Public and private authority in the transnational response to the 2008 financial crisis

Abstract

A remarkable feature of the international policy response to the 2008 financial crisis has been the degree to which it has relied heavily upon existing transnational regulatory arrangements involving public and private actors. The article starts by accounting theoretically for the autonomy of such arrangements. It then examines the role played by these networks before and during the crisis, while also acknowledging the relevance of competing approaches that emphasize the power of states and private actors. Understanding the role of these arrangements in shaping the interactions among public and private actors is important both for the reform of the global financial architecture, and for our more general theoretical understanding of transformations in sovereignty.

The global financial crisis of 2008 provides a useful laboratory for exploring the transnational interaction of public and private authority. The crisis was preceded and provoked by a decades-long process in which states dismantled their controls on finance and relied increasingly on markets to regulate themselves. This contributed to a massive growth in global financial flows. During the crisis public authorities, often in close collaboration with their counterparts in other countries, took aggressive measures to regain control of the financial system and to strengthen regulation to prevent a recurrence of the crisis. This shift of the transnational relationship between public and private actors in a time of severe stress provides an opportunity to understand better the character of this relationship.

At the onset of the crisis a variety of different alterations in the transnational relationship between public and private actors could have been imagined, each linked to a different theoretical perspective. Perhaps public authority would be irrevocably re-established, either through the nation–state, as suggested by realist international relations theory, or through ambitious new global public institutions, such as a world regulatory authority, consistent with a liberal tradition in international relations theory. Or perhaps we would see only the minimum state intervention needed to revive financial sector profitability and restore private finance and free markets to the pre-eminence they had enjoyed before the crisis, a prediction compatible with rational choice or Marxist theories that stress the power of private financial actors.

These tendencies were all evident to some degree in the crisis, but there was another tendency that was also significant, but often underestimated. This was the reliance by states on a complex but robust and autonomous set of transnational regulatory arrangements, with a hybrid public/private character, that had evolved since the mid 1970s, along with the globalization of finance (Tsingou, 2006, 2009). This article argues that the strength, autonomy and continuity of these arrangements indicate that they have become an enduring feature of the global financial system. It further argues that these arrangements are not only reflections of more important factors external to them, such as the interests and power of actors or structures located outside the arrangements. Rather, the properties of the arrangements themselves make an independent contribution to global financial governance, including the response to the 2008 crisis. This includes shaping the balance between public and private actors.

The rest of the article proceeds in three steps. The next section addresses the theoretical issues. In the subsequent section I examine the practical experience of the crisis. The final section concludes.

1 The role of transnational public/private arrangements: conceptual considerations

This article argues that a set of relatively informal transnational regulatory bodies have made a significant independent contribution to the way in which the governance of global finance has evolved, including the response to the 2008 crisis. These regulatory bodies, most of which are hosted by the Bank for International Settlements (BIS) include, among others, the Basel Committee on Banking Supervision, the International Association of Insurance Supervisors, and the Committee on Payment and Settlement Systems. They are related to one another through their informal ties to one another and through their membership in the Financial Stability Board (FSB), a relatively informal body that is also located at the BIS. The integration and coherence of these arrangements are also enhanced by their oversight by the G20.

Much influential analysis of the role of private financial actors in governance pays no serious attention to the specific character and role of these transnational arrangements. For instance Johnson and Kwak's (2010) 13 Bankers: the Wall Street Takeover and the Next Financial Meltdown makes no mention of them despite Johnson's previous position as chief IMF economist. Harvey's (2010) The Enigma of Capital and the Crises of Capitalism briefly notes the significance of the formal organizations, the G7, the G8 and the G20 “as the world's central banks and treasury departments seek to coordinate their actions to constitute an evolving global financial architecture” (p. 51, see also p. 200), but none of the informal bodies are even mentioned. These books assume that the arrangements are either insignificant, or simply one among other passive instruments that are manipulated or ignored by actors external to the arrangements. For Johnson and Kwak these are domestic US actors: US banks and the US government. For Harvey the structural properties of capitalism are more important, and international institutions reflect these, such as the US-dominated IMF's role in promoting the interests of capital. The present article challenges this disregard of the independent role played by the transnational arrangements.

