In the wake of the Great Financial Crisis of 2008, the United States (U.S.) and the European Union (EU)Footnote 1 issued new domestic rules across a variety of financial services (for an overview, see Helleiner Reference Helleiner2014; Moschella and Tsingou Reference Moschella and Tsingou2013; Mügge Reference Mügge and Mügge2014; Helleiner, Pagliari, and Spagna Reference Helleiner, Pagliari and Spagna2018). Early agreement by the Group of Twenty (G20) on high-level principles notwithstanding, the very different (and largely inward-facing) policy-making processes generated incompatible regulation across many financial services subsectors. With both sides insisting that their reforms better protected against future risks to the financial system, conflicts emerged, some high profile, others behind the scenes.Footnote 2 By 2020, however, the U.S. and the EU had mostly resolved the disputes by adopting more “integrationist” approaches. Integrationist regulation fosters cross-jurisdictional interoperability for financial companies through harmonization (increasing similiarity and compatibility) or deference (accepting the regulation of other jurisdictions). Increases in integrationist rules decrease compliance costs for entities operating crossborder and lower cost differentials between domestic and transnational transactions. By doing so, the sources of home-market biases are reduced.
The integrationist turn is important to the future of global finance, which is, at once, a global public good, potentially providing resources where they are needed and making more efficient use of capital, as well as a notorious risk to societies, given the absence of a governance authority able to manage systemic stability and prevent regulatory arbitrage (Pauly Reference Pauly and Ravenhill2008; Underhill and Jones Reference Underhill and Jones2023). Despite the increasing multipolarity in the world economy, the U.S. and the EU remained (at least through 2020, the last year included in this study) the key players—the “great powers” in Drezner’s view (2007)—in the governance of global finance (Mügge Reference Mügge and Mügge2014), and meaningful international cooperation in this field required them to have integrationist regulatory approaches.
The Transatlantic integrationist turn in financial regulation is also empirically puzzling. Domestic politics was paramount in shaping the crisis-induced reforms, which often resulted from bitter and highly politicized contests, involving societal voices not typically part of financial regulation-making processes (Kastner Reference Kastner2017; Woolley and Ziegler Reference Woolley, Ziegler and Mainz2012; Ziegler, Posch and Nath Reference Ziegler, Posch and Nath2024; cf Carpenter Reference Carpenter2010a; Libgober and Carpenter Reference Libgober and Carpenter2024). Thus, in the years immediately following these reforms, strong commitments to clashing domestic rules were on display on both sides of the Atlantic (Posner Reference Posner, Helleiner, Pagliari and Spagna2018; Knaack Reference Knaack2015; Farrell and Newman Reference Farrell and Newman2014, Reference Farrell and Newman2019a; Coffee Reference Coffee2014; Pagliari Reference Pagliari2012). The shift to integrationist approaches took place in spite of a general rise of populism and economic nationalism (e.g., Trump’s “America first”), which affected domestic economic policies and weakened multilateral economic cooperation (Broz, Frieden, and Weymouth Reference Broz, Frieden and Weymouth2021; Helleiner Reference Helleiner2021; Lake, Martin, and Risse Reference Lake, Martin and Risse2021), notably (but not only) in trade (Pollack Reference Pollack2021). By this logic, the U.S. and the EU should have continued to resist pressures to move towards more integrationist regulatory approaches.Footnote 3
Why, then, did Washington and Brussels move beyond the standoffs? What accounts for the integrationist turn? While any satisfactory explanation includes a combination of factors and each subsector will have particularities, the mainstream answers—derived from theories about business power, public salience and international institutions—are incomplete or otherwise inadequate. To fill this gap, we draw attention to the sequences of U.S. and EU interactions set off by the post-crisis development in the two jurisdictions of ‘border-policing capacity’: that is, the ability of public authorities to regulate and supervise foreign entities and transactions and to impose and enforce requirements they must meet to access domestic markets. Our explanation attributes the integrationist turn in large part to processes of “mutual accommodation” arising from such capacity buildups.
The explanation belongs to the International Political Economy tradition that pays close attention to power dynamics within interdependent economic relationships (Hirschman Reference Hirschman1980; Krasner Reference Krasner1991; Aggarwal Reference Aggarwal1985; Farrell and Newman Reference Farrell and Newman2019b). It combines static models about the effects of bipolarity in regulatory arenas (Drezner Reference Drezner2007) with new thinking about temporal processes in transnational spaces (Fioretos Reference Fioretos2011, Reference Fioretos2017; Newman and Posner Reference Newman and Posner2018; Alter and Nelson Reference Alter and Nelson2024), domestic-to-international spillovers (Newman Reference Newman2008), and power and contingency under conditions of complex interdependence (Farrell and Newman Reference Farrell and Newman2014, Reference Farrell and Newman2016; Oatley Reference Oatley2019a; Oatley et al. Reference Oatley, Winecoff, Pennock and Bauerle-Danzman2013). Specifically, we build on research attributing cross-border regulatory interactions in the Transatlantic arena to the EU’s catching up with the U.S. (Kalyanpur and Newman Reference Kalyanpur and Newman2019; Leblond Reference Leblond2011; Műgge Reference Mügge and Mügge2014; Posner Reference Posner2009). Our contribution is to highlight the mechanism of “mutual accommodation” in explaining the integrationist turn in the governance of global finance.
Using congruence analysisFootnote 4 and process tracing,Footnote 5 we find substantial empirical support in our original data on eleven financial subsectors during the post-crisis years through 2020.Footnote 6 Similar yet unconnected U.S. and EU capacity buildups spawned cross-border interactions in which the jurisdictions discovered their inability to foist one’s own approach onto the other and settled instead on adopting more integrationist regulation. The process prompted a change in domestic regulatory approaches, but only after the failure to force one’s own approach onto the other and because of a common desire to avoid major disruptions in transatlantic markets. This multi-method study finds, in sum, that the post-2008 development of roughly equal capacities in two jurisdictions with giant, interconnected markets spurred integrationist regulation that helped avoid financial market fragmentation and sustain global finance.
The next section discusses our data creation process and the empirical pattern of an integrationist turn that emerges from them. The subsequent sections first demonstrate the overall inadequacy of existing accounts that stress the causal effects of business power or international institutions and then develop the paper’s explanation, describing its theoretical contributions and specifying the empirical expectations. The penultimate sections report on the two parts of the empirical evaluation. The conclusion discusses how our study contributes to the accumulation of knowledge derived from qualitative research, advances IPE theory, and adds to debates about global finance.
Original Data and Puzzle
Integrationist regulation fosters cross-jurisdictional interoperability for firms by reducing cost differentials between domestic and cross-border transactions. A jurisdiction’s regulation of a given financial subsector that prohibits foreign participation in home markets – thus making interoperability impossible—would not be integrationist. By contrast, regulation encouraging financial activity beyond national frontiers could be located on a continuum from less integrationist to more integrationist. Policies that put obstacles and costs in the way of cross-border interoperability, intentionally or not, would be less integrationist. Examples include provisions mandating the clearing of derivatives to take place in central counterparties located in a designated jurisdiction, requirements that credit-rating agencies register and comply locally in multiple jurisdictions, and rules that mandate foreign banks to hold separate capital reserves for local affiliates (Coffee Reference Coffee2014; Marjosola Reference Marjosola2016; Scott Reference Scott2014). Examples of more integrationist regulation include provisions enabling financial entities operating in host jurisdictions to comply only with home-country rules, or subjecting certain cross-border transactions only to the rules of one of the two jurisdictions between which the transaction takes place. We use integrationist regulation (levels of integrationism) to avoid the ambiguity of other terms. In some instances, “liberal” regulation may also imply that rules encourage interoperability. Yet the term frequently invokes less stringent or industry-friendly regulation as well. Meanwhile, “internationalist” regulation may not only mean interoperability (promoting international economic activity) but also support of international organizations (multilateralism).
