From Shadow Banking to Public Supervision: Regulating Derivatives in US and UK

• In Event: Regulating Economic Competition in the Era of Populist Politics

Abstract

This paper compares reform responses to the crisis of 2007-2008 by examining efforts to bolster public oversight of markets for financial derivatives in the United States and the UK. Most diagnoses of the crisis focused on the pervasive but opaque use of financial derivatives in the early 2000s. Reform officials were, accordingly, determined to exert greater public control over the derivatives trade. They did so through quite distinct policy strategies. In both London and New York – by far the world’s largest centers for trading derivatives – the nature of intra-industry cleavages structured the sources of political support for alternative reform instruments. In the United States, reform officials could draw one emerging industry groups to challenge the incumbent firms that had benefited from the pre-crisis market structure. In Britain, conversely, regulators could draw on a higher level of industry cohesion and they fashioned reform instruments that assumed the industry would act with some coherence toward the collective goals of stability and competent risk management. And in both cases, the relative cohesion within the finance industry determined the openness of policymakers to non-industry sources of expertise and criticism. As a result, officials in the United States moved more aggressively than their British counterparts to impose disclosure requirements and organizational limis on the ability of the large banks to trade in derivatives. Regulators in Britain, by contrast, relied more heavily on elements of judgment and balance to establish new guidelines for established players in the derivatives trade.

Author

• J. Nicholas Ziegler, Brown University