There is a vast technical literature that discusses developments in these regulatory arrangements in detail, but most directly relevant to the present article is the sizeable literature that has more directly debated the significance for governance of the relation between the transnational arrangements and the actors involved in or excluded from them. Three differing perspectives in this literature have been usefully analyzed by Helleiner and Pagliari (2011, see also Helleiner, Pagliari and Zimmerman, 2009). One perspective emphasizes the decisive role of leading states in a manner that is consistent with realist international relations approaches. A second perspective emphasizes the interplay between domestic actors in a manner consistent with rational choice political economy approaches. A third more constructivist perspective is consistent with the present article's argument in stressing the independent significance of networks of regulators and non-state actors. One should add a fourth perspective to these three: an emphasis on transnational business actors that capture or otherwise determine the character of transnational regulatory arrangements, a theme consistent with some rational choice and Marxist approaches (Barth & Caprio, 2006; Mattli & Woods, 2009; Soederberg, 2002; Underhill & Zhang, 2008).

The article seeks to more clearly specify the properties of the transnational arrangements that may give them the capacity to make an ongoing independent contribution to the governance of global finance, and to the relationship between public and private actors, even after the crisis. It also seeks to more clearly specify the types of criteria and evidence that might support or counter the claim that these transnational arrangements are playing an ongoing significant role, and to comment on the evidence that is available to date. I am not arguing that other approaches do not provide valuable insights. The present article's goal is clarify the roles of transnational regulatory arrangements that have not received sufficient attention, and to show how they make a significant independent contribution to the governance of global finance, interacting with the tendencies and actors identified by other perspectives. In doing this it is neither possible nor necessary to exhaustively review all these other perspectives.

How might transnational regulatory arrangements play a significant independent role in the governance of finance? Four overlapping concepts that draw on a variety of theoretical approaches are especially relevant. These are (1) the constitutive role of ideas; (2) the reinforcement of the effects of ideas through their entanglement with material objects; (3) the importance of functionality; (4) path dependence. It is useful to examine each briefly in turn. It is not possible to provide a comprehensive discussion of each. It is also not possible or necessary to review all the approaches that are consistent with these concepts, including approaches that may be quite different to this article's but which may not be incompatible with one or more of these concepts. Taken together these concepts provide strong reasons to think that transnational regulatory networks could play an independent role in the governance of global finance, including shaping the relationship between public and private, and they provide a basis upon which criteria for assessing this independence can be devised and empirical evidence can be assessed.

Starting then with the first concept, there are a wide variety of theoretical approaches that have seen ideas as playing an independent role in governance. This includes very general approaches such as constructivism, discursive institutionalism (Schmidt, 2010), or Foucault's notion of governmentality (Larner & Walters, 2004), and more specific ones such as the concepts of epistemic communities or policy paradigms. In all these approaches actors cannot fully understand their interests or the problems they are challenged by without relying upon systematized ideas. The durability of these ideas can be enhanced by their intersubjective quality and the necessity of working with them to interact with others—the more actors that share them, the harder it is for any one actor to challenge or avoid them. Their endurance may also be reinforced by their internal consistency, the degree to which one idea builds on or is connected to another.

Ideas are further reinforced by their entanglement with material objects. This is especially evident with technological artefacts, such as a machine and its instruction manual that are the material expressions of a set of technical ideas, and which may interact in an ongoing way with the knowledge of the machine operator (Callon, 1991). Analysis of material/ideational entanglements can be enhanced by insights from actor-network theory, which explores these entanglements at a micro-level, in extended networks (Law & Hetherington, 2000). These networks can be simply defined as identifiable patterns of interaction among humans and objects that make it possible for an action to be transmitted (not necessarily faithfully) from one location to another (Latour, 2005). Such networks are relevant to the work of the transnational regulatory bodies. The ideas of regulators are not simply present in their minds or carried by their words, but instead are interacting with vast networks of humans and objects that extend far beyond the walls of their meeting rooms, such as computer networks or procedure manuals.

