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C H A P T E R F I V E Club Standards and International Finance GLOBALIZATION DRAMATICALLY increased the size and depth of international capital markets. From 1994 to 2002, the valuation of all international debt securities almost quadrupled, from $2.3 trillion to $8.3 trillion. Over the past twenty years, the size of all banks’ cross-border positions increased from $1.4 trillion to $12.7 trillion.1 The renaissance of global finance led to a concomitant rise in global financial instability:2 the frequency of banking and currency crises rose to a level unseen since the interwar years.3 The fallout from these shocks in Latin America, East Asia, Russia, and Turkey triggered fresh demands to strengthen the “international financial architecture.”4 That term refers to the set of governance structures that manage international monetary and financial affairs. The focus of this chapter will be on the governance of the international financial system—the set of rules, resources, and institutions designed to ensure the solvency of financial institutions against the vicissitudes of global finance.5 In the wake of the financial crises of the 1990s, most of the proposals 1 International Monetary Fund, Global Financial Stability Report—Statistical Appendix, March 2003, 120; Bank of International Settlements, “External positions of banks in individual reporting countries,” http://www.bis.org/publ/qcsv0303/anx2a.csv, accessed April 25, 2003. 2 There have been previous areas of financial globalization. See Kevin O’Rourke and Jeffrey Williamson, Globalization and History (Cambridge, MA: MIT Press, 1999). 3 Michael Bordo, Barry Eichengreen, Daniela Klingebiel, and Maria Soledad Martinez-Peria, “Is the Crisis Problem Growing More Severe?” Economic Policy 32 (April 2001): 51–83. 4 Jose De Gregorio, Barry Eichengreen, Takatoshi Ito, and Charles Wyplosz, An Independent and Accountable IMF. (London: Centre for Economic Policy Research, 1999); Council on Foreign Relations, Safeguarding Prosperity in a Global Financial System: The Future International Financial Architecture (New York: Council on Foreign Relations, 1999); Montek Ahluwalia, “The IMF and the World Bank in the New Financial Architecture,” in International Monetary and Financial Issues for the 1990s (New York and Geneva: United Nations, 1999); Barry Eichengreen, Toward a New International Financial Architecture (Washington, DC: Institute for International Economics, 1999); Stanley Fischer, “On the Need for an International Lender of Last Resort.” Journal of Economic Perspectives 13 (Fall 1999): 85–104; International Financial Institution Advisory Commission , Report of the International Financial Institution Advisory Commission (Washington, DC: United States Congress, 2000); Overseas Development Council, The Future Role of the IMF in Development (Washington, DC: Overseas Development Council, 2000); John Williamson, “The Role of the IMF: A Guide to the Reports,” Institute for International Economics Policy Brief 00-5. Washington, DC, May 2000. 5 In focusing on financial matters, I am excluding a discussion of the regulation of the international monetary system, which focuses more on the coordination of exchange-rate regimes and 120 • Chapter Five for strengthening financial regulation focused on the international financial institutions (IFIs)—the International Monetary Fund (IMF) and the World Bank. They implicitly or explicitly assumed that these institutions would remain the focal point for global financial governance, and either belittled or ignored reform efforts made outside these fora. In the early half of this decade, many commentators believed that progress on this front had been minimal.6 However, this overlooks the development of more rigorous financial codes and standards across a range of issues, including banking supervision, insurance, auditing, securities, and data transparency. In recent years several international financial bodies have increased their surveillance of emerging economies to ensure adherence to these standards. Moreover , these codes and standards were developed and selected outside the IFI’s purview, in a newly created venue—the Financial Stability Forum (FSF). Preliminary evidence suggests that the new coordination of financial codes and standards—and the monitoring and enforcement that goes with them—have helped to reduce financial instability and increased the flow of salient information to capital markets.7 The myriad arguments contained within the globalization and global governance literature are hard-pressed to explain both this process and outcome. The most obvious arguments made—race-to-the-bottom arguments8 or capital dominance arguments9 —emphasize structural economic forces. These pressures are theorized to force states to lower their regulatory standards. With regard to financial regulation, however, the race-to-the-bottom hypothesis cannot explain the ratcheting up of regulatory stringency that has taken place over the past five years. Anne-Marie Slaughter and Wolfgang Reinicke argue that monetary policies. See...

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