View metadata, citation and similar papers at core.ac.uk brought to you by CORE provided by Newcastle University eTheses The Redesign of the Global Financial Architecture: Forums, Institutions, and State Power Stuart Pitcairn Maclean Mackintosh Submitted to fulfil the requirements of Doctor of Philosophy School of Geography, Politics and Sociology Newcastle University February, 2014 Abstract This research examines the internationally coordinated, state-led response to the 2007- 2008 economic and financial crisis. It addresses the construction of ‘alternative narratives’ which encompass a partial revision of the economic paradigm, with a particular emphasis on the role of international financial regulatory authority, its rules and institutionalization. The meta-theoretical theme at the centre of this thesis involves the manner in which severe crisis episodes provoke and also reveal the underlying tension and contestation between ‘market authority’ and ‘state authority’ in relation to the regulation of the world economy, financial system and firms, with the goal of ensuring maximization of long-term systemic stability and crisis prevention. The construction of alternative crisis-driven narratives is in part a reaction to the previous ideological hegemonic domination of laissez faire neo-liberal beliefs as applied to deregulation (i.e., of self-regulation by markets and private sector actors in the financial sector). The thesis identifies and examines a paradigm shift in response to the crisis: a move from the dominance of market authority to the reassertion of state authority over financial markets and actors. It addresses the way in which crisis narratives are constructed in response to such episodes and the policy implications of paradigm shifts when they occur. The thesis empirically examines the elite state-level crisis response and its policy consequences, with particular emphasis on the institutional reforms most important to the construction, post-crisis, of a ‘new global financial architecture’. A principal argument within the thesis is that the severity of the financial crisis precipitated a rapid shift in the policy narrative held to by the central banking epistemic community, which constitutes a paradigm shift, and which led to a series of institutional and policy reforms addressing the application of state power and regulatory authority over global financial markets and firms. ii Dedication This thesis is dedicated to my late parents: my mother, Una Maclean; my stepfather Bernard Crick; and my father John P. Mackintosh. iii Acknowledgements I would like to thank all those who have supported me during my research and the writing of this thesis, and I am very grateful for the opportunity to study again at Newcastle University and the School of Geography, Politics and Sociology. My particular thanks to my supervisors, Phil Daniels and Barry Gills. Their careful supervision, encouragement, support, and intellectual guidance, made the research process enjoyable and manageable. They are an outstanding team and it has been a pleasure work with them over the past three-plus years. I cannot name but must warmly acknowledge and thank the scores of individuals who were so generous of their time and who allowed me to interview them regarding the 2007-2008 financial crisis and G20-led intergovernmental response since then. I feel honoured to have been given the time and counsel of presidential and prime ministerial advisors, finance ministers, G20 sherpas, central bank governors and deputy governors, treasury and ministry of finance officials, numerous IMF executive directors, academics, and former senior policy makers. Without their frank insights and personal narratives of the events they experienced, often first-hand, this research would not have been possible. I must also thank my wife, Jean, for allowing me the space to complete this endeavour and for her tolerance of far too many discussions of the subject, the process, and the difficulties it presented. I would also thank my good friend and mentor, Alan Coe, for his advice and support throughout, and Diane Stamm for her careful eye as to style and presentation. I also must acknowledge the support of my employers, and in particular, of Geoffrey Bell, who wholeheartedly supported my decision to conduct the research for this thesis. Stuart Mackintosh Washington DC, February, 2014 iv Table of Contents Abstract ii Dedication iii Acknowledgements iv Table of Contents v List of Figures and Tables x List of Abbreviations xii Chapter 1. Introduction 1 1.1 Goals and content of the thesis 1 1.1.1 The context of the study: Economic cycles, crises, response, and 2 relapse 1.2 Research questions 5 1.3 Key analytical and theoretical framework 7 1.4 Research design 7 1.5 The contribution of the thesis 10 1.6 The structure of the thesis 14 Chapter 2. Analytical Framework 16 2.1 Introduction 16 2.2 A meta-theoretical approach 16 2.3 Revisiting Casino Capitalism 21 2.4 The