Policymakers select from various principles for enabling non-domestic firms to operate in or otherwise have access to their respective markets. The two main principles are national treatment/non-discrimination (whereby home and foreign are treated the same) and reciprocal recognition (in which jurisdictions agree to allow foreign firms access to home markets so long as they comply with their home regulation). It should be noted that different terms are in use for the reciprocal recognition principle. In the EU, officials tend to use “mutual recognition;” in the U.S., “substituted compliance.”Footnote 7 The degree to which these principles are integrationist depends on ancillary characteristics. For national treatment/non-discrimination, the key is the extent to which there are exceptions and exemptions for foreign firms. For reciprocal recognition, the core questions are whether foreign rules need to be equivalent, who makes the determination and how compatible, harmonized, or standardized home rules are with foreign ones or international standards. To establish the empirical pattern to be explained, we combined these principles and characteristics into four categories—to serve as the basis for coding the financial regulation of the U.S. and EU in eleven subsectors at two points in time following the 2008 crisis (see table 1).
Conceptualization and general coding guidelines for integrationist regulation
Regulation falling into the first two categories encourages no integration or only minimal levels. In Category 1, regulation blocks foreign participation in home markets—autarky; whereas, Category 2 regulation allows foreign firms to participate in home markets (industry integration), but discourages cross-jurisdictional market integration. Regulation in Categories 3 and 4, by contrast, sets the foundations for integrated markets by recognizing foreign rules (with increasingly fewer constraints) and making home regulation more compatible with foreign rules and approaches.
Since the analysis focuses on the Transatlantic corridor in the first two decades of the twenty-first century, we would anticipate that only two of the four categories would be relevant. With respect to Category 1, to our knowledge, there has been no discussion between Brussels and Washington about not letting one another’s firms operate inside the U.S. or the EU (though their coordinated sanctions have denied Russian banks access to their financial markets). With respect to Category 4, the most integrationist form of regulation, “reciprocal recognition with no equivalency provisions” is the default regime inside the EU’s Single Market, but is rarely used across the Atlantic. U.S. and EU regulation would thus likely fall into either Category 2 (encouraging low levels of market integration) or Category 3 (sustaining deeper forms of integration).
Empirical Pattern
We created data points for regulation of the following financial services subsectors: accounting; auditing; banking (bank capital, bank resolution, and bank structure); derivatives (derivatives trading, clearing and central counterparties [CCPs]); hedge funds; credit rating agencies; and insurance. The empirical material derives from the large body of qualitative research in this domain as well as from the financial press and public documents.Footnote 8 The authors made coding decisions jointly. In line with new thinking on qualitative research transparency (Jacobs et al. Reference Jacobs, Büthe, Arjona, Arriola, Bellin, Bennett and Björkman2021), the data will be publicly available,Footnote 9 with descriptions of coding decisions as well as discussions about the data-creation process, author positionality and other relevant issues (Shesterinina, Pollack, and Arriola Reference Shesterinina, Pollack and Arriola2019; Soedirgo and Glas Reference Soedirgo and Glas2020). As discussed in this article’s conclusion, these “back-end” elements are partly designed to contribute to the accumulation of knowledge.
The data are for 2014 and 2020. We used the latter because it is the final year in which the UK used EU regulation. Because London is Europe’s leading financial center, Brexit marks an obvious historical juncture for EU finance and financial regulation and a logical parameter for analysis with theoretical and empirical ambitions. We then chose 2014 because it was halfway between the Great Financial Crisis of 2008 and 2020.
The data show an unmistakable post-crisis pattern of a switch from less to more integrationist regulation (see table 2 and figure 1). In the six years after the crisis, sixteen of the 22 U.S. and EU cases covered in the study had regulation that encouraged only low levels of integration (Category 2), while six qualified as integrationist (Category 3). By 2020, the numbers were the mirror image, with four cases in the former category and 18 in the latter. Figure 1 not only identifies the integrationist turn but also visually captures subsectors for which both the United States and the European Union had integrationist regulation—a combination conducive to highly integrated markets and deep cooperation of all kinds in international standard-setting bodies and other forums of the international financial architecture. While in 2014, the United States and European Union were both “more integrationist” in only two of the eleven subsectors—accounting and bank capital and liquidity. By 2020, the number was nine. Only two subsectors had not become more integrationist: hedge funds and credit rating agencies.
Eleven areas of U.S. and EU financial regulation, by level of integrationism for 2014 and 2020
An integrationist turn*
* Eleven areas of U.S. and EU financial regulation, classified as less (light blue or grey) or more (dark blue or grey) integrationist for 2014 and 2020.
Other Explanations
What explains the integrationist turn? An obvious place to start is Business Power arguments that expect transnational financial industries to promote cross-jurisdictional regulatory interoperability and lax regulation and, with their considerable resources and advantages, achieve these goals under specified conditions (Baker Reference Baker2010; Braun and Koddenbroc Reference Braun and Koddenbrock2023; Coffee Reference Coffee2012; Gadinis Reference Gadinis2015; Kalaitzake Reference Kalaitzake2017; McKeen-Edwards and Porter Reference McKeen-Edwards and Porter2013; Libgober and Carpenter Reference Libgober and Carpenter2024; Pagliari and Young Reference Pagliari and Young2014; Young Reference Young2012; Wilmarth Reference Wilmarth2013; Woll Reference Woll2014).Footnote 10 The variant of the Business Power arguments most relevant in the post-2008 context focuses on public salience. The approach postulates that, in the wake of a crisis, public attention on financial regulation is high and the financial industry finds itself on its back foot, therefore hampered in its ability to influence the policy process. Yet as time passes and memories fade, financial services lobbies regain influence and successfully promote industry-friendly agendas (Culpepper Reference Culpepper2011; Pagliari Reference Pagliari2013).
This argument offers some analytical leverage and, in this sense, should be understood as complementary to our own. Nonetheless, as an explanation for the integrationist turn, the Business Power argument has uneven results, as the evidence supports only one of its two main expectations. If rebounded industry lobbies were the primary factor behind the integrationist turn, we would expect the U.S. and EU regulation to reflect the two main goals of international finance: not only cross-border interoperability, but also regulatory loosening. These goals consistently appear in industry documents across subsectors and time. Typical among these is a joint February 2012 letter from three major transnational financial associations to all U.S. financial regulatory agencies and the Treasury concerning the 2010 Dodd-Frank Act’s controversial Volcker rule. The Association for Financial Markets in Europe (AFME), the Asia Securities Industry & Financial Markets Association (ASIFMA), and the International Capital Market Association (ICMA) (2012, 3-4) pressed for both greater interoperability (in this instance, reducing the rule’s extraterritorial scope by extending deference to foreign home country regulators) as well as as less stringency (in this instance, increasing exemptions and exclusions and otherwise expanding the discretion of financial firms). Similarly, to offer an example from the derivatives subsector, the International Swaps and Derivatives Association (ISDA), the Institute of International Bankers (IIB) and the Securities Industry and Financial Markets Association (SIFMA) (2013) initiated judicial action against the CFTC, criticizing its “flawed attempt to act as the paramount regulator of international swaps trading” by imposing “inconsistent, duplicative requirements” on firms regulated by other countries (that is, reducing interoperability) and for producing “irresponsible rules” that were “not cost-effective” (that is, too stringent).