The third concept that is useful in considering the autonomy of transnational regulatory arrangements is functionality. This can be defined as the constraint that the pursuit of a particular purpose imposes on a set of actors and objects. This differs from an older discredited functionalism that was associated with post-World War II sociologists such as Talcott Parsons. That older functionalism was rightly criticized for seeing outcomes as caused by systemic imperatives, without explaining how latent functions were connected to the agency of individual actors, and without acknowledging the role of dysfunction, conflict, and systemic crises. Substantial efforts have been made to address these problems (Alexander, 1985). The concept of functionality used here assumes that functions arise from an interaction between human intention and material constraints, which are not self-evident but are rather interpreted. This overlaps with the notion of techne in philosophy, the meanings of which include the practical knowledge that allows an actor to bring something into existence. The notion can be agnostic on the degree to which functional constraints are due to the physical properties of objects or the interpretive beliefs of humans. This notion of functionality is not incompatible with a variety of approaches, including the constraints associated with different games in game theories, or Foucault's concept of a problematique. With regard to transnational regulatory networks, the influence of functionality is evident in the degree to which debates are framed and actions taken with reference to shared purposes such as promoting financial stability or capital adequacy, rather than, for instance, negotiated compromises between national interests.

The fourth concept that is useful in considering the autonomy of transnational regulatory arrangements is path dependence. Pierson (2004) usefully goes beyond vaguer notions of path dependence to emphasize the way that positive feedback and the impact of sequencing contribute to path dependence; and how when combined with the very slow character of many significant changes this reduces the ability of actors to choose and shifts our attention to how institutions develop. There are a variety of factors that can contribute to path dependence (Mahoney, 2000). The empowering of particular actors or ideas allows them to reinforce their dominance over time. Efficiency-oriented explanations emphasize the way that increasing returns can lock in the cost-effectiveness of current institutional arrangements that might be no more efficient than alternative ones had they been given a chance to develop. Very promising models are beginning to be developed that can explain how incremental change can occur despite the constraints imposed by path dependence (Mahoney & Thelen, 2010). The notion of path dependence is only beginning to be applied to transnational institutions (Raustiala & Victor, 2004), but can be very helpful in explaining how transnational standards setting processes like the BCBS's can enjoy power and autonomy: agency is expressed through specific institutions, but these institutions are built over long time periods and do not easily change. At the global level the embeddness of ideas and practices, for instance in electronic networks, policy documents, and meeting venues reinforces this path dependence (Porter, 2007).

We can identify three propositions which can be used to assess the significance or insignificance of transnational regulatory arrangements empirically:

1.	These arrangements should display incremental development and growing complexity over long periods of time, withstanding shifts in their environment. This is contrary to approaches that see these arrangements as simply expressions of negotiations and conflicts that occur elsewhere, such as in direct state-to-state or business–state interactions, since such negotiations and conflicts should lead to reversals, breaks, or sudden changes in the transnational arrangements as the underlying interests or balances of power shift.
2.	The norms and conflicts in these arrangements should be framed and justified with reference to their functional purposes and shared ideas rather than the type of bargains and threats that are characteristic of negotiations among nation-states or firms unconstrained by such arrangements.
3.	There should be unsuccessful resistance by business to significant costs associated with the arrangements. This is contrary to approaches that see such arrangements as always faithfully expressing the interests of business.

I now turn to the case of transnational regulatory arrangements in finance to assess these propositions and the related theoretical claim that these arrangements have sufficient autonomy to influence the relationship between public and private.

2 Public and private interactions before and after the global financial crisis

In this section I examine transnational regulatory arrangements before and after the crisis to assess the empirical support for the arguments set out above. The discussion is organized into three subsections, corresponding to the three propositions specified above.

Do these arrangements display incremental development and growing complexity over long periods of time or do they instead reflect ongoing bargains among powerful actors?

Today's transnational regulatory arrangements in finance date back to the 1960s when public authorities asked officials at the Bank for International Settlements (BIS) to monitor the worrying growth and volatility of the Euromarkets (which at that time were primarily US dollar deposits held outside the US).¹ This group of officials would be modestly formalized with the creation of the Eurocurrency Standing Committee (ECSC) at the BIS in 1971, renamed the Committee on the Global Financial System in 1999. Since then a series of similar relatively informal bodies have been constituted to address new concerns as they arose. The work of each of these has grown in complexity, and they have become linked more complexly with one another as well. We shall see that this set of arrangements developed incrementally, including through the response to the global financial crisis of 2007/8.

