Prudential Regulation

With the greatest early prospects, prudential regulation is the aspect of global financial regulation. Each country benefits from sound prudential regulation, and from regulation according to a prominent international standard. Further, prudential regulation is an activity subject to clear economies of scale. For these reasons, there is a realistic possibility that an international prudential regulator could be established on an incremental basis.  Prudential regulation can be established on a user-pays model.  The industry can be levied for the ‘service’ of prudential regulation, giving the international prudential regulator a viable financial base.  Prudential regulation is increasingly seen as independent of the day-to-day business of government and carried on by an independent regulator.  Admittedly there would be some loss of sovereignty involved in delegating to an international regulator, but this should be partly ‘repaid’ by a greater ability to signal robust regulation.  Prudential regulation is also the area where the internationally agreed standards, both on substantive and coordination issues, have already been established in detail. Together, this means that the loss of sovereignty involved for the national government is reduced.  As discussed, a federal model is probably a realistic solution to minimize sovereignty issues – at least as a preliminary measure. “A two-tier system of supervisory responsibilities has taken over the supervision of international financial institutions. National authorities rule at the local level; supranational institutions are finding their places globally. A division of competence between national and supranational supervisory entities will be honed and pruned until the supranational authority will be a formal, law-making body.”  Regional prudential regulation is a possible first step. The current closest model is the BIS.  As discussed above, this need not happen in one step or even rapidly; nations could gradually adopt the international prudential regulator as their regulator, either for all of their banks, or just their internationally active ones. "As [the BIS] continues to mature and as its edicts are increasingly accepted throughout the world, it will continue to approach its rightful place as the world’s bank regulator".