Domestic politics, global regulation: Setting standards for the international financial system (United States, England, Japan)

In the past 15 years, financial regulators from the developed world have attempted to create international regulatory standards, often in reaction to market volatility and threats to financial stability. These standards are often heralded as "global public goods" that provide critical safeguards for the world economy, but their creation is marked by discord among the regulators who negotiate them. Certain regulators actively resist any attempts at regulatory harmonization, while others are vocal in their advocacy for an international agreement. In some cases, regulators are forced to terminate their negotiations before reaching an agreement, resulting in a continued divergence in national regulatory environments. How can we explain the preferences of regulators toward international regulatory standards? More generally, how can we explain the patterns of cooperation and discord in the international relations of regulators? This dissertation uses a principal-agent model to explain variation in financial regulators' demands for international regulatory standards. The legislature, as the principal, delegates the responsibility for setting regulatory policy to the regulator (agent). The regulator faces a trade-off between financial stability and international competitiveness, and must choose a degree of regulatory stringency that maintains the legislature's minimum thresholds for each policy goal. Regulations that are either too lax or too stringent will trigger legislative intervention, which the regulator seeks to avoid. Exogenous shocks to competitiveness or stability make it more difficult for the regulator to enact policies that meet the legislature's minimum thresholds for stability and competitiveness. As their "win-sets" shrink and the probability of legislative intervention increases, regulators look to the international arena for a solution. Regulators are therefore more likely to press for international regulatory harmonization when the stability of domestic financial institutions is declining, and when competitive pressures are increasing from less-regulated foreign firms. I explore the empirical implications of the argument for regulators in the U.S., the U.K., and Japan in two important cases: the negotiations leading up to the 1988 Basel Accord on bank capital adequacy, and the oft-overlooked negotiations over capital adequacy for securities firms between 1988 and 1992 under the auspices of the International Organization of Securities Commissions (IOSCO).