Basel II, the Great Recession and the global political economy 176 Basel II as soft law diffusion mechanism 176 Consequences of asymmetric influence in developing Basel II 182 5 Global Banking Regulation after the Great Recession: Basel III, FSB, G20 196 5.1 New policies: Basel III and global systemically important banks 197 5.2 New layers in the governance structure and the deepening transnational regulatory regime: BCBS, FSB, G20 208 The G20 208 The Basel Committee 210 The FSB 213 6 Conclusion: Layers and Gaps in the Global Political Economy 223 6.1 Global banking regulation and financial stability 224 The political economy of the Basel Committee and financial stability 228 Policy implications 229 Extension of the argument to other areas of global regulation 232 6.2 Global financial governance and regulatory reform: diligent, but feeble 233 6.3 Layers and gaps in governing the global political economy 236 Notes 241 1 The Great Recession, Regulatory Failure and Global Governance 241 2 Global Financial Instability and the Evolution of Global Banking Regulation 241 3 Theory: Influence in Global Banking Regulation and the Transnational Regulatory Regime 244 4 Global Banking Regulation Before the Great Recession: The Dynamics of Basel II 247 5 Global Banking Regulation after the Great Recession: Basel III, FSB, G20 259 6 Conclusion: Layers and Gaps in the Global Political Economy 261 References 262 Index 282 Cover -- Title -- Copyright -- Dedication -- Contents -- List of Figures -- List of Tables -- Acknowledgements -- List of Abbreviations -- 1 The Great Recession, Regulatory Failure and Global Governance -- 1.1 Global governance and financial crisis -- 1.2 Transgovernmental governance and regulatory failure -- 1.3 Interdependence and the collision of competition state and global governance -- 1.4 Transnational layering and the New Interdependence Approach -- 1.5 Eclecticism in the study of world politics -- 1.6 The argument: the transnational regulatory regime and regulatory failure -- 1.7 Plan of the book -- 2 Global Financial Instability and the Evolution of Global Banking Regulation -- 2.1 Financial stability and banking regulation -- 2.2 Evolution of the Basel Committee -- 3 Theory: Influence in Global Banking Regulation and the Transnational Regulatory Regime -- 3.1 Influence in global banking regulation -- 3.2 Competition state and opportunity structures of the regulatory regime -- 3.3 Global governance and opportunity structures of the transnational regulatory regime -- 4 Global Banking Regulation Before the Great Recession: The Dynamics of Basel II -- 4.1 An approach to assess influence in the global political economy -- 4.2 Basel II policy analysis -- 4.3 The global politics of the Basel II process -- 4.4 Summary: Basel II, the Great Recession and the global political economy -- 5 Global Banking Regulation after the Great Recession: Basel III, FSB, G20 -- 5.1 New policies: Basel III and global systemically important banks -- 5.2 New layers in the governance structure and the deepening transnational regulatory regime: BCBS, FSB, G20 -- 6 Conclusion: Layers and Gaps in the Global Political Economy -- 6.1 Global banking regulation and financial stability -- 6.2 Global financial governance and regulatory reform: diligent, but feeble 1. The Great Recession, Regulatory Failure, and Global Governance 2. Global Financial Instability and the Evolution of Global Banking Regulation 2.1 Financial Stability and Banking Regulation 2.2 Evolution of the Basel Committee 3. A Theoretical Framework to Explain Influence in Global Banking Regulation: The Transnational Regulatory Regime 3.1 Influence in Global Banking Regulation 3.2 Competition State and Opportunity Structures of the Regulatory Regime 3.3 Global Governance and Opportunity Structures of the Transnational Regulatory Regime 4. Global Banking Regulation Before the Great Recession: The Global Dynamics of Basel II 4.1 An Approach to Assess Influence in the Global Political Economy 4.2 Basel II Policy Analysis 4.3 The Global Politics of the Basel II Process 4.4 Summary: Basel II, the Great Recession, and the Global Political Economy 5. Global Banking Regulation After the Great Recession: Basel III, FSB, G20 5.1 New Policies: Basel III and Global Systemically Important Banks 5.2 New Layers in the Governance Structure and the Deepening Transnational Regulatory Regime: BCBS, FSB, G20 6. Conclusion: Layers and Gaps in the Global Political Economy 6.1 Global Banking Regulation and Financial Stability 6.2 Global Financial Governance and Regulatory Reform: Diligent, but Feeble 6.3 Layers and Gaps in Governing the Global Political Economy "Does global governance contribute to regulatory failure and financial crises? And, if it does, should we enhance global cooperation to prevent future crises or confine our focus on the national level? Roman Goldbach reveals that, while global cooperation of bank regulators should minimise the emergence of financial crises, it actually contributes to the build-up of financial bubbles and the resulting turmoil. He argues, moreover, that the underlying governance structure remains intact to date, which promises comparable future regulatory failure. Goldbach's innovative analysis of the Basel Committee on Banking Supervision and its two most recent global standards--the Basel II and Basel III frameworks--builds on new empirical material from national, transnational and international processes. His results demonstrate how global governance has contributed to the onset of the 'Great Recession'--and how it continues to increase the likelihood of future global financial crises"--Back cover The author provides a theoretical framework of the global political economy of banking regulation and analyses the policies and politics of the Basel Committee on Banking Supervision. He demonstrates how global governance has contributed to the onset of the Great Recession and continues to increase the likelihood of future global financial crises.