Policy preferences in financial governance: public-private dynamics and the prevalence of market-based arrangements in the banking industry

Abstract

This article investigates the process of policy preference formation in global financial governance by examining the changing nature of supervision in the banking industry. The article argues that transparency and market-based supervision are now an integral and formal part of the supervision process, thus providing a public role to the private sector. The analysis focuses specifically at three levels of practice: official supervision in the context of the Basel process; private initiatives and voluntary frameworks of best practice standards; and informal market channels. The article shows that the private sector has used the above means to acquire supervision functions, thus altering the nature of supervision. The analysis highlights the costs and risks of active private sector involvement and calls for stronger accountability patterns and improved disclosure. In addition, it contrasts market-based supervisory arrangements with economic ideas about market discipline and shows that the mix of political and economic imperatives leads to a set-up where private financial institutions have the power of initiative but few incentives to fear market discipline. The article explains how and why private interests are internalised in financial policy processes and focuses on the existence of a transnational policy community of public and private participating actors who are in fundamental agreement about policy. The changing nature of supervision results from developments in global financial integration but also, the different ways in which global financial governance is generated