Transnational Regulatory Networks and Their Limits

by Pierre-Hugues Verdier

I would first like to thank Opinio Juris for hosting this online symposium on my recent article, Transnational Regulatory Networks and Their Limits. Opinio Juris has quickly become an invaluable means of keeping up with current developments in international law, and I am delighted to have this opportunity to share my thoughts with you.

In essence, the article sounds a cautionary note regarding the rise of transnational regulatory networks (TRNs) and the predominantly optimistic scholarship about them. In particular, it takes issue with the argument developed by Anne-Marie Slaughter in A New World Order, according to which TRNs are creating a revolutionary system of effective global governance without centralized world government. My response, instead of focusing on much-debated issues of accountability, representativeness or legitimacy, emphasizes the inherent limits on the effectiveness of TRNs in addressing transnational regulatory problems. This is something that lawyers tend to assume, perhaps because of the proliferation of TRNs and the sheer volume of standards they produce. I argue, however, that the effectiveness of TRNs is intrinsically limited by some of the very features—decentralization, informality, specialization—that make them normatively attractive to Slaughter and other scholars. The argument proceeds in two stages, the first theoretical, the second based on case studies of three major TRNs—the Basel Committee, IOSCO and the ICN.

First, on a theoretical level, I argue that the numerous domestic legal and political accountability mechanisms and other constraints faced by national regulators bind them to the interest of domestic constituencies and prevent them from pursuing optimal global public policy for its own sake. As a result, negotiations within TRNs reflect sharp political divides over the distributive consequences of alternative standards. Since national regulators active in TRNs generally lack the authority to offer trade-offs across issue-areas, such divides will be bridged by other means—such as weakening the substantive international standards, or imposing the standards favored by powerful states. Even after international standards are adopted, they will often be vulnerable to opportunistic defection by regulators under pressure to benefit domestic constituencies. In such circumstances, the institutional incapacity of TRNs to monitor or enforce these standards suggests that they are likely to unravel over time. In other words, localizing governance in networks of specialized regulators does not avoid the intensely political issues involved in any international negotiation, and it sometimes actually makes them harder to address effectively.

The second stage of my argument involves case studies of three TRNs—in banking, securities and antitrust—in light of my theoretical framework. In brief, these case studies reveal that TRNs have been relatively successful in overcoming international coordination problems where state interests converge—for instance, coordinating securities fraud enforcement among regulators in developed capital markets, or smoothing procedural inconsistencies and delays in international merger reviews. They have, however, faced serious difficulties when faced with distributive or enforcement problems. Thus, a close look at the Basel Committee’s capital adequacy standards reveals that, while the accord was initially successful in raising worldwide capital levels in the early 1990s, banks were gradually able to secure looser implementation by national regulators, a trend the Committee was essentially powerless to prevent. Indeed, banking interests essentially drove the recent Basel II reform, whose guiding principle was to align regulatory capital levels with internal bank risk management practices—an approach whose flaws are now evident. Likewise, the debate over cross-border enforcement of securities laws takes a very different shape when relations between major financial markets and offshore financial centers (OFCs) are concerned. Since the attractiveness of many OFCs depends on less stringent and transparent regulation, efforts to improve cooperation involve significant tension and coercive measures by powerful countries acting through bodies like the OECD and FATF.

The article concludes that ambitious claims regarding the transformative potential of TRNs are overly optimistic. Future scholarship on TRNs should be more sensitive to the political aspects of international regulation, and particularly to distributional and enforcement problems, the domestic incentives and pressures on national regulators, and the intrinsic limitations of informal governance structures. There should also be more interaction between international law work on TRNs, emerging political science work on international regulation, and legal scholarship in specialized areas of regulation such as securities, banking and antitrust. In my view, such research will contribute to international regulatory design by developing a pragmatic account of the conditions under which TRNs may be successful and desirable.

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