Yet while the empirical pattern of an integrationist turn suggests success with regard to the former (interoperability), the data on regulatory stringency indicates failure in the case of the latter (table 3). The shift to more interoperable regulation did not come at the expense of stringency, which through 2020 remained relatively high across subsectors on both sides of the Atlantic (Posner and Quaglia Reference Posner and Quaglia2024). Thus, the adopted approaches of the United States and European Union were very much second-best solutions from the perspective of the leading multinational financial services providers—which is why, throughout the years of this study, the firms never ceased their campaign to water down the post-crisis reforms. The Volcker rule again serves as a good illustration. In a 2017 Congressional hearing, the chairman of the Securities Industry and Financial Markets Association (SIFMA), Ronald Kruszewski (Reference Kruszewski2017) was still repeating the arguments made in 2012: “The Volcker Rule needs to be taken off the books, repealed. But if repeal is not possible, it must be materially amended” because it imposed “overly complex” (that is, costly) compliance to the financial industry. By the end of 2020, transnational financial firms had won improved interoperability (that is, the removal of some of the Volker rule’s extraterritorial measures), but made little progress in regulatory loosening. As table 3 suggests, by and large, stringency levels remained similarly high across subsectors in the United States and the European Union.
Pre and post-crisis financial regulatory stringency in the U.S. and the EU*
* Data derived from Posner and Quaglia (Reference Posner and Quaglia2023). Regulation scores from 0 (lax) to 5 (stringent)
The mixed evidence in support of the Business Power argument raises the question of whose goals, if not the industries’, were achieved in the integrationist turn?
A second pair of plausible explanations derive from approaches that feature international institutions. The first highlights the role of financial standard-setting bodies, positing that these international institutions promote cross-border cooperation. By this logic, the adoption of integrationist regulation across jurisdictions in the post-crisis context would be more likely when institutional density at the international level is already high and when the relevant standard-setting body is well established (Knaack Reference Knaack2015; Posner Reference Posner, Helleiner, Pagliari and Spagna2018; Zaring Reference Zaring2020). The explanation, overlapping with classic historical institutionalism, implies path-dependent processes in which pre-crisis institutions continue to shape regulatory approaches in the aftermath of 2008 (Fioretos Reference Fioretos2017; Alter and Nelson Reference Alter and Nelson2024, 389-91). The second institutional explanation emphasizes the effects of transgovernmental networks of financial authorities (see Gadinis Reference Gadinis2015; Slaughter Reference Slaughter2004; Zaring Reference Zaring2020; cf Verdier Reference Verdier2009). It expects repeated interactions among regulators to foster deliberation and technocratic fixes based on expert knowledge and learning.
As elaborated in the conclusion, our study speaks directly to complex temporal processes involving international institutions and even offers evidence in two subfields of the kinds of path-dependent processes expected in the first explanation. It also reveals that transgovernmental networks, comprised of financial regulatory authorities with powers delegated by their respective legislators, generated technocratic solutions and were thereby central to overcoming several U.S. and EU financial regulatory impasses. However, as explanations for the integrationist turn, they too do poorly. The empirical record suggests that outcomes were more or less the same whether the starting point at the time of the 2008 crisis was a deeply institutionalized international standard-setting body, such as the Basel Committee (bank capital) or the absence of one (derivatives), or whether the networks were relatively robust (central bankers) or not well formed (derivatives) (Newman and Posner Reference Newman and Posner2018, 119-155; Knaack Reference Knaack2015).
In fact, attributing the outcome to international institutions in the majority of the cases would confuse cause and effect. As described later, most international standard-setting bodies and regulatory networks proved insufficiently institutionalized and developed to coordinate reforms in member jurisdictions (first and foremost, the United States and the European Union) and were only later strengthened to help them iron out cross-border regulatory clashes, set standards to avoid market fragmentation, and otherwise make cooperation easier. Thus, the relative strengthening of these institutions was mostly a consequence of the bilateral interactions at the core of our explanation. The timing of developments is crucial to this claim. New international standards tended to emerge only after the United States and the European Union had adopted (different) domestic regulations, reached an impasse and tried, in vain, to force their respective approaches onto the other.
With these shortcomings in mind, we proffer an explanation inspired by a different IPE theoretical tradition.
An Explanation Synthesizing Market Power and New IPE Thinking
In the context of real-world trends—the revival of economic nationalism (e.g., Helleiner and Pickel Reference Helleiner and Pickel2004) and more explicit forms of industrial policies, the rise of geoeconomics (Blackwill and Harris Reference Blackwill and Harris2016), including potential disruptions to supply chains and security of strategic materials (Galeotti Reference Galeotti2022)—there is a greater and palpable appreciation for IPE’s long tradition of theorizing about the power dimensions of economic interdependence.Footnote 11 This literature’s original focus was trade (Hirschman Reference Hirschman1980; Krasner Reference Krasner1976; Aggarwal Reference Aggarwal1985) and money (Strange Reference Strange1986; Cohen Reference Cohen1998). But studies on regulation have been particularly vibrant in recent decades (Bradford Reference Bradford2020; Mattli and Woods Reference Mattli and Woods2009; Newman and Posner Reference Newman and Posner2011; Vogel Reference Vogel2009; Young Reference Young2015).
To be clear, the “power dimension” to which we refer concerns market power among jurisdictions—states (and, sometimes, deeply integrated regional economic blocs, such as the European Union). In the literature on financial regulation, too often scholars attribute domestic regulation to domestic factors;Footnote 12 and when the effects of external phenomena are incorporated, the tendency, as discussed earlier, is to attribute causation to the power of capital owners, managers, and intermediaries or to the enduring effects of international institutions. By contrast, our approach starts with the IPE literature that deems power distributions in the international political system as a core structural constraint on the regulatory behavior of jurisdictions.
In finance, this line of theorizing is less explored but has a solid lineage. Susan Strange (Reference Strange1986, Reference Strange1987), Eric Helleiner (Reference Helleiner1996) and Beth Simmons (Reference Simmons2001) stand out as early examples that depicted the system as U.S.-centric with market power frequently tied to the near-hegemonic role of the dollar (Eichengreen Reference Eichengreen2011). The latter theme reemerged after the Great Financial Crisis revealed the continued dominance of the dollar and the central role of the Federal Reserve and the U.S. government in propping up global financial markets (Drezner Reference Drezner2014; McDowell Reference McDowell2012; see also Norrlof Reference Norrlof2014, Reference Norrlof2010; Oatley Reference Oatley2019b; Oatley et al. Reference Oatley, Winecoff, Pennock and Bauerle-Danzman2013). A second strand of research shifted attention to U.S.–EU regulatory bipolarity (Posner Reference Posner2009), widely recognized to have replaced U.S. financial regulatory hegemony (Simmons Reference Simmons2001) after European countries “Brusselised” the sector at the turn of the millennium. Initial analyses tended to adopt static models, reminiscent of classic IR systems theory (Drezner Reference Drezner2007), and simple definitions of market power, more or less equating it to market size (Oatley and Nabors Reference Oatley and Nabors1998; Simmons Reference Simmons2001).
Our approach keeps the attention on market power in bipolar regulatory arenas as well as the contention that explanations for major financial regulatory developments—such as the integrationist turn investigated in this article—are inadequate if they exclude the effects of interactions among the core jurisdictions. However, we depart from static models, one-dimensional conceptualizations of market power, and other elements of this earlier research by building on two insights from IPE theory’s third wave (Fioretos Reference Fioretos2011, Reference Fioretos2017; Oatley Reference Oatley2011, Reference Oatley2019a; Farrell and Newman Reference Farrell and Newman2014, Reference Farrell and Newman2016, Reference Farrell and Newman2019a; Alter and Nelson Reference Alter and Nelson2024).Footnote 13
First, we recognize the relevance of “regulatory capacity” (Bach and Newman Reference Bach and Newman2007) as a necessary component of market power, especially, “border-policing capacity”; that is, the ability of public authorities to regulate and supervise foreign entities and transactions and to impose and enforce requirements they must meet to access domestic markets (Bach and Newman Reference Bach and Newman2007, 831; see also Büthe and Mattli Reference Büthe and Mattli2003 and Posner Reference Posner2009). This type of capacity enables regulatory authorities to use the large markets under their jurisdiction as sources of power. Legal scholars (Brummer Reference Brummer2011, Reference Brummer2015; Coffee Reference Coffee2014; Scott Reference Scott2014) point to two main types of border-policing capacities. There are those based on the principle of “territoriality”, meaning that jurisdictions regulate foreign entities and transactions operating within their borders (e.g,. branches of foreign banks or insurance contracts stipulated with foreign insurers) in the same way they regulate domestic entities and transactions. There are also border-policing capacities based on the principle of “extraterritoriality”, whereby jurisdictions apply regulation exclusively to foreign entities and transactions that occur within its borders or that produce effects on that jurisdiction (for instance, derivative transactions taking place between a foreign and a domestic counterpart, see Gravelle and Pagliari Reference Gravelle, Pagliari, Helleiner, Pagliari and Spagna2018).
