Chris Brummer, How international financial law works (and how it doesn’t)

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Grey Matters

Chris Brummer, How international financial law works (and how it doesn’t) (26 Jan 2010).  Available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1542829

Abstract
The “Great Recession” has given way to a dizzying array of international agreements aimed at strengthening the prudential oversight and supervision of market participants. How these international financial rules operate is, however, deeply misunderstood. Theorists of international law view international financial rules as merely coordinating mechanisms in light of their informal “soft law” quality. Yet these scholars ignore the often steep distributional implications of financial rules that may favour some countries over others and thus fail to explain why soft law would be employed where losers to agreements can strategically defect from their commitments. Meanwhile, political scientists, though aware of the distributional dynamics of financial rule-making, rarely, if ever, examine international law as a category distinct from international politics. Law is instead cast as an inert, dependent variable of power as opposed to an independent factor that can inform the behaviour of regulators and market participants.
 
This article presents an alternative theory for understanding the purpose, operation and limitations of international financial law. It posits that international financial regulation, though formally “soft”, is a unique species of cross-border cooperation bolstered by reputational, market and institutional mechanisms that have been largely overlooked by theorists. As a result, it is more coercive than classical theories of international law predict. The article notes, however, that these disciplinary mechanisms are hampered by a range of structural flaws that erode the “compliance pull” of global financial standards. In response to these shortcomings, the article proposes a modest blueprint for regulatory reform that eschews more drastic (and impractical) calls for a global financial regulator and instead aims to leverage transparency in ways that more effectively force national authorities to internalise the costs of their regulatory decision-making.
 
CFR comment
In 78 pages, Georgetown law professor Chris Brummer takes a look at the “dizzying array of international agreements” on financial regulation in the wake of the global financial crisis and does what law professors do best – puts it into a theoretical framework, drawing on insights from the behavioural economics and international relations literatures.
 
It makes two contributions: (1) it identifies “international financial regulation as not simply an inert normative phenomenon, but also as a force in the global economic system that can, under certain circumstances influence the behaviours of regulators and market participants” and (2) addresses “the strategic implications of soft law as well as its normative consequences”, an issue of import in the international relations field. Despite sufficient theorising to satisfy any academic’s tastes, this is well worth reading by practitioners for its careful explication of the relevant literatures and for insight into where academics will be pushing governments to go. Brummer is a clear writer who is able to boil down a voluminous amount of material into a highly concentrated form; and Brummer has some important insights to share.