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The subprime accountability deficit and the obstacles of international standards setting.

Article Excerpt
Today's financial crisis has triggered some of the largest bank failures in history, including Washington Mutual and Fortis, as well as substantial instability throughout US, European, and Asian banking markets. Bank failures around the globe will likely continue as housing markets collapse and credit markets dry up. Indeed, the crisis may get much worse. As of mid-2008, the US Federal Deposit Insurance Corporation (FDIC) has identified more than 100 banks on its "troubled bank" list, and European regulators are struggling to contain the fallout of the crisis in their respective domestic markets. Central banks have created ad hoc swap arrangements to ease international liquidity problems, and they have recently slashed interest rates in an unusual exercise of international coordination. However, the important question for global governance is whether the financial crisis will prompt a serious international effort to change the rules of domestic and global banking.

Despite the galvanizing effect that the financial crisis appears to be having on central bankers, the prospects for new international regulatory standards are fairly gloomy. The key problem is that US regulators are unlikely to champion new international standards. There are two main reasons for this assessment: first, the myriad proximate and underlying causes of the crisis; and, second, the considerable fragmentation of domestic financial regulation in the United States. Without US leadership, any modifications to the international standards and guidelines created by the Basel Committee, the International Organization of Securities Commissions (IOSCO), the International Association of Insurance Supervisors, or the Joint Forum will likely be cosmetic rather than substantive. (1)

While little may happen internationally, the most significant regulatory response to the financial crisis may be within the United States. The US Treasury's regulatory blueprint recommends the organizational consolidation of domestic financial regulation, including the dissolution of the Office of Thrift Supervision and the creation of a federal insurance regulator. The consolidation of US regulatory agencies might facilitate international regulatory harmonization in the long term simply by reducing the transaction costs of international negotiation and clarifying agency accountability.

Global Banking Standards: Learning from the Past

In the recent past, bank instability in the United States and the United Kingdom prompted both governments to press for new international financial regulation. A quick...

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