In the past fifteen years, financial regulators from the developed
world have attempted to create international regulatory standards in a
variety of financial issue areas. Their negotiations are notable for
the stark variation in the preferences of regulators toward
international regulatory harmonization. Certain regulators actively
resist any attempts at regulatory harmonization, while others are vocal
in their advocacy for an international agreement. When will regulators
seek to harmonize their rules with their foreign counterparts? I
propose a principal-agent framework for analyzing regulator behavior
that views international harmonization as a means of satisfying
domestic political pressures. The framework predicts that regulators
are more likely to seek international regulatory harmonization when
confidence in the stability of financial institutions is declining, and
when competitive pressures are increasing from foreign firms facing
less stringent regulations. I explore the consistency of the framework
with two important cases in the history of international financial
regulation: the negotiations among bank regulators leading up to the
1988 Basel Accord on bank capital adequacy, and the negotiations among
securities regulators over capital adequacy for securities firms
between 1988 and 1992.
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