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In the aftermath of the financial crisis: risk governance and the emergence of pre-emptive surveillance

Published online by Cambridge University Press:  03 July 2013

JOHN GLENN
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Abstract

This article examines the financial reforms that have been undertaken through two perspectives on risk: that of Beck's world risk society and an alternative Foucauldian approach. The former argues that, catastrophes such as the recent financial crisis will induce a political shift towards a cosmopolitan form of statehood. Yet, the lack of radical reform since the financial crisis would suggest otherwise. The article therefore argues that what we are witnessing is best understood in terms of reflexive governance in which the various rationalities of risk are reassessed and strengthened in order to avoid a similar occurrence in the future. Moreover, in response to the uncertainty that surrounds such rare events, more intense forms of surveillance have been adopted with the objective of pre-empting any future crisis. Yet, for various reasons, the reforms remain rather limited and the new rationality of pre-emption is unlikely to prevent further crises from occurring in the future.

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Articles
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Review of International Studies , Volume 40 , Issue 2 , April 2014 , pp. 227 - 246
Copyright
Copyright © British International Studies Association 2013 

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References

1 The author would like to thank the reviewers whose impeccable critiques, extremely helpful comments, and suggested further reading helped forge this final version. My thanks also go to Chris Holmes, Bona Muzaka, and Lena Rethel for their useful comments on earlier drafts of this article.

2 For the most recent version of this thesis refer to Drezner, Daniel, All Politics Is Global: Explaining International Regulatory Regimes (Princeton: Princeton University Press, 2007)Google Scholar.

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8 For pre-crisis work in this area, see Tony Porter, Globalization and Finance; Deuchars, Robert, The International Political Economy of Risk: Rationalism, Calculation and Power (Aldershot: Ashgate, 2004)Google Scholar; and Vestergaard, Jakob, Discipline in the Global Economy?: International Finance and the End of Liberalism New Political Economy, (New York: Routledge, 2009)Google Scholar. Beck's own work on finance and risk is rather limited. Although he acknowledges that the ‘new power-play between territorially fixed political actors (government, parliament, unions) and non-territorial economic actors (representatives of capital, finance, trade) is the central element expressed in the political economics of uncertainty and risk’, he limits his comments on the issue to just a ‘few notes’. Beck, Ulrich, World Risk Society (Cambridge: Polity Press, 1999), pp. 11–12Google Scholar. Beck's main work on the financial crisis features in Beck, Ulrich, World at Risk (Cambridge: Polity Press, 2007), pp. 201–4Google Scholar.

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12 Beck, World Risk Society, p. 131. Emphasis in original.

13 Beck distinguishes between risk and risk uncertainty and argues that the ‘insurmountable uncertainty which lurks in risk from the outset, and may even increase with the claim to rationalization, corrodes the cage of calculable reason and – paradoxical as it may sound – liberates us’. Ulrich Beck, World at Risk, p. 18. See also the section on uncertainty in Beck, Ulrich, ‘The reinvention of politics’, in Beck, Ulrich, Giddens, Anthony, and Lash, Scott, Reflexive Modernization: Politics, Tradition and Aesthetics in the Modern Social Order (Cambridge: Polity Press, 1994), pp. 8–13Google Scholar.

14 Beck, World at Risk, p. 66.

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18 In this respect, it is not that different to the pre-crisis situation. See Porter, Globalization and Finance.

19 Ulrich Beck, ‘This free-market farce shows how badly we need the state’, The Guardian (10 April 2008), available at: {http://www.guardian.co.uk/commentisfree/2008/apr/10/worldrisksocietythe} accessed 12 December 2010.

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21 Robert Deuchars, The International Political Economy of Risk, p. 89.

22 Beck, Ulrich, ‘The terrorist threat: world risk society revisited’, Theory, Culture & Society, 19:4 (2002), p. 39CrossRefGoogle Scholar. It should be noted at the outset that Beck accords risk an ontological status whereas the Foucauldian approach treats risk as a way of ordering reality.

