The political origins of the banking regulation and the modes of international cooperation at the Federal Reserve and the European Central Bank

Neither the U.S. Federal Reserve nor the European Central Bank was created as a banking supervisory institution. Each has evolved into its current role, yet for different reasons. In “The Foundations Of Regulatory Convergence And Divergence Between The Federal Reserve And European Central Bank” (open access) Kathryn Lavelle  focuses on the dual national and international political configurations that made the growth of the supervisory operations of these two central banks possible. Moreover, the paper compares the internal institutional configurations that push and pull on convergence and render the process anything but static.
European_central_bank_euro_frankfurt_germanyWhile international institutions such as the Basel Committee and Financial Stability Board have promoted regulatory cooperation from the system level down, the international and internal dynamics that have propelled the expansion of these supervisory roles have put competing and, at times, opposing pressures on transnational regulatory convergence and divergence. In order to explore the foundations of regulatory divergence between the U.S. and Europe, Lavelle compares the political origins of the regulatory function of the Federal Reserve with the Single Supervisory Mechanism of the European Central Bank (ECB) by considering a vast array of influences that shaped these institutions such as statutory authority, domestic politics, and bureaucratic context. Both central banks share their supervisory responsibilities with other regulators and supervisors.
Federal ReserveThe differences in implementation of international regulatory agreements results in situations where the same political institutions can work for convergence in one forum, and at one moment in time, and then diverge at another moment or in a national setting. Lavelle shows that the pressures for regulatory convergence and divergence originate in different quarters in each institution. In the United States, pressures to cooperate internationally initially came from the domestic need for convergence in prudential bank supervision. When international agreements needed to be implemented, competition among regulators and supervisors emerged, creating the need for coordination at a later stage. As American banks came to look more like European banks, the Federal Reserve played a greater role in supervision at both the national and international levels. In the European example, pressures to cooperate internationally came from the desire to create a single European market that would be able to compete globally. Nonetheless, countervailing pressures came from nation-states that resisted their loss of supervisory authority.
Therefore, concludes Lavelle, discussions of convergence and divergence are not easily categorized as between actors such as banks, states, or regulators that are “for” or “against” international cooperation. She also indicates to future dilemmas in the regulation of foreign banking authorities with respect to formal political institutions at the intersection of national and international politics.

Lavelle, Kathryn C. 2014. “The Foundations Of Regulatory Convergence and Divergence Between The Federal Reserve and European Central Bank.Georgetown Journal of International Law 45 (4): 1137-1168.

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