Eleni Tsingou

CSGR Working Paper No. 131/04

March 2004

 

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.

 

 

Keywords: banking, Basel standards, market discipline, legitimacy, supervision