Regulatory Cooperation and the Trump Administration.

• Author: Zaring, David

Regulatory harmonization has allowed financial institutions to conform to similar standards--absent international or administrative law--for the past forty years. In light of the Trump administration's economic and international approaches to foreign countries, one might expect regulatory harmonization to be threatened. This article suggests that regulatory cooperation has proven to be resilient to administrative change, and "sticky" in that it makes exiting cooperative regulation difficult. While the Trump administration's policies have affected regulatory harmonization, several factors indicate that American financial regulators remain committed to the process.

Introduction I. The Trump Administration's Sustained Commitment to Financial Regulatory Cooperation II. Regulatory Harmonization as an Antidote to Deregulation: The Covered Agreement and Insurance A. Overview B. The Covered Agreement C. Conclusion III. The Turn Away From Trade Agreement-Driven Regulatory Harmonization A. Regulatory Harmonization in the Trans-Pacific Partnership B. Regulatory Harmonization in the Transatlantic Trade and Investment Partnership C. Conclusion Conclusion Introduction

One of the great achievements of international relations in the past forty years has been the transformation of the regulation of financial institutions. It is a story that brought us from a world in which there was no good way for regulators--or investors, for that matter--to know what financial institutions were doing abroad, to one in which an international process governs the most important rules under which any financial institution of any size operates. It is a story about a new form of global governance--the regulatory network--that has provided detailed, organized, and binding governance without adhering to the traditional mechanisms of international or administrative law. This process of "regulatory harmonization," requires domestic regulators to get together with their foreign counterparts in an effort to conform their requirements to one another--to agree to do things the same way.

One might think that this story of progress would be threatened by the new economic and international policies of the Trump administration. One of the clearest departures from the political orthodoxy of either party by this administration has been a change in how it wants the United States to handle its economic relationships with foreign countries. If the establishment consensus was broadly in favor of free trade, executed through agreements with foreign governments, the Trump administration shows real skepticism about the benefits those deals have brought to American workers, and has accordingly sought to renegotiate or even exit from them. (1)

But the Trump administration has not ended the regulatory harmonization practices that have so transformed financial regulation, or regulatory harmonization more generally. (2) Instead, President Trump's regulators have continued to embrace international coordination. (3) The evidence suggests that the enduring appeal of regulatory harmonization to American policymakers could stabilize foreign policy between the Trump administration and the administrations that came before it. (4)

This is not to say that regulatory harmonization has been unaffected by the Trump administration's economic policies. Many of the actions in regulatory harmonization during the last two decades have involved an effort to include it as a mandate in new trade deals. (5) As some of those proposed deals were abandoned and others renegotiated, it does appear that this effort to promote uniform standards through the trade treaty channel has been checked. Moreover, these regulatory coherence chapters of multilateral trade deals would not have only affected financial regulatory harmonization. They would broadly apply to all aspects of the trading relationship.

In this article, I review the enduring commitment of American financial regulators to international regulatory harmonization. I show how regulatory cooperation in insurance regulation has checked an effort by the Trump administration to reduce federal involvement in insurance oversight. Lastly, I review the emerging efforts to include regulatory harmonization chapters in trade deals that the Trump administration has decided to eschew.

I draw two conclusions from this practice so far. First, it suggests that regulatory cooperation is "sticky," and not necessarily only to the taste of internationalists. Perhaps because of path dependence, perhaps because it works, and perhaps because of a degree of socialization afforded by four decades of active regulatory cooperation, the development of common standards for the financial markets has proven to be a hard habit to break. Moreover, the regular consultation and promulgation of rules in consultation with foreign regulators has proven to be a stabilizer of policy across administrations.

1. The Trump Administration's Sustained Commitment to Financial Regulatory Cooperation

   Much of what has happened in international financial regulation began as an effort to solve coordination problems that appeared to be intractable under international law. After World War II, twenty three largely western countries (6) entered into the first multilateral trade deal, the General Agreement on Tariffs and Trade (GATT), and created the first two global international financial institutions, the World Bank and the International Monetary Fund. (7) But they found it impossible to make progress on the creation of an International Financial Organization and abandoned the work after a modest effort. (8)

   There is still no international financial organization or global treaty outlining how financial firms should be treated when they do business abroad. (9) There is, however, a great deal of international financial regulation. (10) Today, the networked domestic regulators--the Basel Committee on Banking Supervision, the Committee on Payments and Market Infrastructures, the Financial Action Task Force, and many more--continue to promulgate a dizzying array of standards, agreements, best practices, principles, and rules. (11) Intertwined with these substantive efforts to coordinate the global regulation of finance has been an effort to improve the procedures followed by the coordinators. (12)

   This evolution, both procedural and substantive, makes for a compelling story about a global regulatory enterprise with few peers not only interesting for the substance, or the process, but also for the institutions that have been created to manage and develop a global regime. These institutions declaim legal authority and are comprised of regulators from the most important financial markets coming together and agreeing on common approaches to supervising those markets. (13) There is no treaty, nor are there tribunals; (14) there are only handshake agreements (backed up by peer review, to be sure) to handle similar problems universally. (15)

   Moreover, regulators have expanded the scope of regulatory targets and the complexity of these institutions has evolved, particularly since the financial crisis. (16) The old efforts to deal with the cross-border externalities of finance, which were limited in their ambitions and range (17), have been cast aside. In their place, a new order has emerged. That order is hierarchical, procedurally regular, and politically supervised. (18)

   At the center of the new status quo, at least since the last financial crisis, is the Financial Stability Board (FSB). (19) The Board is the middle manager of international financial regulation. It coordinates the efforts of regulatory networks to establish common standards for the oversight of financial firms, does some of that work in its own right, and reports to the political leadership provided by the Group of Twenty (G20) on the progress of harmonization initiatives. (20)

   As Randal Quarles, the Federal Reserve Board's vice chairman for financial supervision, has observed, "About one of the important international bodies created since the crisis to promote global financial stability [is] the Financial Stability Board." (21)

   One might expect an administration unconvinced by international agreements to be skeptical of the value of the FSB. But as Quarles, a Trump appointee, has explained, "America's active participation in the FSB is important to our nation." (22) In his view, and I think it is fair to say that this is the view of most American financial regulators:

   [t]he FSB does not impose obligations, it addresses problems-problems that are of great importance to the United States and which, because of the global nature of the financial system, we cannot address alone. The United States and other governments created the FSB and participate in it because it is in our national interests to do so, and that is really the basis of its effectiveness. The United States is not weaker or less independent by participating in the FSB or other standard-setting bodies. On the contrary, when rightly structured our participation in these groups makes our financial system significantly stronger by ensuring that the U.S. perspective is part of the discussions and reflected in standards agreed to. (23) In fact, Quarles has emerged as a leading candidate to assume the chairmanship of the board, a role that reflects the American interest in preserving international regulatory harmonization even in an era of reduced international cooperation on other economic matters. (24) But their commitment to the pre-Trump regime of international policymaking over banking regulation indicates one way in which the ties between regulators from different countries can stabilize policymaking between one administration and the next.

   Other banking regulators have described the work of international financial regulation in similar terms. (25) Trump's choice for the chairmanship of the Federal Reserve Board, Jerome Powell, has described international...