November 04, 2010
Agenda for the 112th: Even Isolationists have to go International
Posted by Chris Brummer

Plenty of challenges await the new Congress and the President, but I think it is clear that politicians, along with financial regulatory authorities and agencies, should not lose sight of the need for continued, robust international cooperation in financial market regulation.  Sure, as an international financial reg scholar I’m biased:  The 2008 agenda ushered in by the G-20 helped to spark unprecedented efforts to coordinate financial regulatory policy, not only in the high profile field of bank capital adequacy, but also in areas as diverse as credit rating agency oversight, executive compensation, and derivatives oversight.

 But there is still much more to be done:  regulatory initiatives for many cooperative efforts remain vague and indeterminate, and significant gaps remain in such key areas as shadow banking regulation, too-big-to fail, and cross-border resolution cooperation.  Plus the monitoring of countries' compliance with international best practices and standards, though recently strengthened by the IMF, is still all too often weak.

 As a result, even assuming US political actors can reach consensus on national regulatory strategy, broader international gaps persist such that Dodd-Frank reforms can potentially be mooted where, as Chris Dodd recently noted, foreign countries with weak supervision provide “safe harbors” from strong regulatory oversight.   Even in an age of increasing isolationist retrenchment, financial authorities and political elites must, as a result, continue to acknowledge and engage the still growing interdependence of not only financial markets, but also financial market regulation.

This will be difficult to do in the absence of agreement or consensus at the local level of US politics.  Still, there are broad areas of agreement such that the US positions as already articulated in the Dodd-Frank Act should provide either the basis or momentum for even greater coordination abroad in areas relating to the accounting of financial instruments, the regulation of clearinghouses and central counterparties, and even, perhaps, greater prudential regulations for the shadow banking industry.  International cooperation and standard-setting often arises in a series of rounds, where successive iterations of negotiation lead to both substantive reforms in earlier standards as well as more prescriptive rulemaking.  Meeting counterparts head on should thus still be possible, if only as a weigh-station for more definitive agreements as post-election regulatory policy takes shape.

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