Politics of International Finance and Bank Regulations

Abstract

The three essays that comprise this dissertation examine the nature of global governance of finance, with a focus on banking regulations. International political economy is often interested in the conditions under which countries engage in cooperation yet, only limited formal, rules-based governance structures have emerged in the area under study. The fundamental tension of whether a hegemon provides global public goods or national private goods is the theme of the first essay. I measure the effect of the renegotiation of international bank regulations, Basel III, upon US bank stock prices in the aftermath of the Great Recession. I establish that the regulations hurt US banks, which is inconsistent with the possibility that regulations provided private goods to US banks. The first essay establishes that, even in the richest countries, regulators can still effectively act against the wishes of financial special interests. The second and third essays focus on countries' decisions to adopt focal point regulatory policies that they are under no obligation to adopt. Why do countries adopt international best practices given that global governance of finance is decentralized and has weak formal characteristics? I argue, and show evidence, that seemingly weak global governance structures are tied to the International Monetary Fund (IMF), which is highly centralized. The IMF acts as an autonomous international actor in its relationship with countries on an ongoing basis. Through this channel, it promotes diffusion of international best practices in both program and non-program years. Statistical analysis of establishing independent bank supervision and adoption of Basel I, respectively, during the 1990s and the 2000s, show evidence for this relationship. Thus, countries do not face direct international organization pressures, but the embedded nature of international best practices into the IMF monitoring and reporting changes adoption calculations, even in the absence of IMF program conditionality. Together, the essays establish that international governance has evolved in a haphazard manner that is not totally captive to US financial interests and not completely reflective of US political priorities.