July 22, 2011
by Annelise Riles

Reforming the Financial Stability Board

Today is my last day as a visiting researcher at the Bank of Japan’s Institute for Monetary and Economic Studies, where I have been working on global financial governance issues, particularly as concerns the Financial Stability Board. It has been a fantastic experience to have a chance to exchange ideas with the people responsible for making monetary and financial regulatory policy at all levels in Japan. What emerges most clearly for me is how provincial is the world view reflected in current international financial governance. I have taken to calling this world view the NAPL model–the North Atlantic Post-Lehman Model–to suggest that it has been made largely by regulators in North American countries, very much with their own experience of the Lehman crisis in mind. As one bank manager in Tokyo put it, “they caused the last financial crisis, we didn’t–so why do they get to write all the rules on how to fix things?”
As the Financial Stability Board grows more diverse and more global, the emerging conflicts between developed economies and emerging markets about what exactly are the key problems that global financial governance should be addressing should be watched closely. If global financial governance is to be truly global, at a minimum it needs to address the key challenges faced by most economies, and not just some economies. This could begin with the FSB expanding its focus from the Lehman crisis to the experience with other financial crises, such as the Asian Financial Crisis, in which the causes and consequences were somewhat different. Japan is sometimes on one side of these debates, sometimes on the other, and sometimes has other concerns altogether. For example, its problem is not banks that take too much risk; its problem is that banks sit on stockpiles of cash and refuse to take risk at all, and this too can be highly damaging to an economy.
Yesterday I gave a seminar to researchers and policy makers inside the Bank of Japan. We had a lively discussion about whether the fancy new tools of financial governance deployed by the FSB to create global consensus and ensure global compliance such as “supervisory colleges,” peer review and the like help to broaden the global agenda in practice or not. I think we need serious empirical research to help us understand better when exactly these new tools work to promote greater mutual understanding across jurisdictions and when they do not. We also had a good discussion of my proposal that we look to develop other regulatory tools, in particular, private international law doctrines and protocals, to supplement the weaknesses of the FSB in the short to medium-term.

July 7, 2011
by Annelise Riles

Learning from Regulatory Diversity

As we look ahead toward how we can do a better job of preventing, or at least lessening the effects of the next financial crisis, I think we can all agree that the more information regulators have about the real world conditions in the market–the nature of the products, the institutional contexts in which business decisions are being made, and the character of the risks–the better.  The question is, what is the best way for regulators to get such information?

One of the big Ahas of my current research at the Bank of Japan is that different regulatory systems, or cultures, may have different approaches to getting such information.  In the United States and in the UK, there is a big emphasis on hiring regulators with practical market experience.  US and UK regulators know that such individuals can be invaluable because they understand the thinking of market insiders.  Ironically, such individuals often turn out to be the toughest regulators of all as they are least likely to be snowed by bogus excuses about the impossibility of implementation of a certain reform, or the unavailability of a certain kind of information.  Think Gary Gensler, former Goldman Sachs executive now head of the Commodity Futures Trading Commission for example.

There is no doubt that this kind of talent is one important route to information.  Japanese regulatory institutions have relatively few such people, and in my interviews some Japanese regulators have suggested that it would be helpful to have more.

But Japanese regulators have a different approach: they maintain much more intensive, almost real-time contacts with their counterparts in the industry.  For example, a junior regulator may have his counterpart in a given bank on the phone two or three times a day.  In addition there are yearly on-site inspections that last several weeks and provide mini “fieldwork” opportunities for regulators to sit on the inside, as well as multiple “targeted inspections” also on-site.  There are daily or weekly contacts at every level of the bank and government, too, from the most junior to the most senior, since one gets a different picture of what is going on inside a financial institution depending on who one talks to.

One advantage of this approach is that in a world in which market realities change very quickly the regulator’s information is very current.  In contrast one problem with the US-UK approach is that after only a few years in government, a former banker’s experience quickly becomes relatively obsolete.

Perhaps here regulatory theory could benefit from the insights of the field of comparative law. Comparative lawyers know that it is pointless to argue about which system in the world is “best” in some absolute sense. French law and American law each have their relative strengths and weaknesses, but more importantly reflect an adaptation to the wider culture and values of the societies out of which they emerge.  Studying these differences can sometimes provide insights for reform (a French court may wish to borrow some precedent from an American court or vice versa) and can also help sharpen, through the contrast, each side’s appreciation of what they value the most. In much the same way, regulatory cultures are different, and interesting in their differences.  Perhaps rather than throw all our energies into defining one global regulatory approach or standard, we could start by noticing these differences, describing them, and analyzing their relative strengths and weaknesses as well as their cultural sources and purposes within each institutional and economic context.

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