April 16, 2012
Peer Review Is The Enforcement Mechanism In International Financial Regulation
Posted by David Zaring

Now that the standards of financial supervision are designed internationally, the signature problem of international rules is something that financial regulators need to deal with.  The problem: how do you enforce laws in an anarchic world with no courts, cops, or central authority?

In IFR, the solution has been to turn to peer review to do the trick.  Since the financial crisis, the FSB and Basel Committee have conducted peer reviews of member countries and particular issue areas.  For example, yesterday, Basel announced the results of its peer review of the powers of its members to engage in stress testing of banks (whereby you run models hypothesizing catastrophic conditions on bank balance sheets), something that Basel feels is necessary for effective supervision.  The report is kind of interesting in its not-very-interestingness.  Although the report indicates that half the members are in the early stages of developing adequate stress-testing protocols, no laggard country is identified, and much of the writing looks not so much like peer evaluation, as it is the sharing of best practices - a subject you can read my wisdom on here.

Still, peer review is a pretty good idea, given the lack of more forceful alternatives for requiring implementation of international rules.  My guess is that the institutionalization of it in IFR will spread more broadly to other international institutions. 

Administrative, Finance, Financial Crisis, Financial Institutions | Bookmark

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