23 Darryl Jarvis, ‘Theorizing risk: Ulrich Beck, globalization and the rise of the risk society’, available at: {http://www.guardian.co.uk/commentisfree/2012/jan/23/welfare-cuts-emergency-loans} accessed 20 June 2012, p. 11. Parentheses added.

24 Ulrich Beck, World Risk Society, p. 72. Quoted in Griner, Shlomo, ‘Living in a world risk society: a reply to Mikkel V. Rasmussen’, Millennium: Journal of International Studies, 31:1 (2002), p. 150CrossRefGoogle Scholar.

25 Ulrich Beck, ‘Self-dissolution and self-endangerment of industrial society: what does this mean?’, in Beck, Giddens, and Lash, Reflexive Modernization, p. 176.

26 Beck, World Risk Society, p. 88.

27 Ibid., p. 72.

28 Ibid., p. 73.

29 Ibid., pp. 77–8.

30 Ibid., p. 81.

31 Beck, Ulrich, ‘The reinvention of politics: towards a theory of reflexive modernization’, in Beck, Ulrich (ed.), Reflexive Modernization: Politics, Tradition and Aesthetics in the Modern Social Order (Cambridge: Polity, 1994), p. 6Google Scholar. Second quote from Beck, World Risk Society, p. 131. Emphasis in original.

32 Beck, ‘The reinvention of politics’, p. 7.

33 Griner, ‘Living in a world risk society’, p. 149.

34 Beck, World at Risk, p. 66.

35 As Claudia Aradau and Rens Van Munster point out, it is not clear where the threshold lies ‘between early modernity and reflexive modernity’ in Beck's schema. Refer to their ‘Governing terrorism through risk: taking precautions’, p. 94. Second, the uninsurability of catastrophic events turns out to be a poor marker with regard to terrorism, environmental disasters as well as the increase in ‘natural’ catastrophes such as floods and hurricanes. Bougen, Philip D., ‘Catastrophe risk’, Economy and Society, 32:2 (2003), pp. 253–74CrossRefGoogle Scholar; and Ericson, Richard V. and Doyle, Aaron, ‘Catastrophe risk, insurance and terrorism’, Economy and Society, 332 (2004), pp. 135–73CrossRefGoogle Scholar. There is also an assumption of ‘uniformity so that it is possible to make a general and abstract characterization of risk in a given type of society, i.e. that risk has fundamentally the same characteristics in all spheres’. Dean, Mitchell, Governmentality: Power and Rule in Modern Society (London: Sage Publications, 1999), p. 181Google Scholar.

36 Dean, Governmentality: Power and Rule, p. 184.

37 Beck, World at Risk, p. 66.

38 Aradau and Van Munster, ‘Governing terrorism through risk’, p. 97.

39 Dean, ‘Risk, calculable and incalculable’, p. 151.

40 Aradau, Claudia, Lobo-Guerrero, Luis, and Van Munster, Rens, ‘Security, technologies of risk, and the political: Guest editors' Introduction’, Security Dialogue, 39:2–3 (2008), p. 150CrossRefGoogle Scholar. Indeed as Pat O'Malley points out the use of incalculability with regard to uncertainty in the works of Frank Knight, John Maynard Keynes, and Ulrich Beck was not meant to imply that no calculation was occurring. O'Malley, Pat, Risk, Uncertainty and Government (London: GlassHouse Press, 2004), p. 14Google Scholar.

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46 Claudia Aradau, Luis Lobo-Guerrero, and Rens Van Munster, ‘Security, technologies of risk, and the political’, p. 150.

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49 Louise Amoore and Marieke de Goede, ‘Introduction: governing by risk in the War on Terror’, in Amoore and de Goede (eds), Risk and the War on Terror, pp. 1–20.

50 Ewald, ‘The return of the crafty genius’, p. 64.

51 Rasmussen, Mikkel Vedby, The Risk Society at War: Terror, Technology and Strategy in the Twenty-First Century (Cambridge: Cambridge University Press, 2006), p. 101CrossRefGoogle Scholar. See also Ericson, Richard V., ‘The state of pre-emption: managing terrorism risk through counter law’, in Amoore, Louise and de Goede, Marieke (eds), Risk and the War on Terror (Oxon: Routledge, 2008), pp. 57–76Google Scholar; and Claudia Aradau and Rens Van Munster, ‘Taming the future: the dispositif of risk in the war on terror’, in Amoore and de Goede (eds), Risk and the War on Terror, pp. 23–40.

