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This chapter assesses the evolution of international standard setting in financial markets by examining the characteristics of the various international bodies, such as the Basel Committee on Banking Supervision and the International Organization of Securities Commissions, that are involved in international standard setting. Topics discussed include international financial institutions, supervisory structures for financial conglomerates, the Financial Action Task Force, and financial crises from the 1990s and onwards.

This chapter analyzes international harmonization of financial regulation. This is a relatively new regulatory area, with international harmonization efforts starting only in the 1980s. Sector-specific regulatory coordination and harmonization efforts are traced in the fields of banking regulation (Basel Concordat, Basel Accord and Basel II), securities regulation (IOSCO MOUs and the Objectives and Principles of Securities Regulation) and insurance regulation. Cross-sector regulatory coordination and harmonization by the Joint Forum are also analyzed. The chapter concludes with detailed analyses of developments after the Lehman Shock, notably activities of the G20 toward the formulation of Basel III.

The actual role domestic courts can play in relation to informal international law partly depends on the way these rules are (to be) implemented domestically. Some informal international law (IN-LAW) instruments are far more complex, also in relation to their domestic implementation, than formal international agreements and decisions. One particular example is formed by the Basel II Accord on banking supervision. As indicated by the chapter, Basel II is a central case of IN-LAW. It is informal along all three dimensions identified in the first chapter of this Volume: it is a non-binding policy framework, rather than a treaty; it was adopted by the Basel Committee, a transnational regulatory network; and national banking regulators, rather than traditional diplomatic actors, were the principal participants. In the absence of formal accountability regimes at the level of the Basel Committee, the chapter investigates whether domestic oversight compensates for this ‘accountability deficit’.

This chapter examines the theoretical framework of international soft law and how it embraces both legally nonbinding and binding rules and standards of international financial regulation. International soft law is defined as legally nonbinding standards, principles, and rules that influence and shape state behavior but do not fit into the traditional categories of public international law of legally binding general custom of states and bilateral or multilateral treaties. It is argued that international soft law in its various dimensions can contribute to an understanding of the development of legally relevant international financial norms and how they govern state regulatory practice.

This essay argues that the internationalization of financial markets has made authorities more aware of the risks of perverse incentives and the costs of excessive regulation. It explains the concept of market-friendly regulation, then discusses how international cooperation provides the best environment for developing market-friendly regulation. The work of the Basel Committee on Banking Supervision is reviewed as an example of regulation that respects spontaneous changes in the market. Increased cooperation between banking, insurance, and securities regulators is recommended.

This chapter argues that the adoption of international standards and principles of corporate governance should be accompanied by domestic regulations that prescribe specific rules and procedures for the governance of financial institutions that address national differences in political, economic, and legal systems. It begins by briefly considering “governance” within this context, using a principal-agent framework. It then discusses the general principles of corporate governance for financial institutions that the Basel Committee has adopted for all banking institutions operating in the G10 industrialized countries, followed by a discussion of the principles of corporate governance for securities firms as set forth by IOSCO. The overriding theme is the belief that transparency of information is integrally related to accountability in that transparency can provide government supervisors, bank owners, creditors, and other market participants with sufficient information and incentive to assess the management of a bank. The chapter concludes by considering these and other issues related to the governance role of financial institutions in the overall economy.

This chapter examines the ongoing revisions to Basel 2, the international standards for banks' regulatory capital developed by the Basel Committee on Banking Supervision (BCBS) to replace the 1988 Basel Capital Accord (Basel 1), and their implications for developing countries. The 2006 text of Basel 2 had been considered closed before the credit crisis which began in mid-2007. This crisis has indicated major shortcomings in the regulatory framework for financial institutions which are now the subject of an agenda of wide-ranging reform. Strengthening Basel 2 is an important item on this reform agenda. This chapter considers two of the major subjects of the revisions of Basel 2: the rules for securitization exposures and the Market Risk Framework. It argues that the Basel 2 rules may engender new problems in the future, citing the possibility that banks may be exposed to risks associated with cross-border asset-backed investments as well as investments linked to operations in their own financial markets.

As finance has become more globalized and global financial crises have become more frequent and severe, a set of international regulatory regimes has been established. These have generally taken the form of relatively informal networks of regulators focusing on particular aspects of the financial system. Over time these regulatory regimes have become more complex. States, operating first through the G7 and then the G20, began to oversee and direct these regimes more actively and politically. The regimes' engagement with internationally active business actors has increased, leading some to see them as having been captured by the industry. Initially they tended to be exclusive, but over time, and especially after the crisis of 2008, the number of countries involved has expanded. The degree and sources of their effectiveness continue to be debated.

Banking was the first financial service to be subject to regulatory harmonization. However, banking regulation has mainly been designed to foster integration in the EU, rather than setting prudential rules (e.g. capital requirements). Over time, the EU has downloaded international capital requirements (the so-called Basel accords), albeit taking into account European ‘specificities’. In the negotiations of the Basel accords, the EU did not present a united front because its member states had different priorities, rooted in their domestic political economies. Banking regulation is a dual (i.e. a state and federal) competence in the US. The US, together with the UK, was able to upload its domestic capital requirements internationally in the late 1980s. The Basel I accord set in place a process of path-dependence and subsequently the US agreed to download Basel II and III.

From the 1970s on, banking supervision grew in size and importance. Which were the characteristics of the regulatory elite leading this activity? Based on archival material from central banks and supervisory institutions and on a collective biography analysis, this chapter explores the profile of the Basel Committee on Banking Supervision members, their role in the construction of an international regulatory institution, and some of their first achievements. It shows that some Basel Committee members were deeply involved in transnational networks of governance, others used their experience as banking supervisor in the private sector, while still others had a more national-centred career and stayed in the central banking or banking supervision sector. The Basel Committee members were the elite of banking supervisors. Over time, their committee evolved from a club to a standard-setter institution, illustrating the newly acquired influence both of banking supervision and experts and expertise in international financial governance.

