Global governance in a neoliberal context: the case of the Basel Capital Accord Dr. Aaron Major Department of sociology University at Albany - SUNY Albany, New York USA Presented at the 22nd Annual SASE meetings Temple University, Philadelphia, Pennsylvania, USA June 25, 2010 Dr. Aaron Major Department of sociology University at Albany - SUNY Albany, New York USA Presented at the 22nd Annual SASE meetings Temple University, Philadelphia, Pennsylvania, USA June 25, 2010

The problem of global economic regulation Transnational institutions for economic regulation have proliferated. Seemed to restore order to global financial system. Transnational institutions for economic regulation have proliferated. Seemed to restore order to global financial system.

Financial crises around the world Source: Luc Laeven and Fabian Valencia (2008). Systemic Banking Crisis: a new database. IMF Working Paper WP/08/224

Why did this system fail so spectacularly? Harmonization of standards and practices. XNo mechanism to regulate macro economic processes.  Build up of massive liquidity imbalances.  Result of a neoliberalization of the regulatory system. Harmonization of standards and practices. XNo mechanism to regulate macro economic processes.  Build up of massive liquidity imbalances.  Result of a neoliberalization of the regulatory system.

Neoliberalization Deligitimation of state intervention Continued need for state intervention 1.Policy insulated from politics 2.Technocratic solutions 3.Market-centric regulation

Basel Accord and Neoliberalization I: Promoting and insulating the role of finance.  Policy homogeneity among central bankers: inflation targeting, protect value of financial assets.  Views of private finance seem favored in policy development.  Spread of central bank independence.  Policy homogeneity among central bankers: inflation targeting, protect value of financial assets.  Views of private finance seem favored in policy development.  Spread of central bank independence.

Basel Accord and Neoliberalization II: Technocratic solutions to political problems.  Adoption (and promotion) of the internal ratings- based (IRB) approach to capturing risk.  Requires the development, and understanding, of complex mathematical modeling.  Credit market discussions increasingly technical.  Adoption (and promotion) of the internal ratings- based (IRB) approach to capturing risk.  Requires the development, and understanding, of complex mathematical modeling.  Credit market discussions increasingly technical.

Basel Accord and Neoliberalization III: Delegating supervision to private finance. It is not the Committee’s intention to dictate the form or operational detail of banks’ risk management policies and practices. Each supervisor will develop a set of review procedures for ensuring that banks’ systems and controls are adequate to serve as the basis for capital calculations. Basel Committee (2006) International convergence of capital measurement and capital standards: a revised framework. Bank for International Settlements (Basel), p. 2.

Compare to Bretton Woods  Broader participation in balance of payments discussions.  Low level of technical sophistication.  Relational, and macro, approach to global regulation.  Broader participation in balance of payments discussions.  Low level of technical sophistication.  Relational, and macro, approach to global regulation.

Lessons of the crisis?  Continued role of private finance in the reform process.  IRB approach still allows for lower risk-weights on resecuritizations versus standard approach.  Implementation and supervision still delegated to private, domestic actors.  Continued role of private finance in the reform process.  IRB approach still allows for lower risk-weights on resecuritizations versus standard approach.  Implementation and supervision still delegated to private, domestic actors. Recognition among regulators that the roots of the crisis are global imbalances and excess liquidity. But…

Some conclusions:  Financial crisis rooted in global, macroeconomic dynamics.  Neoliberal institutional structures not equipped to deal with these underlying causes.  Continued reform within an unchanged organizing framework will not solve the problem of global financial instability.  Financial crisis rooted in global, macroeconomic dynamics.  Neoliberal institutional structures not equipped to deal with these underlying causes.  Continued reform within an unchanged organizing framework will not solve the problem of global financial instability.