Market integration and the politics of regulatory integration: Insights from the integration of banking regulations in the United States, Canada and China

Integration of markets across political jurisdictions increases social and economic costs from uncoordinated regulation. As technological barriers between political jurisdictions fall, business costs from compliance with multiple standards, government difficulty maintaining regulatory integrity and consumer costs from transferred business costs and insufficient regulation rise. Inefficient regulation which increases market uncertainty and produces market failure particularly increases political sensitivity to regulatory costs. In turn, increases in regulatory costs increase political agitation for regulatory coordination and convergence.; Political pressure to develop international regulatory arrangements has grown with market globalization. Debate over the relationship between international market integration and regulatory integration has been ongoing since the 1970s. Market political economists contend that the process is linear: relative absence of major power conflict has elevated economic considerations and increased the likelihood of "hard" convergence. Realist political economists contend that national governments will never cede important areas of economic rule-making to international authorities given their primary charge to preserve citizens' physical and economic well-being. The shortage of incontrovertible international examples of "hard" regulatory integration sharpens the debate.; To better understand the connection between market and regulatory integration, this dissertation analyzes the correspondence between capital market integration and the integration of banking regulation between jurisdictions in three large countries---the United States, Canada and China. The study finds a direct connection between increases in regulatory costs and regulatory convergence. Macroeconomic instability associated with inefficient supervision of banks by regional authorities and regulatory competition between different jurisdictional authorities resulted in regulatory harmonization shortly after capital market integration in all three cases. Increased micro- and macroeconomic costs due to uncoordinated regional market regulation increased political interest for and eventual realization of substantial regulatory integration within several decades of harmonization. While complete regulatory integration did not occur in any of the cases (some allowance was left for regional oversight of smaller retail institutions), substantial integration has proved unquestionably durable. The findings suggest that regulatory coordination in banking is linearly connected with market integration, with an increasing likelihood of coordination rising in regulatory cost. Expansion of harmonized international banking standards through the BIS since the 1970s coincides with this perspective.