International Financial Standards: Assessing Effectiveness from the Private Sector Perspective

The paper investigates market participants’ endorsement of international financial standards. While the most part of scholarship works has focused on market incentives for states to comply, we shift the focus of the analysis to the incentives for market participants. Why do markets participants choose to follow through the standard and to incorporate states’ compliance with international standards in their investment decisions? In answering this question, the paper develops two hypotheses and provides preliminary empirical support to them. First, the paper argues that the participatory mechanisms that allow market participants to make their views known, to articulate dissent, to submit observations, to avail themselves with legal protection are critical incentives for market participants’ endorsement of internationally-negotiated standards. Second, the paper suggests that the higher the level of standard clarity and coherence, the higher the likelihood of standard endorsement. We illustrate our argument by reviewing the mechanisms that facilitate private market actors’ participation to the process of standard formulation within the Basel Committee on Banking Supervision (BCBS) and the International Association of Insurance Supervisors (IAIS). Furthermore, we compare the degree of clarity and coherence of the BCBS standards with those produced by the IAIS by focusing on the standards on the supervision of operational risk in the banking and insurance industry.