Ours is not the first study to identify that even with continued dollar domination, the more even distribution of border-policing capacities is a distinct source of regulatory outcomes. The reduction of pre- and, especially, post-2008 asymmetries have been tied to the EU’s efforts to catch up with U.S. capital markets, to Europe’s attempt to influence international standard setting, to Donald Trump’s failure to gut the Dodd Frank Act in 2018 and to similar failures by industry lobbies on both sides of the Atlantic (Posner Reference Posner2009; Leblond Reference Leblond2011; Mügge Reference Mügge and Mügge2014; Bradford Reference Bradford2020; Posner and Quaglia Reference Posner and Quaglia2024). Our study extends this line of research: not only can parity in border-policing capacity deter from loosening regulation but, we posit, also encourage (Transatlantic) regulatory adjustment and cooperation. Specifically, we highlight the mechanism of “mutual accommodation”, a temporal process in which the regulatory giants make concessions after interacting and failing to get the other to adopt its respective homegrown approach.
Second, we follow the new thinking in envisioning financial regulation to be part of an evolving and complex international political economy (Oatley Reference Oatley2019a; Alter and Nelson Reference Alter and Nelson2024). Our explanation pays close attention to temporal processes (Fioretos Reference Fioretos2011, Reference Fioretos2017; Newman and Posner Reference Newman and Posner2018) and to mechanisms through which change in one part of a system affects other parts to generate outcomes. It does so by spelling out how reforms within powerful jurisdictions affect their interactions and set off endogenous sequences in which regulatory goals and strategies can change in reaction to what the other does.
So, there is the need to theorize about this dynamic, which we do by modelling interactions and outcomes in three distinct consecutive phases, and to make corresponding adjustments, such as in the explanatory role attributed to actors and agency. Financial authorities (mainly agencies possessing delegated regulatory and supervisory powers as well as relative degrees of autonomy from elected officials and the financial industry) sit at the center of our explanation (Carpenter Reference Carpenter2010a; Gadinis Reference Gadinis2015; Singer Reference Singer2004, Reference Singer2007; Verdier Reference Verdier2009; Zaring Reference Zaring2020). Yet unlike studies that have a more agential focus, asking whether and how technocratically oriented officials expand and protect their autonomy (Carpenter Reference Carpenter2010b; Singer Reference Singer2004, Reference Singer2007), we shift the spotlight to an interactive process and how it constrains and conditions the regulators.
Causal Mechanism
After the Great Financial Crisis, regulatory agencies in the United States and the European Union were given a renewed political mandate to prevent another financial meltdown by enhancing financial regulation (Baker Reference Baker2013; Gravelle and Paliari Reference Gravelle, Pagliari, Helleiner, Pagliari and Spagna2018; Thiemann Reference Thiemann2024). They had to reconcile this goal that embraces high levels of regulatory stringency with the political (non)decision to preserve global finance (that is, maintain general levels of financial interdependence and capital mobility).Footnote 14 Legislation had sometimes endorsed coooperation with foreign counterparts as a means for overcoming the inherent tension between the two mandates (Zaring Reference Zaring2016). However, the reality was an international financial architecture comprised of standard-setting bodies with mostly limited capacities. Despite exceptions (notably, the Basel Committee on Banking Supervision and the International Accounting Standards Board), these bodies lacked sufficient institutionalization to prevent the highly politicized, inward-facing reform processes in Washington and Brussels from generating uncoordinated—less integrationist—regulation across a variety of financial services subsectors.
Different regulatory approaches, sometimes but not always rooted in domestic institutional variance (Thiemann Reference Thiemann2018, Reference Thiemann2024), had long been a mainstay. But the reforms in pursuit of financial stability and regulatory stringency (replete with the expected peculiarities of distinct post-crisis political processes) turned existing differences into incompatibilities and created other ones de novo (Gravelle and Pagliari Reference Gravelle, Pagliari, Helleiner, Pagliari and Spagna2018). The subsequent series of regulatory conflicts thus emerged by default and were tough to resolve because, once adopted, domestic financial rules are notoriously hard to change (Thiemann Reference Thiemann2018, Reference Thiemann2024). Nevertheless, as illustrated in table 2 and figure 1 and discussed earlier, by 2020 the United States and European Union had adopted more integrationist regulation. What explains the shift? Why did they do so without loosening regulation, as expected by the Business Power argument, and with only an uneven array of the kinds of international institutions deemed necessary by International Institutionalist accounts?
Our explanation begins with the uncoordinated and enhanced U.S. and EU border-policing capacities introduced to preserve and defend the original homegrown rules. As detailed later, tucked into the same legislation as the new stringent rules were territorial and extraterritorial provisions that increased the ability of financial authorities to oversee foreign firms and transactions and to make access to domestic markets contingent on meeting home requirements (Gravelle and Pagliari Reference Gravelle, Pagliari, Helleiner, Pagliari and Spagna2018; Posner and Quaglia Reference Posner and Quaglia2024; Coffee Reference Coffee2014; Marjosola Reference Marjosola2016; Scott Reference Scott2014). We envision a three-phase sequence by which these capacities might trigger mutual accommodation processes: unilateral deployments of fairly equal border-policing capacities; conflicts over incompatible and inflexible domestic rules and a turning point at which regulators realize they cannot reach their respective goals without accommodating the other; and a finale, when they make their respective regulation more integrationist.
Empirical Expectations
(t1) Post-crisis deployment of border-policing capacities: At t1 we expect U.S. and EU authorities to deploy their respective new border-policing capacities in the name of safeguarding internal financial system stability and to do so by insisting that foreign firms and cross-border transactions are compliant with their own newly written stringent rules.
(t2) Failed unilateralism: Bids to foist homegrown approaches onto the other are likely to fail when border-policy capacities are relatively equal. Any insistence on market access being contingent on foreign firm compliance with host-country rules would be unlikely to yield the desired outcomes and instead generate a similar reciprocal stance by the other jurisdiction and mutually unwanted outcomes, such as market fragmentation. Thus, at t2, we expect transatlantic regulatory rifts and impasses, as each of the two jurisdictions unsuccessfully seeks unilaterally to impose its rules onto the other. We also expect authorities (and sometimes legislators) to realize the futility of their preferred policy.
(t3) Mutual adjustment and integrationist rules: At t3 the two jurisdictions would likely be willing to adopt more integrationist rules that accept deference and exemptions or make home rules more compatible with foreign ones.
Empirical Analysis
We turn now to an empirical evaluation of our explanation. Building on previous studies in this field, we first outline the development of border-policing capacities in the United States and the European Union across the eleven financial subsectors. We next use congruence analysis and process-tracing to assess how well the evidence supports our expectation that enhanced border-policing capacities would set off reactions and interactions, generating the mutual accommodation causal mechanism and thereby resulting in the integrationist turn in U.S. and EU regulation.
Legal scholars (e.g., Brummer Reference Brummer2011, Reference Brummer2015; Coffee Reference Coffee2014; Scott Reference Scott2014) have highlighted the increased use in the United States and European Union of extraterritoriality (in its various forms) as a regulatory technique to reduce regulatory arbitrage after the Great Financial Crisis, and our previous research pointed out how building up border-policing capacities supported stringency levels (Posner and Quaglia Reference Posner and Quaglia2024). This study, extending research on the consequences of the build up, uses some of the same publicly accessible data to establish it (Posner and Quaglia Reference Posner and Quaglia2023). Indeed, a contribution of this article, we hope, is to show how qualitative researchers can make use of publicly available empirical material.
