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Why reregulation after the crisis is feeble: Shadow banking, offshore financial centers, and jurisdictional competition
Author(s) -
Rixen Thomas
Publication year - 2013
Publication title -
regulation and governance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.417
H-Index - 45
eISSN - 1748-5991
pISSN - 1748-5983
DOI - 10.1111/rego.12024
Subject(s) - scrutiny , competition (biology) , financial crisis , shadow (psychology) , financial regulation , economics , financial system , regulatory competition , business , finance , corporate governance , political science , macroeconomics , psychotherapist , biology , psychology , ecology , corporate law , law
Abstract A crucial element in the complex chain of factors that caused the recent financial crisis was the lack of regulation and oversight in the shadow banking sector, which is largely incorporated in offshore financial centers ( OFCs ), but instead of swift and radical regulatory reform in that sector after the crisis, we observe only incremental and ineffective measures. Why? This paper develops an explanation based on a two‐level game. On the international level, governments are engaged in competition for financial activity. On the domestic level, governments are prone to capture by financial interest groups, but also susceptible to demands for stricter regulation by the electorate. Governments try to square the circle between the conflicting demands by adopting incremental and symbolic, but largely ineffective, reforms. The explanation is put to empirical scrutiny by tracing the regulatory initiatives on shadow banks and OFCs at the international level and within the U nited S tates and the E uropean U nion, where I focus on F rance, G ermany, and the U nited K ingdom.