One measure of the incremental growth of these arrangements is simply the list of committees that they involve and the date they were created. In addition to the ECSC this includes the Basel Committee on Banking Supervision (1974); the Committee on Payments and Settlement Systems (early 1970s); the International Accounting Standards Committee, created 1973 and transformed into the more structured International Accounting Standards Board in 2001; the Interamerican Association of Securities Commissions and Similar Organizations (1974), renamed the International Organization of Securities Commissions (1984); the International Association of Insurance Supervisors (1992); the Financial Action Task Force (1989); the International Association of Deposit Insurers (2002); the International Organization of Pension Supervisors (2004); OTC Derivatives Regulators’ Forum (2009). During this time the Basel Committee on Banking Supervision (BCBS), the most prominent of these groupings, developed extensive relations with a set of regional committees of bank regulators, many of which were constituted by the BCBS. These committees include the Offshore Group (1980), the Commission of Supervisory Authorities of Latin America and the Caribbean (1981), the Gulf States’ GCC Committee of Banking Supervisors (1981), and many more, covering all regions by the late 1990s.

The development of these arrangements is also evident in the creation over time of bodies that integrate the work of the individual groupings, including a growing involvement of political leaders as well as officials. In the 1970s the groupings were coordinated especially by the Group of Ten central bank governors, but following the Mexican peso crisis of 1994 the Group of Seven finance ministers and leaders began to play a more assertive role. The Tripartite Group, bringing together the BCBS, International Organization of Securities Commissions (IOSCO) and the International Association of Insurance Supervisors (IAIS), was created in 1993, and was reconstituted as the Joint Forum in 1996. Following the East Asian crisis of 1997/98 the Financial Stability Forum was formed in 1999, bringing together representatives of most of the above committees, along with officials from the G7 countries. That same year the G20 was formed, bringing together central bank governors and finance ministers from the G7 and systemically important emerging economies, such as Russia, China, India and Brazil, as well as representatives from the World Bank, International Monetary Fund, and the European Union. Following the financial crisis of 2007/8 the Financial Stability Forum was transformed into the Financial Stability Board, and its membership increased to match the G20's. The G20 was upgraded to a leader's level meeting, replacing the G7/G8 as the premier coordinating body for the global economy.

The institutions mentioned so far are mostly dominated by public authorities, although some, such as the IAIS, involve private sector actors extensively, and the International Accounting Standards Board is a private non-profit, albeit with a public sector oversight Board that was created following the crisis of 2007/8. In addition there has been a corresponding development of more fully private transnational financial associations. The most important of these is the Institute of International Finance (IIF), created in the early 1980s. It has become the primary interlocutor with the public groupings. Examples of the evolution of associations on the private sector side include the creation in 2005 of the International Capital Markets Association from the Association of International Bond Dealers and the International Primary Markets Association, the two associations that organized the Eurobond markets in the 1970s. Similarly in 2009 the Global Financial Market Association brought together the Association for Financial Markets in Europe (AFME), the Asia Securities Industry and Financial Markets Association (ASIFMA), and, in the United States, the Securities Industry and Financial Markets Association (SIFMA, 2008). SIMFA itself was created by a 2006 merger of the Bond Market Association and the Securities Industry Association. In addition to lobbying many of these associations contribute directly to governance through setting standards or providing model contracts, as does the International Swaps and Derivatives Association.

The above public and private groupings vary considerably in their degree of formality and their membership, but they also share certain characteristics. They all create or seek to influence transnational standards rather than seeking to create binding “command and control” regulations. They all have a greater degree of informality and less commitment to universal membership than more traditional intergovernmental organizations such as the United Nations or the IMF. A partial exception is IOSCO, which is quite formalized and includes securities regulators from around the world, but in practice its standards are developed in a Technical Committee that resembles the other bodies.

