Kasinomics

Thoughts on transnational networks of private international bodies in the financial architecture

In most fields of regulation, even on the national level, organisation representing private interests or corporations have a saying. Private interestes are expressed through lobbyism and public relation activities, but the governance system in most states is characterized by representatives from the relevant industries having their say in standard-setting and standard-implementation.

It certainly makes sense to involve private bodies and the representatives of business when creating standards. The technical expertise of these bodies is valuable for ensuring that the goals of the regulation are feasible and achievable.

However, standards are not neutral, they not only provide a public good of a market framework which lowers transaction costs and deters fraudulent behaviour, they also serve those who are setting the standards. One interest of a private body could be to exclude competitors from gaining market share by obligating standards which these competitors can’t fulfill.

In the debate on the causes of the sub-prime crisis, media and academia are discussiong the incentives set by standards. They claim that Basel II has encouraged pro-cyclicality of Bank lending, or that reliance on Credit Rating Agencies in regulation has reduced the banks effort to conduct their own diligent risk management. The overall criticism is levered at governments, central banks and regulators for setting up the wrong system of financial regulation.

Attached to this criticism is the challenge that the current system of co-ordinating financial regulation is not working. Calls for a World Financial Architecture (see book by John Eatwell and others) are being heard.

However, it is often ignored that for standards to be functional, the private sector needs to be a consistent advocator of good standards. This should be reflected in a financial architecture which involves the private sectors in the crucial decisions on standard-setting, impact assessment, implementation and enforcement. Such an involvement is only possible if the private sector can give a coherent response to the demand for consultation coming from the public sector.

What is most striking is that the private sector does not speak with one voice. With ICMA, SIFMA and the IIF there are three private institutions speaking on behalf of the capital market. The G30, as a quasi corporative think-tank, ammends these views on serves as a coordinating body between highly influential individuals in the international financial institutions.

It would be interesting to have a closer look at this network of institutions and individuals:

• Which companies are members of which institution?
• Which individuals are members of which institution?
• Which companies and which individuals are key nodes in this network?
• Is there an overlap of tasks of the private institutions?
• Which formal and informal coordination groups exist between the bodies representing the views of the financial actors?

Would financial institutions disclose this kind of information?

See also

• The need for systemic risk
• Project: Mapping the Financial Governance
• Trilemma in financial supervision - Schoenmaker, Oosterloo
• Pro-Cyclicality - Discussion of the problem and possible solutions
• Overview of 2008 FSF Report on Financial Stability
• Discussion of 2008 FSF Report on Financial Stability
• Alexander, Dhumale, Eatwell: “Global Governance of Financial Systems”
• The mechanisms of the Credit Crisis - George Reismans article
• Subprime Losses
• Role of the Central Bank in Financial Supervision - Article by Goodhard