The following, summarized in figure 2, is a bird’s eye view of the post-crisis development of border-policing capacities across a variety of financial subsectors in the United States and the European Union. In accounting, even prior to the crisis, foreign companies listed on the U.S. stock exchange were required to reconcile their financial statements with U.S. accounting standards (Posner Reference Posner2010). After the crisis, the EU adopted a similar approach: foreign companies that wanted to be listed on EU stock exchanges were subject to EU accounting standards, unless foreign standards were deemed to be equivalent to EU ones. Likewise, in auditing, prior to the crisis, foreign public company auditors were required to comply with the U.S. auditing standards and be subject to some oversight by the U.S. authorities (Dewing and Russell Reference Dewing and Russell2004). Post crisis, the EU required foreign public company auditors to comply with specified EU rules, unless foreign auditing standards were deemed to be equivalent to EU ones (Posner and Quaglia Reference Posner and Quaglia2023, 7).
The development of border-policing capacities*
* U.S. and EU border-policing capacities, classified as No (white), In part (light blue or grey) or Yes (dark blue or grey) for pre-2008 and post-2008. Derived from Posner and Quaglia (Reference Posner and Quaglia2023).
In the banking sector, as part of the post-crisis reforms, foreign banks operating in the United States and European Uuion had to set up intermediate holding companies subject to capital and liquidity requirements on their own terms. Moreover, the U.S.’s Volcker rule applied also to the parent companies of foreign banks operating in the United States (Brummer Reference Brummer2011; Coffee Reference Coffee2014). Similarly, the EU’s rules on financial conglomerates reached beyond the EU’s border (Posner and Quaglia Reference Posner and Quaglia2023, 8-11). As far as derivatives are concerned, transactions involving a U.S./EU counterpart and a foreign counterpart were subject to U.S./EU rules on trading and clearing (Gravelle and Pagliari Reference Gravelle, Pagliari, Helleiner, Pagliari and Spagna2018). If the transactions involved two foreign counterparts, but had had direct and substantial effects in the U.S./EU, these transactions were subject to U.S./EU rules, unless certain conditions were met. Derivatives trading platforms and Central Counterparties based abroad, but wishing to trade and clear transactions for U.S./EU market participants, were subject to certain U.S./EU rules as well as registration requirements with U.S./EU authorities, unless they were granted exemptions (Buxbaum Reference Buxbaum2016; Marjosola Reference Marjosola2016).
In insurance, the Dodd-Frank Act established a Federal Insurance Office with a view to coordinating state-level insurance regulators and representing the United States in the relevant international financial forum. Moreover, the Federal Insurance Office and the Trade Representative were given the power to negotiate bilateral or multilateral “covered agreements”, a new type of international agreement for recognizing foreign prudential measures in the insurance sector (Congressional Research Service 2017a). The United States had pre-crisis provisions that penalised “alien” reinsurers operating in the United States by requiring them to post collateral locally (Stubbe Reference Stubbe2019). After the crisis, the EU issued new rules whereby foreign insurers operating in the EU that were subject to home country supervision deemed to be equivalent to the one in place in the EU, would be subject to solvency requirements on a group basis, not a solo basis (which would be more onerous) (Quaglia Reference Quaglia2014). Finally, for credit rating agencies and hedge funds, only the EU built up its post crisis border-policing capacities, whereby ratings issued by foreign rating agencies could be used in the EU only subject to de facto endorsement by the EU authorities; whereas, foreign hedge funds could market their products across the EU with the so-called “passport”, only if they were subject to rules deemed to be equivalent to EU rules (Pagliari Reference Pagliari2013; Quaglia Reference Quaglia2015).
Congruence Analysis
Our explanation postulates that the change in border-policing capacities (more or less equally enhanced) set off a mutual accommodation mechanism that resulted in more integrationist regulation in the United States and the European Union. The analysis—applying the logic of congruence—assesses whether there is a match between the presence of our theoretically-derived hypothesized cause (the emergence of parity) and the expected outcome (more integrationist regulation). The evidence summarized in figures 1 and 2 shows a high degree of congruence. Of the eleven financial services subsectors included in the study, seven had integrationist turns between 2014 and 2020. In all of these, there was also the emergence of enhanced and roughly equivalent border-policing capacities.
Congruence analysis applies high-level correlational logic; without providing information about causal mechanisms, it is not a satisfactory tool for drawing conclusions about an explanation’s empirical robustness. Congruence analysis cannot answer the question of why the United States and the European Union made changes to their original post-crisis regulation and does not establish whether the changes are attributable to our postulated mutual accommodation mechanism. In brief, there is no way to establish whether the easing in cross-jurisdictional interoperability for financial businesses was attributable to clashing domestic rules and the inability of either jurisdiction to achieve its goals without making compromises. Nevertheless, the tight match between postulated cause and expected outcome for more than half the subsectors is encouraging.
The evidence in two additional subsectors does not disconfirm the explanation and probably supports it. In accounting and bank capital and liquidity rules, the evidence demonstrates a similarly tight match. Yet these two cases do not belong to the congruence analysis in the strict sense—since the United States and European Union both already had integrationist regulation by 2014 and therefore did not undergo a puzzling turn. As the two subsectors had relatively developed international standard-setting bodies, we suspect equifinality (different paths to the same outcomes) occurred before 2014, after which the new parity in border-policing capacities helped sustain the integrationist approaches.
Two of the remaining subsectors—credit rating agencies and hedge funds—appear to fit the argument’s expectations in the sense that there exists a match between the absence of enhanced and equal border-policing capacities (figure 2) and no integrationist turn (table 2 and figure 1). Such a conclusion, however, would be facile. In fact, our explanation holds that parity in increased border-policing capacities combined with several preexisting conditions—including roughly balanced subsectoral interdependence—generate the integrationist turn. We make no claims about the converse—subsectors that do not exhibit equal and enhanced capacities—nor about subsectors missing the specified pre-conditions—in this instance, balanced interdependence as U.S. firms dominate both credit rating agency and hedge fund subsectors.
Process-Tracing
Delving deeper than the correlational logic of the congruence analysis, we process trace to see whether the outcomes were generated via the ascribed causal mechanism (Beach and Pedersen Reference Beach and Pedersen2019; Checkel Reference Checkel, Pevehouse and Seabrooke2021). In particular, we need to uncover empirical evidence of the following sequence: First, the evidence should suggest that U.S. and EU regulators deployed the new border-policing capacities at their disposal. Second, there should be evidence of failed unilateralism (in the sense that conflicts emerged and the regulators were unable to meet their goals) and recognition by regulators (that to achieve one’s main goals, each of the two jurisdictions had to make adjustments to accommodate the other). Lastly, the evidence should show the integrationist turn: that U.S. and EU authorities modified regulation in a way to include deference to each other’s rules, exemptions for foreign players and reference to international standards. While including all eleven regulatory areas would be beyond this paper’s scope, process tracing within the derivatives and insurance cases offers substantial additional support for our explanation.
Derivatives
Derivatives are “critical cases” because they are the world’s largest market and thus the analytical leverage of our explanation would be limited if it could not account for them. In addition, they are “least-likely” cases for the study’s integrationist puzzle. In fact, the U.S.–EU regulatory conflicts concerning derivatives were the most contentious (Knaack Reference Knaack2015; Coffee Reference Coffee2014) even though, unlike other sectors such as insurance (discussed next), direct public regulation of derivatives was created from scratch following the Great Financial Crisis (Pagliari Reference Pagliari2012); thus, the bitter conflicts did not represent the intensification of longstanding historical institutional differences. For years, both the U.S. and EU officials obstinately insisted on foreign firm compliance with their respective tighter, but different, domestic templates, making back-peddling unlikely—especially in the absence of a focal international standard setter such as the Basel Committee on Banking Supervision. Yet by 2020, the United States and the European Union had put in place integrationist rules.