I consider the content and significance of the transnational standards produced by these various bodies below, but their organizational features support the proposition that is the focus of this subsection. Together they display a consistent pattern of incremental growth, integration, and complexity over time. None of them have been terminated, except when they have been renamed and upgraded into a more formal or larger grouping. Along with the institutions that integrate the individual groupings, this shows that they are not simply ad hoc expressions of bargains among states at particular points in time, but instead part of a developing system of global financial governance. Their development has spanned four decades, including a series of global financial crises and major shifts in the balance of power among states, such as the strengthening of the EU as a global political actor and the growth of new global powers such as China and Brazil. None of these shifts has disrupted the incremental growth of these arrangements. This further indicates their relative autonomy from other powerful actors.

This pattern continued through the 2007/8 crisis, the worst such crisis since the 1930s. Despite calls for more ambitious institutional responses, the official response built incrementally on the existing arrangements. As noted above, this included the upgrading of the G20 and the transformation of the informal FSF into a more formalized FSB, with a membership expanded to match the G20's, a written Charter, a formalized Steering Committee, and a requirement that all members submit to an FSB peer review process. The membership of the Basel Committee was similarly expanded and commitments were made to expand the membership of other groupings that were not as representative. The FSF/FSB provided the overall roadmap, drawing on the programs of the transnational regulatory bodies represented in it. As discussed further below, the other transnational regulatory bodies built incrementally on their existing programs to address the crisis.

Are the norms and conflicts in these arrangements framed and justified with reference to their functional purposes and shared ideas or with reference to bargains and threats?

A scan of any part of the vast number of documents produced by the various transnational regulatory groupings discussed in the previous section will quickly reveal that they conspicuously omit any references to national interest, and agreements are not formulated as bargains but rather as debates over best practices for obtaining the broader goal of financial stability or the specific shared purposes of the regulatory grouping with which the agreement is associated. This does not mean that national or commercial interests are absent, but the need to formulate policies with regard to shared goals exercises a powerful constraint on the promotion of particular interests. This is reinforced by the materiality and complexity of many of the practices that are being developed. Once implemented the standards involve changes in national regulation and in the daily operating procedures of banks and other financial actors, and these are often embedded in computer systems, procedure manuals, paper forms, and other objects. Moreover the effects of these implemented standards can extend beyond the boundaries of the actor that is implementing them, such as when implementation of standards constraints the volume of loans issued by the implementing bank or when the perception that standards have been implemented makes it easier for the implementing bank to borrow.

While it is impossible to review the work of all the groupings, it is useful to look at the standards produced by one of the most important ones, the BCBS standards. These standards reveal the type of incremental development that was evident in the transnational arrangements more generally. Its first initiative, its 1975 Concordat, sought to establish a division of labour among regulators to reduce the ability of banks to play one regulator off against the other. It then initiated a long process of defining common standards for bank regulation. These centred on risk-based measures of the level of capital held by banks. Capital, which can be thought of as the difference between assets and liabilities, is an important safety cushion that helps protect banks from failing. It also works to impose the risks on shareholders, to whom the capital belongs. The risk that the capital bears makes it more expensive than other funding, such as bank deposits. Raising capital requirements therefore constrains the ability of the bank to solicit the funds that are needed to engage in lending. The first set of BCBS capital adequacy standards were agreed in the 1988 Basel Accord, and these were quickly implemented around the world. However they were soon seen as too broad-brush and a long process of upgrading them began, culminating in the Basel II agreement, issued in 2004. This agreement sought to include more types and finer measurements of risk and it involved lengthy extensive testing of risk models with simulations in which banks participated, resulting in an extraordinarily complex and detailed document.

Following the crisis a new package of measures was developed by the BCBS, labelled ‘Basel III’. This package included more stringent and clearer standards on what would be allowed to count as bank capital, a simpler leverage ratio linking assets and capital to offset the complexity of Basel II, stronger liquidity requirements, to prevent the evaporation of liquidity that had occurred during the crisis; and new rules to begin to integrate the shadow banking system that had developed to escape regulation. For instance banks were now required to hold capital against risks in their trading books and in the quasi-independent entities they had created to produce securitized debt and other complex products at the heart of the crisis.