52 Haldane, Andrew and May, Robert, ‘Systemic risk in banking ecosystems’, Nature, 469 (20 January 2011), p. 354CrossRefGoogle ScholarPubMed.

53 This insight is thanks to one of the reviewers. Quote is from Haldane and May, ‘Systemic risk in banking ecosystems’, p. 354.

54 The capital requirement of 7 per cent of risk-weighted assets will be comprised of ‘a minimum common-equity target of 4.5% of assets, to be reached by 2015, plus a “conservation buffer” of 2.5% of assets (which can be drawn upon with restrictions in times of stress) to be in place by 2019’. The total tier 1 capital which includes common equity will be 8.5 per cent. See The Economist, ‘Basel's buttress: New rules on bank capital and derivatives trading’ (18–20 September 2010), p. 92. See also Basel Committee on Banking Supervision, Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems (June 2011), available at:{http://www.bis.org/publ/bcbs189.pdf} accessed 5 January 2012.

55 Haldane and May, ‘Systemic risk in banking ecosystems’, p. 353.

56 The Economist, ‘Financial regulation: Not all on the same page’, p. 72.

57 Independent Commission on Banking (London, Domam Group, 2011), pp. 12–13. Available at: {http://bankingcommission.independent.gov.uk} accessed 7 January 2012; Alex Barker, ‘EU review wants bank trading ringfenced’, Financial Times (2 October 2012), available at: {http://www.ft.com/home/uk} accessed 2 October 2012.

58 Haldane and May, ‘Systemic risk in banking ecosystems’, p. 354.

59 Acharya, Viral, Cooley, Thomas, Richardson, Matthew, and Walter, Ingo (eds), Regulating Wall Street: the Dodd-Frank Act and the New Architecture of Global Finance (Hoboken, New Jersey: John Wiley & Sons, 2010), p. 186CrossRefGoogle Scholar.

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61 For an excellent overview of thee reforms, see Helleiner, Eric, ‘What role for the new financial stability board? The politics of international standards after the crisis’, Global Policy, 1:3 (2010), pp. 282–90CrossRefGoogle Scholar.

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63 Financial Stability Board, Reducing the Moral Hazard Posed by Systemically Important Financial Institutions: FSB Recommendations and Time Lines (October 2010), available at: {http://www.financialstabilityboard.org/publications/r_101111a.pdf?frames=0} accessed 10 December 2010; European Commission, Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the European Central Bank – Bank Resolution Funds (May 2010), available at: {http://ec.europa.eu/internal_market/bank/docs/crisis-management/funds/com2010_254_en.pdf} accessed 10 December 2010.

64 For a summary, see The Economist, ‘Dealing with bad banks: Equipping the Emergency Room’ (December 2010), pp. 91–3.

65 Augar, Philip, Chasing Alpha: How Reckless Growth And Unchecked Ambition Ruined The City's Golden Decade (London: Bodley Head, 2009), p. 12.Google Scholar

66 Zoltan Pozsar and Mammohan Singh, ‘The nonbank-bank Nexus and the Shadow Banking System’, IMF Working Paper, WP/11/289 (December 2011), p. 8.

67 See Gary Gorton and Andrew Metrick, Regulating the Shadow Banking System (18 October, 2010), available at: {http://ssrn.com/abstract=1676947}, p. 2.

68 OICU-IOSCO, ‘Money Market Fund Systemic Risk Analysis and Reform Options: Consultation Report’, available at: {http://www.csrc.gov.cn/pub/csrc_en/affairs/AffairsIOSCO/201205/P020120503381074840200.pdf} accessed 27 April 2012, Appendix 1.

