Globalized Finance and National Regulation: The Influence of Internationalization on Supervisory Consolidation

Abstract

Financial regulatory reform remains high on global and national political agendas. Some proposals call for the consolidation of regulatory structures by merging or eliminating existing regulatory agencies. Financial supervisory consolidation has occurred in a number of developed countries over the past two and a half decades. This paper seeks to explain why a substantial number of developed countries have opted to reform their financial regulatory structures from a sector-based to a consolidated model. Based on an ordered logistic regression analysis of a newly created cross-national financial dataset, this paper argues against the prevailing literature in globalization that has discounted the influence of multinational firms on domestic politics. It moreover disputes the assumptions of realist-based and policy diffusion perspectives that prioritize hegemonic market power. This paper demonstrates how the internationalization of finance, through the spread of global financial services firms (“conglomerates”), has driven supervisory consolidation in developed countries. These global firms prefer reduced compliance costs through the elimination of duplicative regulation. Motivated by competitiveness concerns, politicians and regulators in highly internationalized countries are pressured to consolidate financial supervision, lest they cause global firms to move elsewhere because of unfavorably duplicative regulation. A consolidated supervisor offers lower compliance costs compared to a system of sector-based supervisors by eliminating duplicative regulation. In sum, the higher the level of financial internationalization in a country, the greater the level of supervisory consolidation. This paper revises the undergraduate thesis, "And Then There Was One: Conglomeration, Internationalization, and the Formation of Consolidated Financial Supervisors": (http://papers.ssrn.com/abstract=1368797).