As evident in a comparison of figures 2 and 1, there is congruence between the presence of strong and more even border-policing capacities—which make conformity to host regulation the condition for market entry for foreign firms and create the extraterritorial extension of home regulation—and the empirical expectations that such a configuration would lead to integrationist approaches. Process tracing allows us to attribute the outcome to the “mutual accommodation” mechanism.
Post-crisis deployment of border-policing capacities (t1). In the United States, Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (2010) contained the provisions that enhanced border-policing capacities. It required that certain types of over the counter derivatives be traded on exchange-like platforms; to be centrally cleared through CCPs (“derivatives clearing organizations”); and to be reported to repositories storing trading data. It also required that the new derivatives rules should apply outside the United States, if those activities had a direct and significant connection with activities in the United States. The enacting rules were set by the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) (Acharya et al. Reference Acharya, Cooley, Richardson and Walter2010), which were also responsible for issuing rules on CCPs (such as those related to default funds and margins). U.S. regulators were given the power to exempt third-country players from registration in the United States, if they were subject to “comparable, comprehensive supervision and regulation” (Dodd-Frank Wall Street Reform and Consumer Protection Act 2010, Sec 725 (h); see also Coffee Reference Coffee2014). However, for several years, the CFTC issued only targeted exemptions for limited time-periods (Gravelle and Pagliari Reference Gravelle, Pagliari, Helleiner, Pagliari and Spagna2018).
The EU also bolstered its border-policing capacities in derivatives after the Great Financial Crisis, raising them to U.S. levels. The EU set rules for CCPs, which also included equivalence provisions, in the European Market Infrastructure Regulation in July 2012, and the Markets in Financial Instruments Directive II and the Markets In Financial Instruments Regulation, both adopted in June 2014, required certain types of derivatives to be traded on exchange-like platforms, to be cleared via CCPs and to be reported to trade repositories. Partly in response to U.S. rules, EU rules also applied to activities outside the EU, if they produced direct and significant effects in the EU. Although EU legislation contained equivalence provisions designed to allow foreign players to provide services to EU firms on the basis of their home country regulation and supervision (Gravelle and Pagliari Reference Gravelle, Pagliari, Helleiner, Pagliari and Spagna2018; Pagliari Reference Pagliari2013), the EU took a long time to adopt equivalence decisions, partly in retaliation to what the U.S. authorities were doing.
Soon after the politicians passed their respective legislation, U.S. and EU derivatives regulators sought to impose their respective rules on each other. Immediately following the passage of the 2010 Dodd Frank Act, which preceeded EU legislation, the CFTC moved first, adopting a broad extraterritorial application of its rules (Brush and Schmidt Reference Brush and Schmidt2013). Foreign trading venues and CCPs, for instance, fell under U.S. rules and, therefore, these foreign entities needed to register with the CFTC (Marjosola Reference Marjosola2016; Ryan and Ziegler Reference Ryan, Ziegler and Mayntz2015; Gravelle and Pagliari Reference Gravelle, Pagliari, Helleiner, Pagliari and Spagna2018). The European Commission pursued similar applications of EU derivatives rules, most notably (and in retaliation of the CFTC’s actions) in the case of its narrow reading CCP equivalence (Gravelle and Pagliari Reference Gravelle, Pagliari, Helleiner, Pagliari and Spagna2018, 95-99). Analysts and the financial press widely covered these unilaterist bids. As Knaack (Reference Knaack2015, 1226) nicely put it, to the question of whose rules should apply to cross-border derivatives transactions, policymakers in the United States and in the European Union found an unhelpful answer: “theirs and only theirs.”
Failed unilateralism (t2). As early as 2012, EU authorities were giving voice to the idea that narrow and unilateral applications of the new more stringent rules were problematic, had produced a tit-for-tat dynamic, and would fail. It took U.S. officials longer—and only after explicit EU threats of retaliation—to recognize that mutual adjustments were necessary.
In June 2012, the EU Commissioner for financial services, Michel Barnier (Reference Barnier2012) wrote an open letter to the Financial Times, criticizing the fact that many of the CFTC requirements “would apply to companies in the [European Union] and to trades between the EU and U.S. clients. American rules would take primacy over those in Europe.” A few months later, during a gathering between U.S. and EU officials in Washington, Patrick Pearson (reported in Brush Reference Brush2012), a senior official dealing with derivatives regulation at the European Commission, noted that “the proposed approaches across the globe simply won’t work. They won’t mesh. They won’t interact. They will cause conflicts … ‘Washington, we have a problem’.”
By this time, it had already become patently clear that regulatory unilateralism was indeed a major hindrance to the functioning of cross-border markets—and thus undermining one of the joint goals of both the United States and the European Union. In fact, divergent domestic rules, their extraterritorial reach and the lack of regulatory deference fragmented the global derivatives markets along jurisdictional lines (ISDA et al. 2011). Consequently, derivatives market participants had an incentive to do business only with counterparties located in their own jurisdiction, and to trade and clear through, respectively, trading venues and clearing venues (i.e., CCPs) registered in that jurisdiction so as to avoid being caught up in two sets of jurisdictional rules (Coffee Reference Coffee2014; Marjosola Reference Marjosola2016).
The financial industry lobbies representing the firms most heavily engaged in the global derivatives business complained loudly about the market fragmentation and the new costs of operating cross-border, including the duplication costs. For instance, Robert Pickel, ISDA Chief Executive Officer, in his opening speech at the ISDA annual conference in 2012 criticized the U.S. and EU unilateralist approaches, notably that they created cross-border regulatory inconsistencies threatening to fragment global derivatives markets. He also pointed out the need to foster “a globally consistent regulatory landscape that ensures a level playing field and avoids fragmentation of markets and regulatory arbitrage is crucial in the development of a robust, safe and efficient OTC derivatives market.”Footnote 15
Despite these signs of global derivative market fragmentation, the CFTC was not yet ready to yield (Brush and Schmidt Reference Brush and Schmidt2013). In April 2013, the European Commission amplified its campaign, sending a letter (jointly authored with the finance ministers of France, Germany, the United Kingdom, Italy, Switzerland, Brazil, Russia, Japan, and South Africa) to the U.S. Treasury. It pointed out that
an approach in which jurisdictions require that their own domestic regulatory rules be applied to their firms’ derivatives transactions taking place in broadly equivalent regulatory regimes abroad is not sustainable … . A coherent collective solution is therefore needed for cross-border derivatives, and regulators must work together to avoid outright conflicts in regulation and minimise overlaps as far as possible. In this regard, mutual recognition, substituted compliance, exemptions, or a combination of these would all be a valid approach (European Commission, Treasury Ministers of France, Germany, the UK, Italy, Switzerland, Brazil, Russia, Japan, and South Africa 2013).
Initially, the European Commission’s renewed efforts seemed to pay off in July of 2013 when the CFTC, under pressure from lawmakers and the financial industry, agreed with the European Commission on a “Common Path Forward on Derivatives”, laying out a compromise to avoid firms the burden of complying with two different sets of regulations.Footnote 16 Brussels accepted that EU firms would have to register with the CFTC when they met applicable standards, while the CFTC accepted a greater degree of “substituted compliance” for firms to comply with EU requirements instead of CFTC rules.