69 Gorton and Metrick, Regulating the Shadow Banking System, p. 16.

70 Germain, Randall, Global politics and Financial Governance (Basingstoke: Palgrave Macmillan, 2010)CrossRefGoogle Scholar.

71 On the flight to quality, see Gorton and Metrick, Regulating the Shadow Banking System, p. 16.

72 Financial Stability Board, ‘FSB letter to G20 Leaders on Progress of Financial Regulatory Reforms’ (9 November 2010), available at: {http://www.financialstabilityboard.org/publications/r_101109.pdf} 27 November 2010.

73 G20 Meeting (April 2009). Quoted in Eric Helleiner and Stefan Pagliari, ‘The end of self-regulation?: Hedge funds and derivatives in global financial governance’, in Eric Helleiner, Stefano Pagliari, and Hubert Zimmermann (eds), Global Finance in Crisis, p. 77.

74 Helleiner and Pagliari, ‘The end of self-regulation?’, p. 77.

75 Ibid., p. 88.

76 Tett, Gillian, Fool's Gold: How Unrestrained Greed Corrupted a Dream, Shattered Global Markets and Unleashed a Catastrophe (London: Little Brown, 2009), p. 63Google Scholar.

77 Ibid., p. 114.

78 The US has already stipulated that this must be the case for all bank holding companies. Refer to Section 165 (k) of the Dodd-Frank Act. Available at: {http://www.sec.gov/about/laws/wallstreetreform-cpa.pdf} accessed 2 October 2012.

79 Financial Stability Board, ‘Strengthening the Oversight and Regulation of Shadow Banking: Progress Report to G20 Ministers and Governors’ (16 April 2012), p. 3.

80 OICU-IOSCO, ‘Money Market Fund Systemic Risk Analysis’, p. 20; Financial Stability Board, ‘Strengthening the Oversight and Regulation of shadow Banking: Progress Report to G20 Ministers and Governors’ (27 October 2011), p. 20; Gorton and Metrick, Regulating the Shadow Banking System, p. 20.

81 Gorton and Metrick, Regulating the Shadow Banking System, p. 20.

82 OICU-IOSCO, ‘Global Developments in Securitization Regulation Consultation Report’ (June 2012), pp. 25–7.

83 Brief Summary Of The Dodd-Frank Wall Street Reform And Consumer Protection Act. Available at: {http://banking.senate.gov/public/_files/070110_Dodd_Frank_Wall_Street_Reform_Comprehensive_summary_Final.pdf} accessed 27 November 2010. Also The Economist, ‘Financial reform in America: New foundation, walls intact’ (20–6 June 2009), p. 29.

84 Gorton and Metrick, Regulating the Shadow Banking System, p. 21.

85 For a more detailed analysis refer to Tobias Adrian and Hyun Song Shin, ‘The Changing Nature of Financial Intermediation and the Financial Crisis of 2007-09’ (New York: Federal Reserve Bank of New York Staff Reports, March 2010), p. 13.

86 For a good overview of this process and the problems that pertain to it refer to Financial Stability Board, ‘Securities Lending and Repos: Market Overview and Financial Stability Issues’ (27 April 2010), available at: {http://www.financialstabilityboard.org/publications/r_120427.pdf} accessed 6 June 2012.

87 Gorton and Metrick, Regulating the Shadow Banking System, pp. 24–5.

88 This was agreed in September 2010. The 25 jurisdictions are: Australia, Austria, Belgium, Brazil, Canada, China, France, Germany, Hong Kong SAR, Italy, Japan, India, Ireland, Luxembourg, Mexico, the Netherlands, Russia, Singapore, South Korea, Spain, Sweden, Switzerland, Turkey, the United Kingdom, and the United States. Available at: {http://www.imf.org/external/np/exr/facts/pdf/fsap.pdf} accessed 3 January 2012.

89 These were actually put in place after the Asian financial crisis but were on a voluntary basis and after one round of assessments the system by and large fell into abeyance. See Germain, Randall, ‘Global financial governance and the problem of inclusion’, Global Governance, 7 (2001), pp. 411–26Google Scholar; and Randall Germain, Global politics and Financial Governance.

