Exploring the WFO Option for Global Banking Regulation

Authors

Lawrence G. Baxter, Duke Law SchoolFollow

Document Type

Chapter of Book

Publication Date

2011

Abstract

The Global Financial Crisis and the global operations by participants in the financial services industry has led observers and even senior public representatives to call for global regulatory solutions that go beyond the current, transnational regulatory network (TRN) framework provided by the G20, the Financial Stability Board and the Basel Committee on Banking Supervision. The concept of a global banking regulator has often been advocated, but this is not remotely politically viable. Recently the imaginative concept of a World Financial Organization (WFO), that would follow the model of the World Trade Organization (WTO), has been proposed. Although attractive in that such a framework might seem to offer a less dramatic inroad on national sovereignty than might a global regulator, the WFO idea has difficulties as well. In particular, financial and especially banking regulation is quite unlike trade regulation. Trade regulation focuses on access to markets and fairness among nations. Banking regulation is concerned with safe and sound operations of specific financial institutions and with the threats to financial stability that such operations might pose. This latter kind of regulation demands highly specific and very responsive regulatory action that does not fit well with the cumbersome processes of international trade regulation. This paper argues that the real problems begin with the globalized nature of specific modern banking operations and that these problems should first be addressed domestically, not internationally. At the same time, international coordination (as opposed to governance) is always critically important. While the TRNs can be criticized for mistakes of their own, their activities provide much more immediate and practical focus than would an abstract WFO treaty that might attempt to move beyond the access to financial markets already addressed in the Annex on Financial Services of the General Agreement on Trade in Services and analogous regional agreements, such as the North American Free Trade Agreement , ch. 14. The paper therefore argues that the WFO proposal is conceptually misaligned to the problems that must be addressed, and that it is also impractical as a short or medium term solution to the problems of financial instability.

Citation

Lawrence G. Baxter, Exploring the WFO Option for Global Banking Regulation, in Globalisation and Governance 113-124 (Laurence Boulle ed., Syber Ink 2011)