financial crisis, paradigm shifts, and reform 24 2.4.1 A paradigm shift in state oversight of global financial markets 27 2.4.2 Constructing a new paradigm, worldview and narrative 28 2.5 Epistemic communities and financial reform 30 2.6 Additional analytical lenses 34 2.6.1 Hegemony, hegemonic shift, decline and competition 34 2.6.2 The two-level game 38 2.6.3 IMF reform 41 2.7 Conclusion 42 Chapter 3. The G20, Global Summitry, and Financial Reform 44 3.1 Introduction 44 3.1.1 Background 47 3.1.2 A thematic approach 50 3.2 Structure and membership of the G20 54 3.3. Phase one: crisis management - the G20 emerges 57 v 3.3.1 An emergency summit takes shape 58 3.3.2 The Washington Summit delivers more than expected 60 3.3.3 Broad political direction now, detailed plans later 61 3.3.4 Why Washington mattered 66 3.4 Phase two: concrete reform 69 3.4.1 Clear deliverables in London: but first some big numbers 70 3.4.2 The Pittsburgh Summit - an affirmation of the G20 role 74 3.4.3 The apogee of reformist zeal 76 3.4.4 The emerging countries' voice 76 3.5 The new global financial architecture - the G20 at the centre 78 3.5.1 The key FSB role 80 3.5.2 Enhanced and coordinated Standard-Setting Bodies 81 3.5.3 IMF, bigger better but below the G20 82 3.6 Phase three: a return to disunity 83 3.6.1 Divergence and disputes as the consensus begins to fray 85 3.6.2 Toronto - stimulus or austerity? 86 3.6.3 Seoul and imbalances - the G20 has no solution 88 3.6.4 Summit disunity: but real progress in the regulatory sphere 90 3.6.5 A degree of progress but a lot of discord 92 3.6.6 Cannes and Los Cabos: Dealing with the Eurozone crisis 94 3.6.7 Greece dominates everything 95 3.6.8 Finally, a firewall 97 3.6.9 Emerging country voices 99 3.7. Conclusion: watching a paradigm shift take place 101 3.7.1 Perspective matters 102 3.7.2 What type of paradigm you get depends on who leads 107 3.7.3 Emerging countries growing into their roles 108 3.7.4 Inclusion postpones a head-on clash 109 3.7.5 The G20 as a flexible leadership response to the crisis 110 3.7.6 Legitimacy still matters 110 3.7.7 Dissension and the dialectic of crisis response and reaction 112 Chapter 4. The Financial Stability Board: its Creation and Structure 115 4.1 Introduction 115 4.2 The creation of the Financial Stability Board 120 vi 4.2.1 Central bankers as an epistemic community forming a new consensus 120 4.2.2 Seizing the crisis and reasserting collective state and central bank control 123 4.3 The institutional structure of the FSB 126 4.4 Dissecting the FSB's structure and operation 134 4.4.1 An institutional structure that implies permanence 134 4.4.2 Lack of formal state obligations not insurmountable 134 4.4.3 Dominance by European and North American members of the community 135 4.4.4 Decision making within the Board 137 4.4.5 The evolving Steering Committee membership 138 4.4.6 Legitimacy and the FSB 140 4.4.7 Does size matter? 143 4.4.8 Transparency: A real weakness in the new structure 143 4.5 Conclusion 146 Chapter 5. The Financial Stability Board and Key Policy Outcomes 148 5.1 Introduction 148 5.1.1 A policy reform matrix 149 5.1.2 Defining success 152 5.2. The FSB Mandate 152 5.2.1 Compliance 153 5.3 The FSB approach to international regulation 153 5.4 Coordination and information exchange 156 5.4.1 Stronger lines of communication and control 156 5.5 A significant macroprudential policy shift 160 5.5.1 Basel III - the high point of the regulatory reform wave 162 5.5.2 Capital: How much is enough? 162 5.5.3 A paradigm shift takes shape 166 5.5.4 Pledges with international reach 167 5.5.5 Taxation not prohibition 168 5.5.6 The cost of Basel III 169 5.5.7 Basel-plus - national add-ons are seen 171 5.5.8 Intended and unintended consequences 172 5.5.9 Consistent implementation and monitoring is key 172 vii 5.6 Clearing of OTC derivatives 176 5.6.1 Consistency and a minimum of exemptions 177 5.7 Compensation, bankers’ pay, and bonuses 181 5.7.1 Monitoring and enforcement: A real and meaningful shift? 182 5.7.2 A new dispute settlement procedure 182 5.8 Regulating shadow banking 185 5.9 Too big to fail 188 5.9.1 Resolution regimes and living wills 189 5.9.2 Working within the limits of the new paradigm 191 5.10 Accounting standards 194 5.11 Early warning exercises, the mutual assessment program, and peer review 197 5.11.1 Early-warning exercises 197 5.11.2 The Mutual Assessment Process and peer review 198 5.12 Conclusion: Strong policy requires a strong consensus to be made real 202 5.12.1 Policy coordination at a new level 202 5.12.2 Macroprudential policy, the Basel III Accord, and the policy consensus 203 5.12.3 The further away the FSB is from control, the less uniform the process 205 5.12.4 Compensation principles and institution building by stealth in the FSB 205 5.12.5 FSB standards and the limits of the regulatory paradigm shift 206 5.12.6 No consensus and paradigm conflict means no progress 206 5.12.7 Gauging success in FSB policy making 207 Chapter 6.