Umbrella or Broom? The New Role for International Regulators
A recent paper by Stefano Pagliari, presented at a Temple University workshop in May, uses an analysis of IOSCO’s changing role through the financial crisis as the basis for considering how international financial regulators are evolving in the capital markets ecosystem. Given the interconnections between markets and easy mobility of capital across geographic borders, the rationale for international standards is easy to appreciate.But Pagliari suggests that as the financial crisis has motivated greater activism among politicians in the realm of financial regulation, international standard setters are going from a role that emphasizes market-based solutions and global standards to one that focuses more on identifying and reconciling gaps between national regulatory frameworks. For example, interest in regulating credit rating agencies has morphed from implementing IOSCO’s best practices to a more sharply divided regional approach, with the Europeans taking a more aggressive posture at changing how the rating agencies operate. Similarly, bringing “shadow” financial institutions under increased supervision has diverged into separate paths for the U.S. and the EU. It’s a new world for national regulators who had grown accustomed to deflecting political interest in “their” issues by pointing to international standards set forth by institutions that they had significant influence over. And since the modus operandi of institutions like IOSCO had been to consult closely with market participants, a global system of voluntary adoption of industry best practices was pretty palatable to the financial services industry as well. There are many likely reasons for growing domestic political activism, including disappointing performance of some self-regulatory approaches, and rising populist anger at the resources expended on bailing out financial institutions. Less clear is whether this political heat is a temporary phenomenon, or whether the balance between politicians and regulatory technocrats is altered for the foreseeable future. The choice between ineffectual international standards and a fragmented world of local rules is not a good one for investors. Finding the right mechanism to develop and enforce global standards isn’t easy, as observers of the occasionally tortured process of convergence of accounting standards between U.S. GAAP and IFRS would attest. Perhaps the best hope lies with a global political apparatus such as the G-20, which might have the authority and decision-making capacity to settle national differences in approach in favor of a more unified strategy. At the least, a concerted effort by the G-20 to lead efforts to untangle the rules for something of great consequence would be a demonstration of the potential for the future. Not the easiest place to start, but my vote would be for coordination of OTC derivatives trading and clearing requirements at that level. Still lacking, of course, is the infrastructure to uniformly implement and enforce G-20 mandates in the financial world. Is there appetite for a new world body to do so, something like a World Bank or IMF for financial markets supervision? Seems doubtful that the same politicians who have inserted themselves in the regulatory reform debate would cede national oversight power. Ultimately, this matters a lot, not just for securities markets, but also as we grapple with coordinating systemic risk detection and mitigation, international financial reporting standards, and standards for rendering investment advice. Ultimately, it seems likely that it will be the politicians who decide, either recognizing the benefits of a more unified approach or falling back on a more myopic focus on national issues. Which way should they go?