Yet the conflict persisted for several years. In fact, some analysts and participants consider the nadir to have occurred in the summer of 2014, when the chairman of the CFTC, Timothy Massad (Reference Massad2014) intimated the need for additional European clearing operations to move to the United States on the ground that he believed “physical presence or conduct in the U.S. has long been a traditional basis for jurisdiction”, and the EU made public its intention not to extend equivalence to U.S. clearinghouses even though it was doing so for other countries (Quaglia Reference Quaglia2020). Suggesting deference arrangements as a way to move beyond the impasse, in June 2014 Commissioner Barnier made the following offer: “If the CFTC also gives effective equivalence to third country CCPs, deferring to strong and rigorous rules in jurisdictions such as the EU, we [the EU] will be able to adopt equivalence decisions of U.S. CCPs very soon” (Jones Reference Jones2014). Shortly after, CFTC Commissioners began to float similar ideas. In November 2014, for instance, CFTC Commissioner Mark Wetjen endorsed the idea that the U.S. regulator should allow more oversight by foreign jurisdictions (Stafford Reference Stafford2014) and in 2015, moreover, Massad (Reference Massad2015b), gave evidence before the European Parliament, armed with data, charts, and tables to prove that his agency’s CCPs regime was equivalent to that of the EU. By publicly offering detailed technocratic solutions to some of the most contentious issues, he confirmed his agency’s new commitment to a more integrationist approach (see also Massad Reference Massad2015a).
Mutual adjustment and integrationist rules (t3). Having tried and failed in unilateralist applications of their respective rules and finally digested the futility of these tactics achieving their aims, U.S. and EU authorities worked together to narrow differences between their regulatory approaches, making use of deference arrangements, while promoting the creation of international standards to foster international harmonization across jurisdictions.
In 2016, the CFTC and the European Commission adopted a “Common approach for transatlantic central counterparties.”Footnote 17 The European Commission agreed to adopt an equivalence decision with respect to CFTC rules. Thus, U.S. CCPs could continue to provide services in the EU while complying primarily with U.S. rules. In return, the CFTC permitted EU CPPs to provide services in the United States, while complying primarily with EU rules. In 2017, the CFTC and the European Commission agreed on a “Common Approach to Certain Derivatives Trading Venues”, whereby the CFTC adopted an exemption from its registration requirements for EU trading venues, while the EU granted equivalence to U.S. trading venues.Footnote 18
The U.S./EU rapprochement enabled progress in the international standard-setting bodies as well. The Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) (CPMI–IOSCO 2017a, b), for instance, issued rules on the resilience and recovery of CCPs in 2017, and the Financial Stability Board (FSB) (2017, 2019) published guidance on the resolution of CCPs. International standards were also issued concerning the data format for derivatives trade reporting, especially for critical data in 2019 (CPMI–IOSCO 2019), and an entirely new international system for global identifiers for legal entities, transactions, and products was established by the FSB (2019) and the CPMI–IOSCO (Quaglia and Spendzharova Reference Quaglia and Spendzharova2021).
Insurance
Although U.S./EU disputes over insurance regulation were longstanding, pre-dating the Great Financial Crisis in some areas, they were never as heated or publicly aired as in the derivatives subsectors. Even so, insurance is another critical case for our explanation, and not only because of the size of the Transatlantic insurance markets. Like the six other positive cases, there was congruence between the parity in border-policing capacities and the empirical expectations that such a configuration would lead to integrationist approaches. However, the post-2008 increase in border-policing capacities was smallest in insurance—with the United States already having substantial capacities and the EU enhancing what had been partial capacities. Thus, finding evidence of the mutual accommodation process in the insurance cases would, first, suggest a cumulative effect whereby gradual incremental capacity increases triggered the mechanism and, second, amplify our confidence in the explanatory claims we are making with respect to other cases where the capacity increases were less gradual.
In the rest of this section, we process trace how deployment of border-policing capacities, after a period of standstill, set off a series of mutual adjustments that eased cross-border interoperability and culminated in a U.S./EU covered agreement.
Post-crisis deployment of border-policing capacities (t1). Prior to the 2008 crisis, U.S. insurance authorities, even in the absence of a federal regulatory regime, had substantial border policing capacity because each U.S. state had a “credit for reinsurance” law, nearly all of which were based on the National Association of Insurance Commissioners’ model law. These coordinated state-level statutes had specific provisions for “alien” (i.e., third country) reinsurers that required the firms to operate through a U.S. subsidiary (and be treated as a national reinsurer) or to post collateral for the value of their commitments in the markets (U.S. states) where they conducted business (Singer Reference Singer2007, 96-113). The EU, by contrast, had partial border policing capacity before the crisis because the Reinsurance directive (2005) had only weak equivalence provisions.
After the crisis, the Dodd-Frank Act established the Federal Insurance Office at the Treasury Department to monitor all aspects of the insurance sector and to represent the United States on international insurance matters. It also gave the Office new authority to address areas where state insurance laws treated U.S. insurers differently than non-U.S. insurers (Stubbe Reference Stubbe2019), further strengthening U.S. border policing capacity. In the EU, the Solvency II directive of 2009 contained stronger rules on third-country equivalence, requiring EU authorities to cross-check whether third-country insurance and reinsurance companies were subject to home country supervision that was equivalent. These reforms gave U.S. and EU insurance authorities more or less equal levels of capacity.
In the decades before the crisis, starkly contrasting institutional configurations had produced differences between U.S. and EU approaches to insurance regulation. Post-crisis reforms extended these pre-existing differences and exacerbated longstanding conflicts surrounding them. Already in 2007, a member of the European Parliament who would become the rapporteur of the 2009 Solvency II directive, Peter Skinner, wrote in a letter published by the Financial Times (November 9, Reference Skinner2007) that the National Association of Insurance Commissioners’ (2017) defence of the United States’ collateral requirements for foreign reinsurers was “wrong” and that the threat of retaliatory measures against the EU was “outrageous”. The U.S. representatives, for their part, wanted EU recognition of U.S. regulation to reduce the costs of U.S. insurance companies. In 2007, a robust exchange of views continued at the margins of a series of Transatlantic Economic Council meetings in Washington, showcasing how the bilateral dialogue, at least with respect to the insurance, had borne little fruit (see Mildner and Ziegler Reference Mildner and Ziegler2009).
Then, after the passage of Solvency II Directive, EU insurance regulators deliberately leveraged their new capacities to pressure the United States to change its rules for “alien” reinsurers (that is, subsidiaries or branches of non-U.S. insurers). Specifically, the European Commission threatened not to recognise U.S. regulation as equivalent to the EU’s, potentially making U.S. insurance businesses more costly to operate in the EU. U.S. regulators initially rebuffed the EU’s extraterritorial attempts and threatened retaliatory measures (Quaglia Reference Quaglia2014).
Failed unilateralism (t2). Despite purported efforts to find common ground, the threats and unilateralism went on for years before U.S. and EU officials conceded that such measures could not have the intended effects. In an initial half-hearted attempt, the European Commission, the European Insurance and Occupational Pension Authority, the U.S. National Association of Insurance Commissioners, and the Federal Insurance Office of the U.S. Department of the Treasury established a regulatory dialogue specifically on insurance. The official objective was to gather a better understanding of insurance regimes in the U.S. and the EU. The (unstated) objective (at least for the U.S. officials) was to facilitate the EU’s decision on equivalence of U.S. insurance regulation or, to be precise, the decision of the European Commission, following the advice of the European Insurance and Occupational Pension Authority (Quaglia Reference Quaglia2014). However, in 2012, the European Commission was still attempting to achieve its goals by flexing its new muscles; its provisional list of countries qualifying as equivalent under Solvency II excluded the United States. And the United States persisted in its unbending policy towards alien insurers.
After years of regulatory tug of war, officials reached a turning point in 2014. In June of that year Jonathan Faull, senior official responsible for insurance regulation at the European Commission, sent a letter to Michael McRaith, director of the Federal Insurance Office, and Benjamin Nelson, chief executive officer of the National Association of Insurance Commissioners, proposing an explicit bargain based on reciprocal adjustments: the European Union would designate U.S. regulation as equivalent and the United States would remove the capital requirements that the states placed on non-U.S. reinsurers (Faull Reference Faull2014). Acknowledging that “mutual retaliation”Footnote 19 was the alternative to compromises like Faull’s proposal, the National Association of Insurance Commissioners made an initial gesture by revising its model “Insurance Holding Company System Regulatory Act” by easing a supervisory requirements that had been particularly detrimental to EU insurance groups operating in the United States.