Even though there is no reference to national interests in the documents issued by the BCBS it is clear that there are some nation-based conflicts, but even these are managed with reference to the functional purposes of the standards. For instance Denmark initiated a very strong campaign against the Basel III liquidity requirements because it happens to have a very successful covered bond market that finances mortgages, and the liquidity requirements restrict reliance on covered bonds. This campaign was joined by France and Germany, which also rely on covered bonds to a significant degree. However this dispute is not framed at all as a competitive one involving a negotiation between national interests. Instead it is treated as a technical problem for which a solution will probably be found. Danish covered bonds have been remarkably stable since the beginning of the crisis, and thus there are strong arguments on systemic stability grounds for making an exception for them (Brogger & Brunsden, 2011). This shows that even nation-based stresses are interpreted in functional terms.

Powerful newcomers to the regulatory table can share many of the same interests in global standards that the old players had. China, for instance, which is very exposed to US regulatory failures and has experienced regulatory difficulties of its own, is aggressively implementing Basel III ahead of the required schedule (China Daily, 2011). The Director General of the Policy Research Bureau and Statistics Department at the China Banking Regulatory Commission, stated in 2011 that “Regulators around the world are increasingly speaking the same language in terms of prudential standards and best practices in supervision… policymakers should not be swayed from the general direction of financial reform undertaken so far” (Chunhang, 2011). Even in the US, with irreconcilable ideological differences between Democrats and Republicans, and despite the twists and turns the legislative process took, its outcome, the 2010 Dodd–Frank Act, mostly complemented the transnational arrangements and did not undermine them. For instance the specifics of levels and definitions of capital, the core of the Basel III negotiations, were not specified in the Act and were left to the BCBS. The two main ways the Act sets the US on a different course than international standards, the restrictions on proprietary trading by banks and on mergers that would create banks with liabilities greater than 10% of all US banking liabilities (Tartullo, 2010), do not weaken international standards since they make US rules more restrictive than most international practices.

The work of the BCBS displays the type of incremental development evident in the transnational regulatory arrangements as a whole, with each step building on the previous one. Although the BCBS's standards are among the most developed issued by a transnational body, similar types of incremental developments are evident with other bodies as well. For instance the CPSS started with standards for the payment systems linking banks, adding an emphasis on systemically important payment systems in 2001, standards for settlement in securities markets in 2002, a methodology for assessing compliance with the latter in 2002, and then in 2004, together with IOSCO, standards for central counterparties (CCPs), which intervene between buyers and sellers. In the response to the crisis a significant G20 initiative was to start to shift derivatives trades onto CCPs to improve transparency, control, and stability (through the netting process in which liabilities are offset multilaterally against one another). Following the crisis a process was initiated to upgrade the 2004 CCP standards as part of this initiative to better regulate derivatives.

The incremental development of the content of transnational financial standards and the lack of references to national interests supports the argument that the transnational regulatory arrangements have considerable autonomy from the actors that have an interest in them. The standards build on past work in transnational groupings and are framed with reference to the goals of those groupings rather than reflecting the shifting preferences of powerful states or firms engaged in negotiations with one another. Even powerful actors need to work through the existing transnational arrangements, building on the work that they have already done. However it is necessary to analyze the degree to which these relatively autonomous standards actually alter or constrain the conduct of financial market actors. This is the focus of the next subsection.

Is there evidence of unsuccessful resistance by business to significant costs associated with the arrangements or do they instead promote business interests?

Even if transnational arrangements have considerable autonomy it is possible that this is used to promote the interests of business or the most powerful states, and thus simply to reinforce prevailing properties of global capitalism or world politics. It should be noted that some approaches take as an article of faith that prevailing arrangements always reflect the interests of the most powerful capitalist or state actors. These approaches can always claim that even arrangements that constrain these actors may be in their long-term best interest. If this is attributed to structural properties of capitalism or world politics that cannot be directly observed then this belief is unfalsifiable and not very useful since it obscures important differences between effective and ineffective regulation. The goal of this section then is to assess whether the transnational regulatory arrangements are significantly constraining business or if instead business sees them as promoting business interests.