Chapter 5 shifts the focus from soft law’s effects on great powers to its impact on influential business groups. It argues that by expanding arenas of contestation to the transnational level, soft law transforms business representation as well as individual industry associations. The chapter’s empirical focus is on banking regulation from the 1980s to the 2000s. Much of the literature on transnational banking standards centers on the role of industry associations and, in particular, on the Institute of International Finance. In this chapter, the authors explain the rise of direct industry participation in and influence over Basel-based standard setting. They show that the orientation and priorities of the IIF as well as its membership and internal structure were deeply conditioned by 1980s international soft law. The IIF’s transformation subsequently set off a series of changes to the ecology of financial industry associations and the politics of financial regulation.

This chapter focuses on the various reports and research on corporate governance of banks that sprang up after the 2008 financial crisis. It examines the Basel Committee of October 2010, one of the first institutions to codify minimum requirements for bank governance. The chapter defines first what corporate governance is and discusses its relevance for banks. It then describes the bank's instruments of deposit insurance and bail-out which has been given new importance due to the recent financial crisis. It explains how these two instruments reduce interests and incentives of taxpayers and bank creditors. It also states the possible legal and regulatory problems that can arise between debt governance and debt-holders, and enumerates proposals in covering these difficulties.

This chapter discusses the Basel III capital requirements. Following the 2008 financial crisis, the Basel Committee on Banking Supervision issued reform proposals for capital regulation, entitled “Basel III,” as part of a series of initiatives sponsored by the Group of 20 (G20) nations. The centerpiece of Basel III is a series of amendments to the capital adequacy standards embodied in the worldwide framework for capital regulation created by Basel I and extensively revised and expanded under Basel II. These amendments specify three broad revisions to the Basel I and II architecture: (1) increases in minimum mandatory bank capital requirements; (2) new measures to control countercyclicality in capital regulation; and (3) new restrictions on what instruments qualify as capital and adjustments to risk-weightings.

Chapter 3 describes the international financial regulatory architecture, providing necessary background for the substantive studies that follow. It gives special attention to the architecture’s two defining aspects: the soft law character of the rules it produces and the fragmentation of rule-making by subsectors. A matrix of forums develops advisory prescriptions for specific financial policy areas. The chapter traces the architecture’s origins and evolution, including how policy-makers and standard-setting organizations dealt with the breakdown of traditional boundaries between markets and subsectors. It provides background on the book’s featured causal variable: international soft law. It also offers an original explanation for the architecture’s key features. The chapter highlights the prominent role of domestic institutional arrangements within the United States and other jurisdictions with important markets for the early development of soft law-creating organizations and establishes the role of contingency, sequence, and endogeneity (with reference to domestic institutions) in the architecture’s evolution.

This chapter discusses Basel's revised liquidity requirements. The Basel Committee adopted a new liquidity standard for phase-in at the start of 2015, to be completed by 2019. Basel's liquidity metric, known as the liquidity coverage ratio (LCR), requires banks to hold unencumbered high-quality assets sufficient to meet all outstanding 30-day-or-fewer liabilities. Basel has also proposed a longer term metric called the net stable funding ratio (NSFR) designed to secure institutions with enough liquidity support for one year, to be implemented by January 2018. The components of “stable funding” are capital, preferred stock, other liabilities with maturities of more than one year, plus “stable” deposits. Beyond LCR and NSFR, the Basel III proposal introduces other measurements oriented at facilitating supervisory monitoring of institution liquidity. Their focus is on maturity mismatching, wholesale funding dependency, and amount of available unencumbered assets. The remainder of the chapter deals with US implementation of Basel liquidity requirements.

This chapter tells the story of international institutional from the 1970s forward. While the existing scholarship highlights processes of financial market liberalization in this period, this chapter highlights three developments in the evolution of the international monetary system that have elevated monetary authority's role in managing the global economy: (1) the assault on inflation in the 1970s and the spread of inflation targeting regimes, (2) the construction of a bank-centered regulatory system for capital, (3) and the performance of “lender of last resort” functions in times of crisis.

Financial stability is an international public good. Yet there is no international financial regulator; nor has any single domestic financial regulator the capacity to govern the global financial system. While capital might flow relatively freely across borders, domestic authorities face inherent jurisdictional constraints and are often hamstrung by their incomplete access to information and finite financial, political, and human resources. In the post-crisis period, despite the absence of new formal international law-making, a global financial regulatory order has emerged—rather remarkably—through the concerted action of states’ executive leadership, financial regulatory agencies, central banks, international organizations such as the Financial Stability Board and the Basel Committee, and private actors. This new order can be characterized as a regime of ‘international financial regulatory coordination’ rather than ‘regulation’ because it is sustained through cooperation rather than the force of international law. This chapter considers the challenges of international coordination in financial regulation, and charts progress since the financial crisis.

A frenzy of regulatory proposals followed the 2008 crisis, while the basic question loomed persistently: can financial markets be controlled? Before attempting to answer this question, the chapter looks at the system to which regulatory efforts are addressed. The contemporary financial system is described as a mega-machine developed over the last decades that accumulates and maximizes, in the form of capital and therefore of power, the values that can be extracted from the highest possible number of human beings and echo-systems. Three major components of this machine are identified: bank holding companies, institutional investors, and private banks. The chapter goes on to list a series of recent proposals for financial regulation, their rejection, or implementation. It concludes that measures aimed at regulating the financial world often result in the expansion of unregulated grey markets.