The political economy of post-crisis international standards for resolving financial institutions

ABSTRACT

The development of post-crisis international standards for resolving financial institutions highlights an intriguing puzzle: the European Union (EU), which is often considered as a ‘great financial power’, had a marginal influence in the standard-setting process, which was led by the United States (US) and the United Kingdom (UK). Why? This paper brings together and further develops the concepts of cross-border externalities derived from the hierarchical network structure of the international financial system and domestic regulatory capacity. The US and the UK had the incentives (externalities) to promote and the domestic capacity to shape international standards. By contrast, the EU was mainly exposed to regional (intra-EU) cross-border externalities and lacked regulatory capacity on the matter. Paradoxically, international standards contributed to developing EU resolution capacity by facilitating an agreement on EU (and later on, euro area) rules.

KEYWORDS:

• Resolution
• financial regulation
• international standards
• post-crisis

Acknowledgements

I wish to thank the reviewers and the editors for their perceptive comments on an earlier draft of this paper. I also wish to thank the participants to the workshop ‘Politics and Economics of the Financial Crisis’ in Berlin in April 2016, and the participants to the research seminar at the Scuola Normale Superiore in Florence in May 2016.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes on contributor

Lucia Quaglia (DPhil Sussex) is Professor of Political Science at the University of York. Her most recent books include: (with D. Howarth) The Political Economy of Banking Union, Oxford University Press (2016); The European Union and global financial regulation, Oxford University Press (2014). Together D. Howarth, she was the guest co-editor of the special issue of the Review of International Political Economy on ‘The political economy of the sovereign debt crisis in the Euro area’ (2015). Together with D. Hodson, she was the guest co-editor of the special issue of the Journal of Common Market Studies on ‘The global financial turmoil: European perspectives and lessons’ (2009). Her work has been published in journals, such as Review of International Political Economy, New Political Economy, Governance, European Journal of Political Research, Journal of Public Policy, Journal of European Public Policy, Journal of Common Market Studies, and West European Politics.

Notes

1 I wish to thank a reviewer for suggesting a link between the earlier literature about externalities to the more recent work on the network structure of the financial system.

2 http://www.fsb.org/2011/09/c_110909/.

3 Examples of critical economic functions include: payments, clearing and settlement, custody services, etc.

4 This point was made very forcefully during an event in Brussels attended by the author under the ‘Chatham house rule’ in 2014.

5 The Key Attributes were subsequently revised in 2014, when additional guidelines for non-bank financial institutions were added as annexes.

6 I wish to thank a reviewer for this point.

Additional information

Funding

This work was supported by Hanse-Wissenschaftskolleg (HWK) – BIGSSS (University of Bremen) – Visiting Fellowship.