Challenge of International Cooperation and Institutional Design in Financial Supervision: Beyond Transgovernmental Networks

I. INTRODUCTION The Umited role international organizations and networks played in preventing and responding to the global financial crisis is a case of expectations faUing short of reaUty. As David Zaring has noted in this journal, the "international financial architecture," which consists of the universe of speciaUzed international organizations, economic treaties and regulatory networks pertaining to financial regulation, was mostly ineffective or at best marginaUy useful in helping to manage the financial crisis.1 Instead, the international response to the crisis reUed on state-to-state negotiations by poUtical leaders, most notably through the G20.2 The fact that it took agreements at the ministerial and heads-of-government level to coordinate a response to the crisis is a rebuke to those who argue that transgovernmental networks3 and soft law instruments can sustain a robust framework for regulatory cooperation among states.4 At the same time, dependence on high poUtics5 and state-centric forums Uke the G20 to prevent and manage future financial crises is deeply unsatisfying from both the financial law and international law perspectives. WhUe the G20 was effective in spurring joint action by states,6 there are reasons to be skeptical that the G20 will retain its high level of activity once the immediate threat of the crisis dissipates and international cooperation in the area of financial regulation loses its political urgency.7 Likewise, it is unclear whether the G20 will regain its vigor and effectiveness if a future crisis develops. For financial law scholars, the G20, both in its existence and in the types of actions it puts forward, represents only a temporary solution to an on-going problem of regulation of international financial markets and institutions. A regulatory vacuum remains to be filled. For international law scholars, the G20 offers little advancement of international legal norms in promoting cooperation among states and their regulatory agencies. Having witnessed its shortcomings, we should consider ways to bolster the international financial architecture to fill this regulatory vacuum and to strengthen the international legal framework for regulatory cooperation. The path forward depends first on recognizing two problems with how legal scholars viewed the international financial architecture before the crisis. International law scholars frequently noted that the international financial architecture relied to a great extent on informal transgovernmental networks as opposed to formal international organizations or other treaty-based mechanisms.8 Thus, the international financial architecture appeared to provide convincing empirical support for such scholars' claims about the effectiveness of transgovernmental networks in promoting regulatory cooperation among states.9 In fact, the international financial architecture proved incapable of preventing or managing the causes and effects of the recent financial crisis. The reason why is the second problem. Financial law scholars (and, for that matter, regulators and poUcymakers) did not speak out more strongly before the crisis about the Umitations of the international financial architecture. SpecificaUy, financial law scholars focused their attention on the coordination and harmonization of rules and standards in areas of accounting, securities, and capital adequacy, but left unresolved the problems of prudential supervision of cross-border financial institutions and systemic risk regulation.10 The fauure of states to provide for an international legal regime capable of conducting prudential supervision of crossborder financial institutions proved to be one of the reasons why the international financial architecture was unable to prevent financial instabiUty in the US from becoming a global financial crisis. In response to the recent financial crisis, national regulators and financial law scholars now agree on the greater importance of prudential supervision and systemic risk regulation. …