Lecture – Part 2B
Regulatory brain drain –
PRA, FCA worth looking at graduate roles
Banks now have incentives that pay off in the medium term
Justifications for the global regulatory architecture
There are at least three related rationales
If we perceive ourselves as potential losers in an environment of regulatory
competition
If we thinks regulatory competition might trigger a downward spiral in regulatory
standards
If we think poor regulation and supervision in other jurisdictions will result in
financial turmoil, the effects of which will spills over into our jurisdicitokn (bnegative
externalities)
Note that if each of these rationales is framed from the perspective of esxisting
public actors (i.e states which would need to cede authority
A note on regulatory competition
The conventional framework: regulatory competition as a joint maximisation
problem between issuers/manahers and investoras
Heavily influenced by the debate surrounding regulatory competition for corporate
charters
The prediction: in a competitive environment, issuers will select a level of
investor protection where the benefit of the higher offering price outweighs the
higher costs of protection
• At least in theory, therefore, competition may lead to the maximisation of
joint
welfare
• And more efficient regulatory regimes
Positive theory
Perspective of the issuers, creators of the financial priducts on one side
Negative theory is from the investors
Where youvew got a highly competitive environment the issuer will increased the price of
the product because they will afford the investors greater investor protection, this way, the
issuers will get more money and the investors receive greater investor protection, leads to
more efficient regulatory regimes
However it does not predict whether we are going to have a race to the top,
In and of itself, however, this framework does not predict whether we should
expect to observe a ‘race to the top’ or ‘race to the bottom’ in investor
protection
• Romano (1998) versus Fox (1999)
, Lecture – Part 2B
• See also Coffee (2002) and, specifically, his ‘bonding’ hypothesis
• More broadly, is the issuer/investor joint welfare maximisation problem the
most appropriate framework in all cases?
• What about cases where interests are aligned?
• And what about externalities?
The design of global regulatory architecture
Putting aside the social desirability of an international regulatory architecture
(at least for the moment), the fact is that we already have one
• So who are the key players within the existing international regulatory
architecture?
• Brummer (2011) provides us with a useful taxonomy:
• Bilateral and Multilateral Memoranda of Understanding
• International Standard-Setters (e.g. Basel Committee on Banking
Supervision)
• Cross-functional Networks (e.g. Group 20)
• Other international institutions (e.g. International Monetary Fund)
These institutions coordinate across a number of dimensions, including:
• Cross-border information flow – this is in direct response to the issue of the direct
international markets, if there is merging risks is some kind of forum network
exchange on where countries can say, this rism is happening, we wish to work as
international partners
• Cross-border banking supervision
• Cross-border crisis response
• Functional harmonisation – in line with the basil committee, trying to harmonise
what the banking regulations are. – limit regulatory arbitrage opportunities
The current international regulatory architecture is based predominantly on
‘soft law’ mechanisms
• Standards, guidelines, and interpretations (produced by e.g. Basel
Committee on Banking Supervision
• Not binding or enforceable under international law, but theoretically capable of
influencing behaviour through reputational enforcement mechanisms
• Peer review processes
• Developing countries may adopt standards because they are easily
identifiable — national regulators may lack the expertise and information
• ‘Comply or explain’ obligations
• ‘Name and shame’ strategies
• And, theoretically at least, removal from the group
Regulatory brain drain –
PRA, FCA worth looking at graduate roles
Banks now have incentives that pay off in the medium term
Justifications for the global regulatory architecture
There are at least three related rationales
If we perceive ourselves as potential losers in an environment of regulatory
competition
If we thinks regulatory competition might trigger a downward spiral in regulatory
standards
If we think poor regulation and supervision in other jurisdictions will result in
financial turmoil, the effects of which will spills over into our jurisdicitokn (bnegative
externalities)
Note that if each of these rationales is framed from the perspective of esxisting
public actors (i.e states which would need to cede authority
A note on regulatory competition
The conventional framework: regulatory competition as a joint maximisation
problem between issuers/manahers and investoras
Heavily influenced by the debate surrounding regulatory competition for corporate
charters
The prediction: in a competitive environment, issuers will select a level of
investor protection where the benefit of the higher offering price outweighs the
higher costs of protection
• At least in theory, therefore, competition may lead to the maximisation of
joint
welfare
• And more efficient regulatory regimes
Positive theory
Perspective of the issuers, creators of the financial priducts on one side
Negative theory is from the investors
Where youvew got a highly competitive environment the issuer will increased the price of
the product because they will afford the investors greater investor protection, this way, the
issuers will get more money and the investors receive greater investor protection, leads to
more efficient regulatory regimes
However it does not predict whether we are going to have a race to the top,
In and of itself, however, this framework does not predict whether we should
expect to observe a ‘race to the top’ or ‘race to the bottom’ in investor
protection
• Romano (1998) versus Fox (1999)
, Lecture – Part 2B
• See also Coffee (2002) and, specifically, his ‘bonding’ hypothesis
• More broadly, is the issuer/investor joint welfare maximisation problem the
most appropriate framework in all cases?
• What about cases where interests are aligned?
• And what about externalities?
The design of global regulatory architecture
Putting aside the social desirability of an international regulatory architecture
(at least for the moment), the fact is that we already have one
• So who are the key players within the existing international regulatory
architecture?
• Brummer (2011) provides us with a useful taxonomy:
• Bilateral and Multilateral Memoranda of Understanding
• International Standard-Setters (e.g. Basel Committee on Banking
Supervision)
• Cross-functional Networks (e.g. Group 20)
• Other international institutions (e.g. International Monetary Fund)
These institutions coordinate across a number of dimensions, including:
• Cross-border information flow – this is in direct response to the issue of the direct
international markets, if there is merging risks is some kind of forum network
exchange on where countries can say, this rism is happening, we wish to work as
international partners
• Cross-border banking supervision
• Cross-border crisis response
• Functional harmonisation – in line with the basil committee, trying to harmonise
what the banking regulations are. – limit regulatory arbitrage opportunities
The current international regulatory architecture is based predominantly on
‘soft law’ mechanisms
• Standards, guidelines, and interpretations (produced by e.g. Basel
Committee on Banking Supervision
• Not binding or enforceable under international law, but theoretically capable of
influencing behaviour through reputational enforcement mechanisms
• Peer review processes
• Developing countries may adopt standards because they are easily
identifiable — national regulators may lack the expertise and information
• ‘Comply or explain’ obligations
• ‘Name and shame’ strategies
• And, theoretically at least, removal from the group