As in the previous subsection it is useful to focus on the BCBS standards rather than trying to review all the standards. There has been sharp disagreement about whether the BCBS standards constrain or promote the interests of powerful banks. This dates back to the 1988 Accord: critics have seen it as imposing costs on Japanese banks that posed a competitive threat to US banks, while supporters point to the effectiveness of the agreement in raising capital standards world-wide. The debate continued with Basel II, with critics arguing that it served the interests of the large transnational banks, pointing to the process in which the main global lobby group for those banks, the Institute of International Finance, had privileged access to the BCBS, the IIF's pride in having persuaded the BCBS to allow banks to rely on their own risk management systems in calculating their capital adequacy levels, the lower capital costs that the large banks subsequently enjoyed relative to their competitors who did not have the capacity to develop those internal risk models, and the general weakness of bank regulation (IIF, 2007; Lall, 2010; Underhill & Zhang, 2008). Supporters can argue however that the BCBS could not reasonably impose a complex set of standards without consulting with the industry, and the IIF was the most efficient way to do this. In principle there is no reason that a supervisor's demanding scrutiny and high standards for a bank's internal model could not result in a strong form of regulation where the risk management costs are imposed on the bank. However in the wake of the 2007/8 crisis there is little room for disagreement that standards at all levels were too weak, and that the power of the industry played a key role in this. The response to the crisis is therefore important in determining whether the regulatory arrangements responded effectively to the problem it revealed or if instead they continued to reflect the excessive power of business.

Private sector resistance to elements of Basel III has been fierce at times. There is some evidence that this has had an effect on the standards. The extension of the deadline for the completion of key elements of Basel III to as late as 2019 was a response to bank arguments that a faster pace would harm them and restrict their ability to lend. Following some of the more alarming warnings issued by the banking industry the FSB and the BCBS produced studies concluding that “the transition to stronger capital and liquidity standards is likely to have a modest impact on aggregate output” (BIS, 2010). Nevertheless the deadlines were extended. In addition to this apparent success of the banks in delaying implementation some observers have argued that Basel III is too weak. For instance Lord Adair Turner, chair of the UK's Financial Services Authority, argued in early 2011 that Basel III should have set the core capital at a ratio of 15–20% rather than the 7% that was agreed (Kumar, 2011). Stefan Walter, Secretary General of the BCBS also warned in April 2011 that “Despite the severity of the crisis, we are already seeing signs that its lessons are beginning to fade” and that the risk of banking crises in one of the BCBS members was roughly one in 20, “unacceptably high” (Wilson, 2011). At the same time it seems clear that Basel III does impose serious costs on banks and is significantly restricting their riskiness. A 2010 BCBS report estimated that the 94 largest banks would have to raise €577 billion. The big banks also were below the liquidity standards, with only 83% of the short-term cash needed (Ewing, 2010a). A respected Wall Street analyst, Charles (Brad) Hintz published a detailed report on Dodd–Frank and Basel III, in November 2010 concluded that the changes will make banking significantly less profitable, clients will be charged more to borrow, and compensation ratios will come down (Rose-Smith, 2010; Demos, 2010). Had Basel III been fully implemented in 2010 banks would have been forced to raise €2.9 trillion in one year to meet the liquidity standards (Brunsden, 2010). Thus at least part of the delay in implementation could reasonably be attributed to the need not to disrupt the global financial system too severely.

Recent industry responses to Basel III have been quite varied. For instance the Global Financial Markets Association, the key representative of capital market actors, in its February 2011 remarks to the BCBS on Basel III noted that “we acknowledge that the new standards will help protect financial stability and promote market confidence” (GFMA, 2011). Its major emphasis was on requests for clarity and consistency rather than demands to roll back or abandon Basel III. Similarly the IIF has not issued reports criticizing Basel III since its adoption, and generally has focused on clarifying its provisions and seeking to influence rules that are not yet finalized. The IIF Managing Director, Charles H. Dallara, has indicated that banks can live with Basel III as long as there is enough time for them to adjust, but that he is concerned that some countries are raising the bar above the Basel standards (Ewing, 2010c). The Wall Street Journal reported that at the 2011 World Economic Forum banks “bankers and their lobbyists say they will be jetting into the Alps armed with long lists of proposed and pending rules that they would like to water down or kill altogether.” However it also reported that the focus is on rules that are not yet finalized, particularly those targeted at global systemically important financial institutions (G-SIFIs), and it concluded that the argument against the G-SIFI rules “isn’t likely to sway many policy makers. Bailouts of giant banks, not small ones, have been costly and deeply unpopular for many Western countries” (Enrich, 2011). Consensus on G-SIFIs may not be achieved. In November 2010 Nout Wellink, who has headed the BCBS, noted that countries may be allowed to exempt their banks from the G-SIFI provisions once they are agreed (Ewing, 2010b), which would seriously weaken them.

