Capital Market Integration

The global integration of capital markets over the last three decades is at once a principal driver of globalization and a hallmark of the increasingly globalized economy. Capital markets are settings in which buyers and sellers of different kinds of capital—foreign currencies, corporate securities, government bonds, bank loans—meet to negotiate prices. Global capital markets are now open for business twenty-four hours a day and, thanks to information technologies, transactions can be carried out from anywhere in the world in a matter of seconds. International capital flows now routinely exceed international trade flows by a ratio of ten to one. Within global capital markets, portfolio and short-term investment now surpass foreign direct investment (FDI) and bank lending. The cross-border integration of increasingly volatile and dynamic capital markets creates obvious challenges for governance.

In contrast to international trade, there is no single international organization to provide governance for international capital markets. In part, this is because [Page 71]there are many different kinds of capital (and capital markets), thus a central organization would make little sense. However, just as important is the fact that the boundary between domestic and international capital markets has become so blurred that centralized international governance would require substantial sovereignty transfers. Therefore, international capital markets feature a governance patchwork and have become a principal terrain for experimentation with new forms of global governance.

International organizations, such as the International Monetary Fund (IMF) and the Organisation of Economic Co-operation and Development (OECD) as well as intergovernmental forums such as the Group of Eight (G8), certainly play important coordination roles. But governance over integrating capital markets is primarily provided by networks of domestic regulatory agencies, such as the Basel Committee on Banking Supervision, the International Organization of Securities Commissions (IOSCO), and the International Association of Insurance Supervisors (IAIS), that develop international standards and diffuse best practices. On particular issues, regulatory networks and international organizations combine to form special task forces. The Financial Action Task Force (FATF) to combat money laundering and terrorist financing is one such instance. These networks emphasize the technical—and thus supposedly apolitical—character of international capital market governance in a world of sovereign states.

In addition to regulators and governments, the private sector actively contributes to capital market regulation. In many countries, stock exchanges play important supervisory roles. The integration of capital markets gives large exchanges a corresponding role in international market governance. The technical algorithms underpinning modern stock exchanges themselves provide market governance. Finally, private bond rating agencies exert powerful influence over capital market dynamics around the world.

Capital market integration has been a driver of the international diffusion of U.S. capital market governance practices over the past fifteen years. Many countries have created independent regulatory agencies modeled on the U.S. Securities and Exchange Commission. Likewise, there has been a marked trend toward the adoption of U.S. standards ensuring market transparency and investor protection.