90 The ROSCs cover ‘data dissemination, fiscal practices, monetary and financial policy transparency, banking supervision, insurance supervision, securities market regulation, payments systems, anti-money laundering, corporate governance, accounting, auditing, insolvency regimes, and creditor rights’. Soederberg, Suzanne, ‘On the contradictions of the New International Financial Architecture: another procrustean be for emerging markets?’, Third World Quarterly, 23:4 (2002), p. 615CrossRefGoogle Scholar.

91 Vestergaard, Discipline in the Global Economy?, p. 94.

92 Ibid.

93 IMF, The Financial Sector Assessment Program (FSAP), available at: {http://www.imf.org/external/np/exr/facts/pdf/fsap.pdf} accessed 3 January 2012.

94 IMF and World Bank, The Financial Sector Assessment Program After Ten Years: Experience and Reforms for the Next Decade (August 2009) available at: {http://www.imf.org/external/np/pp/eng/2009/082809b.pdf} accessed 5 January 2012, p. 36.

95 Financial Stability Board, ‘FSB letter to G20 Leaders on Progress of Financial Regulatory Reforms’ (9 November 2010), available at: {http://www.financialstabilityboard.org/publications/r_101109.pdf} accessed 27 November 2010.

96 Best, Jacqueline, ‘The limits of financial risk management: or what we didn't learn from the Asian Crisis’, New Political Economy, 15:1 (2010), p. 37CrossRefGoogle Scholar.

97 This is not to suggest that the competition between these two institutions that existed previously has dissipated, the claim is simply that there is a certain degree of cooperation in this specific area. Domenico Lombardi, ‘The Governance of the Financial Stability Board’, Brookings Institution Issues Paper (September 2011), available at: {http://www.brookings.edu/~/media/research/files/papers/2011/9/23%20financial%20stability%20board%20lombardi/fsb_issues_paper_lombardi} accessed 8 August 2012, p. 7.

98 IMF, ‘The IMF-FSB Early Warning Exercise: Design and Methodological Toolkit’ (September 2010), available at: {http://www.imf.org/external/np/pp/eng/2010/090110.pdf} accessed 10 July 2012, pp. 20–7.

99 IMF, ‘The IMF-FSB Early Warning Exercise’, p. 34.

100 This is a summary of IMF, ‘The IMF-FSB Early Warning Exercise’, pp. 33–5.

101 Financial Stability Board, ‘Shadow Banking: Strengthening Oversight and Regulation’ (16 April 2012), available at: {http://www.financialstabilityboard.org/publications/r120420c.pdf}, accessed 27 August 2012, pp. 10–12.

102 IMF, ‘The IMF-FSB Early Warning Exercise’, p. 37.

103 Ibid., p. 39.

104 Ibid., p. 5.

105 Ibid., p. 41.

106 Ibid.

107 Strange, Mad Money, pp. 4–9.

108 Helleine, Eric and Pagliari, Stefano, ‘Crisis and the reform of international financial regulation’, in Helleiner, Eric, Pagliari, Stefano, and Hubert, Zimmermann (eds), Global Finance in Crisis: The Politics of International Regulatory Change (London: Routledge, 2010), p. 11Google Scholar.

109 Germain, Randall, ‘Financial governance and transnational deliberative democracy’, Review of International Studies, 36:2 (2010), p. 496CrossRefGoogle Scholar.

110 On the difference between influence and autonomy, refer to Cohen, Benjamin, ‘The international monetary system: diffusion and ambiguity’, International Affairs, 84:3 (2008), pp. 455–70CrossRefGoogle Scholar. For example, ‘the British successfully lobbied the Council of Ministers to oppose a proposed European Systemic Risk Council from being able to demand that national governments either bail-out or wind-up a financial institution based in that country, on the basis that this is a matter of national control over taxation and expenditure’. Refer to Randall Germain, ‘Global Politics and Financial Governance after the Great Freeze’, paper presented at BISA Conference, 2009, p. 18. Similarly, the previously mentioned G20 agreement on hedge fund supervision, ‘allows countries to choose whether they will use an indirect or direct model of national regulation to meet their international obligation’ thus satisfying both the US and UK, on the one hand, and France and Germany on the other. See Fioretos, Orfeo, ‘Capitalist diversity and the international regulation of hedge funds’, Review of International Political Economy, 17:4 (2010), p. 718CrossRefGoogle Scholar.

