Diffusion everywhere: Regulatory independence reaches the Vatican

The diffusion of independent regulatory authorities has been well documented (e.g., here, here). Now the tide has reached even the Vatican:

The Vatican is seeking to make its new financial watchdog agency fully independent by relieving its president of his other job in the Holy See’s administration.

There had been questions about possible conflicts of interests when Cardinal Attilio Nicora was named president of the Vatican’s Financial Information Authority earlier this year.

The watchdog agency was created to ensure all Vatican financial transactions comply with EU and international anti-money laundering and anti-terror financing laws.

Vatican spokesman the Rev. Ciro Benedettini said Thursday that “common sense” dictated that as chief watchdog, Nicora couldn’t be responsible for checking compliance of his other office, which administers Vatican personnel and other assets.

Just Another Talk Shop? International Institutions, European Summits and Financial Markets

Many commentators hold the view that international diplomacy does not affect financial markets in any notable way. Especially since international decisions require consent by all actors, this de facto unanimity requirement allows every government to torpedo any attempt to bring about a collectively binding agreement. What we observe then in the theatre of international diplomacy and negotiations is a sometimes entertaining, yet economically ineffective play. Governments meet in “talk shops” and make lofty proclamations, but produce nothing more than “hot air” that markets do not care about.

In a recently published article, Gerald Schneider (University of Konstanz) and I take issue with the view that the results of deliberations in multilateral fora are “hot air”. Our focus is on decision-making in the European Union’s (EU) key intergovernmental body in the domain of EU foreign and security affairs. As is the case for most international institutions, the unanimity requirement governing this body allows nationalist governments to torpedo any attempt to build up a credible European defense force and a unified foreign policy stance.

We argue that investors react positively to a successful strengthening of Europe’s military component – a vital part of the intensified cooperation within the European Security and Defense Policy (ESDP) – since such decisions increase the demand for military products and raise the expected profits in the European defense industry. We find that financial markets react positively to those summit decisions which consolidated EU military capabilities and the ESDP. Each of these substantial Council decisions increased the value of the European defense sector by about 4 billion Euros on average. This shows that multilateral decisions can have considerable economic and financial repercussions.

Clearly, this is not to say that the skeptical view many hold about the effectiveness of international institutions, diplomacy and their relevance for the economy is incorrect. Yet, the potential for effective decision-making within international institutions that is relevant for markets may be underestimated, because we lack systematic evidence on when and how it matters. Our results also suggest that political scientists may detect economically crucial events in international relations by studying the way in which markets differentiate in the short run between events that are important to them and those that will remain “hot air”.

Independent Regulatory Agencies’ Black Sabbath?

A guest post by Martino Maggetti:

Mr. Osborne, the Chancellor of the Exchequer of the United Kingdom, recently announced the dismembering of the Financial Services Authority. The watchdog was publicly blamed for its alleged “light-touch” regulatory approach and failure to prevent the financial meltdown.

From 2012, its competencies will be separated between a number of new and old agencies. The Bank of England will assume not only monetary policy, but also “macro-prudential supervision”, that is, the responsibility for systemic risks oversight and regulation. In addition, a Consumer Protection and Markets Authority will ensure the “integrity” of financial markets, while a new Prudential Regulatory Authority “will carry out the prudential regulation of financial firms, including banks, investment banks, building societies and insurance companies”.

This is quite a spectacular institutional development. Continue reading