In the lead-up to the financial crisis, the role and authority of private market agents in global monetary and financial governance increased as global market integration proceeded. This shift in markets, patterns of governance, and the ideas that underpinned policy was often encouraged by states themselves in pursuit of liberalisation policies and the consequences thereof. Much of the literature and economic theory viewed these developments in a positive light, yet more sceptical analysis should apply to the post-crisis reform period. Why was there such an adverse selection of idea-sets such that crisis became far more likely? This paper develops empirical evidence to support the proposition that ideas and material interests are closely aligned in the construction of regulatory institutions at the international level. Institutional entrenchment, the necessary stability of regulatory coalitions in periods of crisis management, and the absence of tested ideational alternatives all render reform problematic. Massive policy failure endogenous to the pre-crisis regulatory coalition has so far failed to overcome the tenacity of material interests and institutional inertia of path dependency.
This paper develops its central propositions in relation to two cases of ongoing global financial governance processes: the Basle-II/III capital adequacy standards for international banking supervision and the IOSCO-based transnational regulatory processes underpinning the functioning of cross-border securities markets. Based on the case findings, the paper argues firstly that the market-based system of financial governance that emerged in the pre-crisis period, and that was based on private sector self-regulation and/or public-private partnership in governance processes, left public authorities vulnerable to dependence on the information and expertise provided by private agents in a fast-moving market environment. Policy in the vital domain of financial supervision and regulation became increasingly aligned to private sector preferences to a degree that should have raised fears of policy capture. There were ample alternative idea-sets in the pre-crisis period which echo loudly in the period of ‘reform’. The paper contends secondly that the outcome achieved by the market-based system of regulation and supervision measured in terms of the efficacy of global financial governance and of systemic stability brought of important benefits for a narrow range of interests but also ushered in instability and ultimately ubiquitous and serious episodes of crisis for many societies to a degree that should challenge the very market-based idea-set associated with global financial governance itself. The system provided neither financial stability and nor did it resolve the weakness of national-level governance in a context of cross-border integration. Lastly, it is not yet clear that in the post-reform period either the knowledge of the pre-crisis debates or the lessons of the crisis itself have been well absorbed and/or put to practical use. The reform debate continues to pursue an essentially market-based approach to the problem of financial governance at the national, regional and global levels.
The paper proceeds in three steps. First, the paper examines what we knew from the literature and therefore what public and private authorities alike should have known prior to the crisis. Secondly the paper examines the emergence of the pre-crisis market-based system of governance in relation to the two cases of the Basle Committee on Banking Supervision and of IOSCO. Thirdly the paper looks at the as yet incomplete post-crisis reforms of both institutions.
