TILEC Work In Progress: Panos Delimatsis
Financial Standard-Setting as a Form of Economic Activism and the Role of Crises
Advances in financial instruments and financial innovation have been key in increasing the pervasive character of finance. However, they have also led to some of the most severe economic crises, as more recently exemplified by the Great Recession. In the aftermath of such crises, it becomes apparent that private bodies active in regulating various aspects of financial instruments, including securities, derivatives, or interbank loan rates, remain hale and hearty, resilient as never before. Thus, instead of a reassessment of the foundational principles of the neoliberal model in financial regulatory making, crises do not appear to affect the continued relevance of such private actors in regulating the financial sector. Theoretical insights from the field of transnational private regulation and governance suggest that the State deliberately enrols and transfers power to such private bodies, maintaining a role as the orchestrator of regulatory activity. However, reality defies existing regulatory theories. Rather, a progressive, yet steady transfer of power to private regulatory bodies can be observed.
This paper innovates by arguing that such transfer of power is the result of pro-active attempts by private bodies active in financial regulation to expand the purview of their regulatory activities (and thus their regulatory power) in the aftermath of regulatory failures that shake the fundamentals of the financial sector. The paper hypothesizes that private financial regulators manage to remain afloat and even become more controlling thanks to their core rule-making activities, more specifically the continuous promulgation of voluntary standards that are quickly prepared, adopted and diffused to pre-empt rules by (public) rule-making competitors. Rather than bringing about a decisive State intervention that increases the accountability mechanisms and rationalizes the relevant market structures, financial crises create ideal conditions for opportunism by private rule-making bodies, allowing them to consolidate their autonomy and proactively seek more power and undermining any effort for effective supervision by the public regulatory authorities. After presenting a novel conceptual framework to scrutinize and understand the evolution of private authority based on private standard-setting and regulatory disasters in the financial sector, the paper will apply this framework to the case of the International Swaps and Derivatives Association (ISDA), focusing on the role of ISDA in the Great Recession and its derivatives-related activities that arguably allow testing the main hypothesis of the paper, notably when viewed in relation to the Financial Stability Board (FSB). Some of the questions that we will examine relate to: the type of strategies used by ISDA internally and externally to maintain and strengthen its relevance and resilience; the type of interaction with and supervision by the FSB; the role of national supervisors in this equation.
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