Mutual adjustment and integrationist regulation (t3). After six years of failed unilateralism, U.S. and EU regulators shifted to more conciliatory approaches. The European Union granted the United States provisional equivalence in 2015,Footnote 20 after the opening of negotiations on the 2017 Covered Agreement, which aimed to facilitate an equivalence determination by the European Union and to secure uniform treatment of EU reinsurers operating in the United States (Congressional Research Service 2017b).
Several industry groups on both sides of the Atlantic supported the Covered Agreement, as suggested by the joint statement issued by more than ten industry associations in the United States and in EuropeFootnote 21 (see also American Insurance Association, the American Council of Life Insurers, and the Reinsurance Association of America 2017). Yet there were also forces opposing it. The National Association of Mutual Insurance Companies (2017), which represented purely domestic insurers, described the Covered Agreement as a “proposed solution to an invented problem—the question of European regulators deeming our regulatory system equivalent”. Other detractors were state regulators and state lawmakers, who had been mostly sidelined during the negotiations. The National Association of Insurance Commissioners described the potential use of the Agreement as a “backdoor to force foreign regulations on U.S. companies” (cited in Morris Reference Morris2017). The National Council of Insurance Legislators remarked that “state-based regulation of insurance, a system that has worked very well for three-quarters of a century, needs to be protected, from both federal and international regulation” (National Council of Insurance Legislators 2017). Eventually, internationlly focused insurance companies got the interoperability they wanted. But domestic insurance companies and state regulators who benefited from unilateralist policies lost.
In 2017, the United States and European Union finalized the Covered Agreement, whose reinsurance provisions eliminated the collateral requirements that the United States had traditionally imposed on EU reinsurers. State laws that retained collateral requirements for EU reinsurance companies could be invalidated, if those rules were inconsistent with the Agreement (Stubbe Reference Stubbe2019, 224). In 2019, the National Association of Insurance Commissioners (2017) revised its Credit for Reinsurance Model Law and Regulation so as to take into consideration the new provisions of the Covered Agreement. In effect, the revisions offered an equivalent elimination of reinsurance collateral for qualified reinsurers domiciled in the United States and in “qualified jurisdictions” that met the criteria for mutual recognition and reciprocity envisaged in the Covered Agreement (Stubbe Reference Stubbe2019).
Conclusion
This article started with a real-world puzzle: the turn toward integrationist approaches in financial regulation in the United States and the European Union between 2014 and 2020. Our medium-n, multi-year analysis of several subsectors highlighted how, by and large, in a situation of high financial interdependence, the build-up of border policing capacities in both jurisdictions after the Great Financial Crisis (creating a roughly equal distribution of market power) triggered the mechanism of mutual accommodation of domestic rules to those of the respective counterpart. In addition to advancing our understanding of the evolution of the post-crisis governance of global finance, this article makes methodological and theoretical contributions.
Methodologically, by deliberately applying recent ideas for enhancing research transparency and rigor (Jacobs et al. Reference Jacobs, Büthe, Arjona, Arriola, Bellin, Bennett and Björkman2021), this study contributes to debates about how to balance the many new demands on scholars who use qualitative methods. In addition to discussing data-generation processes (including author positionality) and analytical techniques, we seek to add to the accumulation of knowledge in two ways that are still relatively rare for qualitative research: by making our original data accessible to readers, and by making use of qualitative data that is already in the public domain.
Theoretically, this study is part of a new generation of international political economy research that is attentive to complexity and temporal process in explaining global governance outcomes. Revealing how interactions between powerful actors lead to adaptation in behavior (i.e., regulatory approach) and the system itself (i.e., level of international institutionalization), the findings resonate with theoretical frameworks depicting the international political economy as a complex, adaptive system (Alter and Meunier Reference Alter and Meunier2009; Jervis Reference Jervis1997; Oatley Reference Oatley2019a). Our main contribution to this body of work is to identify and understand the role of an additional causal sequence that does not follow one of the path-dependent logics showcased in existing research (Alter and Nelson Reference Alter and Nelson2024). Two of the eleven subfields in this analysis do exhibit “traditional” path-dependence, whereby the presence of fairly institutionalized pre-crisis standard setters helps to explain post-crisis outcomes. The remaining, however, lacked pre-2008 institutional density and also failed to follow another prominent path-dependent sequence—the “domestic-international two-step” (Alter and Nelson Reference Alter and Nelson2024, 389-91)—in which domestic change in a “first-mover” spills over to shape global governance (for example, Bradford’s Brussels Effect [Reference Bradford2020]).
Rather, in the post-crisis context, the presence of two regulatory giants yielded something different. Instead of shaping global governance in one jurisdiction’s image, the spillovers from the respective internal capacity-building blunted the effects of the other’s, pressured regulators in the two jurisdictions to make adjustments, and ultimately created the foundation for cooperation through the deepening of the international financial architecture. The paradox—familiar to IR scholars—is that cooperation sprouted from an impasse between powerful players, not from like-mindedness. By featuring the sequence, this study highlights the need to incorporate the international configuration of market power when theorizing about change and continuity in global governance.
This conclusion—that the number of rule-making jurisdictions (large jurisdictions with similar market power) matters—also has unmistakable real world relevance. One challenge, however, lies in identifying which jurisdictions deserve the attention of future analyses. Despite the bolstered regulatory capacity, Brussels regulators post-Brexit oversee a smaller market without London, Europe’s leading financial center, and as a result could have reduced leverage vis-à-vis U.S. and other foreign counterparts. Meanwhile, the global heft of UK authorities remains a question mark. There are signs that London’s share of some financial markets has shrunk (Uddin, Giusti and Smith Reference Uddin, Giusti and Smith2024), and British regulation has remained mostly aligned with the EU’s (albeit with notable exceptions, James and Quaglia Reference James and Quaglia2023) perhaps indicating the efficacy of the EU’s border-policing capacity, notably equivalence provisions, which now apply to the UK. Recent trends in China add further uncertainty about which jurisdictions will wield market power. The country’s anticipated financial liberalization (especially opening to foreign investors and financial services companies) and Shanghai’s predicted rise as an international financial centre have stalled (Hale and Leng Reference Hale and Leng2024) and suggest a possible lessening of the type of financial interdependence that underpinned the post-crisis U.S./EU power dynamics. These European and Chinese developments conjure an intriguing scenario: What if the new Trump administration were to adopt an America First policy in finance, insisting that foreign firms do things the U.S. way? A diminished EU, the on-its-own UK, and a not-yet-arrived China may not have the market power to check Washington’s unilateralism.
Acknowledgments
Drafts of this article were presented to the Susan Strange Political Economy Working Group at the European Union Institute in March 2024 and at the Annual Meeting of the International Studies Association in April 2024. The authors thank the discussants, fellow panelists and audiences for their comments and reactions. We are particularly grateful to Mark Cassell, Orfeo Fioretos, Erik Jones, Scott James, Debora Macbeth, Manuela Moschella, Abraham Newman, William O’Connell, Waltraud Schelkle, Aneta Spendzharova, Amy Verdun, Nicolas Véron, Gillian Weiss, and Jonathan Zeitlin. They also thank the journal editors and anonymous reviewers for their thoughtful and constructive comments, Jesse Boockvar-Klein for invaluable research assistance, and Dessislava Kirilova for guidance through the steps at the Qualitative Data Repository where the dataset for this article is stored. Finally, since this project began during his 2018–2019 sabbatical, Elliot Posner acknowledges the generous support of IMÉRA Institute for Advanced Study at the Aix-Marseille Université and Case Western Reserve University.
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