Explaining Institutional Development in Global Financial Regulation Over Time

Global financial regulation has seen significant changes after the Financial Crisis of 2008ff. While the economic shock of the crisis, associated with demands for more public accountability, can be identified as exogenous driver of change, we cannot explain the observed variation of adaptive measures across different regulatory institutions with this exogenous factor alone. Our paper explains this variation as a function of endogenous institutional design. An institution’s current design (Zt) moderates the influence of exogenous variables and limits future design choices (Zt+1), constituting a mechanism of path dependence. By modelling institutions as networks, we identify three types that distinctively influence the adaptation process. First, informal institutions like the Financial Stability Forum (FSF) and the Basel Committee on Banking Supervision (BCBS) had their mandate expanded and were subject to formalization. Second, contract-based institutions like the International Accounting Standards Board (IASB) or the International Organization of Securities Commissions (IOSCO) experienced major constitutional changes with respect to structure, decision-making and membership. Finally, treaty-based institutions reacted with minor constitutional reforms; examples are the Organization for Economic Co-operation and Development (OECD) or the International Monetary Fund (IMF). We contribute to literature on historical institutionalism by highlighting the importance of endogenous factors for institutional development, the literature on formal and informal IOs by providing theoretically and empirically sound categorizations of institutional types and the empirical literature on the effects of the financial crisis in our case studies.