The tension between the private interest of banks and the global public interest in financial stability is being played out within and through the regulatory arrangements that this article has been analyzing. The BCBS standards, by focusing on the level of capital banks need to hold, adjusted by the riskiness of the activities in which banks engage, enter into the internal incentive structure of firms, affecting the relationship between bank management, borrowers, shareholders, and other stakeholders. This type of effect is characteristic of most of the global financial standards. For instance the FSB has developed risk-based standards for executive compensation in financial firms, which aim to prevent the problem of executives enjoying the immediate returns to risky activities while leaving the firm, its shareholders, and taxpayers to pick up the longer term costs associated with those risky activities. The shifting of derivatives onto centralized clearing parties will be facilitated by higher capital charges on trades that are not carried out there. While not concluded, transnational regulation of banks that are too big to fail will likely work through higher capital charges on G-SIFIs rather than forced break-ups of large banks. All these types of standards shift the constraints on firms by altering their incentives rather than by directly coercing them into change. This leaves the measures open to criticism for being too weak, but the lack of coercion also reflects the autonomy and complexity of transnational financial governance, which has developed so extensively that struggles between banks and regulators are carried out through densely complex transnational arrangements.

In sum, it is hard to predict with certainty the degree to which industry will be able to subvert Basel III and related regulatory initiatives as they are implemented. However it seems reasonable to see the aspects of Basel III that were endorsed by the G20 in November 2010 as relatively settled, with the industry itself moving on to other issues, such as G-SIFIs or national regulations that exceed Basel III. It also seems clear that Basel III sets a path midway between the banks’ preferences and the degree of regulation that would be necessary to ensure that crises do not reoccur. In other words, it shifts agreed regulatory standards significantly upward, but not as far upward as may be optimal from the perspective of systemic stability. In part this seems due to the ability of banks to lobby for their own private interests, and in part due to concern about the impact on the global economy of imposing regulatory demands on banks too quickly or severely. At the same time it is clear that banks continue to argue that regulation is too heavy, and they may enjoy more success in pressing their case as the memory of the crisis continues to fade.

3 Conclusion

This article has argued that transnational regulatory arrangements play a significant role in the governance of global finance and shaping the relationship between public authorities and financial market actors. This challenges perspectives that entirely neglect these arrangements, or that treat them as insignificant reflections of bargains and conflicts among powerful actors that occur elsewhere. It identified four overlapping concepts that explain how such transnational arrangements might achieve their effects: the constitutive role of ideas; the reinforcement of the effects of ideas through their entanglement with material objects; the importance of functionality; and path dependence. It then drew on these to specify three testable propositions: that these arrangements should display incremental development and growing complexity over long periods of time, withstanding shifts in their environment; that the norms and conflicts in these arrangements should be framed and justified with reference to their functional purposes and shared ideas; and that there should be unsuccessful resistance by business to significant costs associated with the arrangements, contrary to approaches that see such arrangements as always faithfully expressing the interests of business. The article then assessed these propositions with regard to the transnational regulatory arrangements in finance, including during and after the 2007/8 crisis.

These transnational regulatory arrangements are very important for understanding the relationship between public and private at the global level. The autonomy of these arrangements means that both states and market actors seek to influence them but also need to work through them. As well, these arrangements work in part by altering incentives within firms and by drawing to a significant degree on the governance capacities of the private sector. Even though the standards produced by these arrangements generally need to be implemented by states, the establishment of the standards takes place in the transnational arrangements, and private sector actors seek to influence them directly as well as through states. In other words, the interaction between public and private actors is mediated to a significant degree through these transnational regulatory arrangements. This has more general relevance for theorising the relationship between public and private actors at a time when transnational networks are playing a larger role in all areas of governance.

Notes

1 On these regulatory bodies see their websites and Davies and Green (2008), Porter (2005).