Risk models and transnational governance in the global financial crisis: The cases of Basel II and credit rating agencies

While it is widely recognized that deficient risk models and methodologies were major factors in the current financial crisis, there is a lot more to be done to understand the connections of these models and methodologies to the broader transnational institutions and practices involved in the stabilization and governance of global finance, and to know what should be done to address these deficiencies. In recent decades risk has become a prominent feature of individual and collective experience at all scales, as signaled for instance by Beck’s (1992) notion that we are now living in a risk society, where the distribution of risks has become more important than the distribution of wealth. As Power (2007: 22) has noted, “risk enters into the description of the everyday in a manner coextensive with personal responsibility and innovation. Popular magazines celebrate risktaking individuals.” In contrast to words such as danger or hazard, risk signifies a method for acting on the basis of a calculation of the probability of a future occurrence and thereby to exercise control over an uncertain future (Ewald 1991). In today’s fast moving and uncertain world it is therefore not surprising that risk has become a significant theme in governance. In global finance, and especially in the current crisis, the presence of the concept of risk at all levels, from the most micro-level technical calculations involved in pricing derivatives, through systemic financial risk, certainly suggests that there are connections to be drawn between particular risk practices and the larger features of the governance of global finance. This chapter seeks to better understand these by focusing especially on two of the risk-related features of global financial governance that have been closely associated with debates about how to respond to the crisis: the Basel II standards for bank regulation and the International Organization of Securities Commissions Code of Conduct Fundamentals for Credit Rating Agencies.