111 Eichengreen, Barry, Financial Crises And What to Do About Them (Oxford: Oxford University Press, 2002), p. 2CrossRefGoogle Scholar.

112 Tony Porter, ‘Risk models and transnational governance in the global financial crisis’, p. 57 and Randall Germain, Global Politics and Financial Governance, p. xii.

113 Germain, Randall, ‘Financial order and world politics: crisis, change and continuity’, International Affairs, 85:4 (2009), p. 677CrossRefGoogle Scholar.

114 Ulrich Beck, ‘This free-market farce shows how badly we need the state’, The Guardian (10 April 2008). On a global reserve currency, see Helleiner, Eric, ‘The new politics of global reserve reform’, Journal of Globalization and Development, 1:2 (2010), pp. 1–12CrossRefGoogle Scholar.

115 The Economist, ‘Base camp Basel: Regulators are trying to make banks better equipped against catastrophe’ (10–17 January 2010), p. 72.

116 Andrew Haldane (BoE), ‘The dog and the frisbee’, Speech at Jackson Hole, 31 (August 2012), available at: {http://www.kansascityfed.org/publicat/sympos/2012/ah.pdf} accessed 20 August 2012, p. 12.

117 Ibid., p. 5.

118 Deuchars, The International Political Economy of Risk, p. 89.

119 Viral Acharya, Thomas Cooley, Matthew Richardson, and Ingo Walter (eds), Regulating Wall Street, p. 58.

120 Ibid., p. 59.

121 The Economist, ‘The silent bazooka: The three-year loans offered by the ECB to banks have helped stabilise the euro zone’ (4 February 2012), p. 58.

122 Braithwaite, John, Regulatory Capitalism: How it Works, Ideas for Making It Work Better (Cheltenham: Edward Elgar, 2008), p. 42CrossRefGoogle Scholar.

123 Financial Times, ‘Spain takes brunt of the stress test failures’ (15 July 2011).

124 The capital adequacy ratio is set at a mere Core Tier 1 capital of 5 per cent. See Patrick Jenkins, ‘EU stress test pass rate under fire’, Financial Times (15 July 2011).

125 Sean Farrell, ‘Europe's banks in free fall as fear stalks the markets once again’, Financial Times (11 August 2011).

126 Financial Times, ‘How did Europe's bank stress tests give Dexia a clean bill of health?’ (5 October 2011).

127 The Economist, ‘Down a notch’ (21 January 2012), p. 37.

128 For example, one of the finance industry's lobbying bodies, the Institute of International Finance estimated that the Basel 3 standards could reduce GDP by 3 per cent for the US, the eurozone and Japan. The Economist, ‘Not all on the same page: America's Congress nears agreement on a financial-reform bill, but the final shape of the new regime is unclear. The international picture is murkier still’ (2–9 July 2010), pp. 71–3.

129 Although there have been suggestions concerning the creation of a modern day Bancor through the use of SDRs rather than the dollar, but this has not, as yet, been taken up. Neither has one of the most important policy proposals of John Maynard Keynes – that of charging fines on excessive trade surpluses which would help redress the current trade imbalances that are in many ways at the heart of current instabilities. See The Economist, ‘Beyond Bretton Woods 2’ (6–12 November 2010), pp. 85–7.

130 Ulrich Beck, ‘Risk Society's “Cosmopolitan Moment”’, Harvard Lecture, p. 10 (12 November 2008), available at: {http://www.labjor.unicamp.br/comciencia/files/risco/AR-UlrichBeck-Harvard.pdf} accessed 12 June 2012.

131 Ibid., p. 4.

132 Ibid., p. 8.

133 Ibid., p. 10.

134 Deuchars, The International Political Economy of Risk, p. 89.