The world has seen its share of financial crises before, but never have the effects been so globally synchronous. And this fact has forced greater co-operation among policy-makers, highlighting the ongoing erosion of their local autonomy.

The policy-makers of few countries prize their autonomy as highly as those in Canada do, both among the provinces and with other countries. “Made in Canada” isn’t just a blue-collar imperative here. Policy wonks are just as dedicated to defending their brand — they tout the importance of so-called “made-in-Canada solutions” to everything from climate change to accounting issues and securities regulation.

Despite the fact that our economic fortunes are tied closely to those of the U.S., and that many of our largest issuers are interlisted, we’ve insisted on preserving homegrown accounting rules, different corporate governance standards and unique trading rules. Defenders of the existing system of provincial securities regulation claim that local issues make it necessary to maintain that Byzantine structure to preserve their ability to deal with local issues, as if geography somehow creates meaningfully different policy problems.

Even when regulators can manage to agree on a common rule for something, they often preserve minor exceptions or insist on slightly different interpretations, thereby robbing the intended uniformity of its efficiency.

However, much of this conceit is now being undone by the global financial crisis. The worldwide, synchronized nature of the financial market meltdown, and the ensuing economic downturn, has exposed the myth of local issues.

The problems revealed by the crisis are global, and thus the solutions must be global, too. As a result, policy-makers around the world have been forced to swallow their local pride and sign on to global policy prescriptions — central banks have delivered co-ordinated rate cuts and finance ministers have anted up with agreed-upon levels of fiscal stimulus.

Canadian policy-makers have been participants on both the fiscal and monetary fronts. Moreover, the federal Finance Department has created lending facilities and asset-purchase plans driven not by local market conditions but by a fear of the Canadian financial industry being disadvantaged by similar policies elsewhere.

Last fall, Canadian securities regulators fell into line with a global moratorium on short-selling financial stocks; and the new regulatory regime for credit-rating agencies being proposed by the Canadian Securities Administrators aims to follow an international code. Accounting standards-setters have also (partly) followed U.S.-led moves to ease the impact of mark-to-market accounting, and they have committed to adopting International Financial Reporting Standards.

It’s not just Canadian policy-makers that are setting aside their local concerns; the same preoccupation with pursuing a level playing field for global markets is evident in the U.S. and Europe, too.

For example, when the U.S. Treasury announced its plans to bring greater oversight and transparency to the over-the-counter derivatives markets in mid-May, it stressed that it would push for the implementation of similar measures around the world “to ensure our objectives are not undermined by weaker standards abroad.”

The same concern was echoed by Charlie McCreevy, the European Commission’s commissioner for the internal market and services, in a speech he gave in Edinburgh in mid-May, in which he noted the worry that governments may be losing their sovereignty over financial regulation.

However, he added, global measures are indeed needed to deal with a global crisis. “The first lesson we have drawn from this crisis is that we need to tackle certain issues at a global level. I believe there is a wide consensus now that we simply cannot have global integrated financial markets and a patchwork of national regulation and supervision.”

McCreevy went on to say: “There is a clear mismatch between the activity of global players trading and doing business across the globe and supervisors and rule-makers overseeing those players whose powers stop at their national borders.”

He also stressed that national regulation creates unnecessary duplication and inefficiency. The conclusion, he says, is that we need global standards and much more co-operation among regulators.

This decay in policy autonomy, and the drift toward international standards, has been underway for some time, observes David Brown, former chairman of the Ontario Securities Commission and now counsel with Davies Ward Phillips & Vineberg LLP in Toronto. “The seeds of this erosion were sown several years ago,” he says, “as regulators tried to react to the issues exposed by the Enron [Corp. and] Parmalat [SpA] bankruptcies.

@page_break@“In many ways, the regulators and policy-makers were the last to join the globalization party,” Brown adds. “By the time they became engaged — arguably, the Enron crisis forced them to become engaged — it was clear that purely domestic solutions to the global collapse of market confidence would not be enough.”

The result has been an increasing willingness to accept international standards in areas such as accounting, auditing and corporate governance.

Tanis MacLaren, former head of the OSC’s office of international affairs and now managing director of financial services industry consultant Kempenfelt House Consulting Inc., traces the shift toward global regulatory policy even further back than the Enron saga. She sees this as part of an ongoing evolution in the financial services sector.

MacLaren recalls that the big European banks first began using risk-based capital calculations in the mid-’90s, and this started to filter throughout the global banking industry.

Meanwhile, she notes, discussions on modernizing both U.S. and international accounting standards cross-pollinated both efforts well before there was any official effort at convergence.

“Common accounting standards made sense in Europe with movement toward an integrated market and free flows of capital,” she says. “And as the capital and other markets became more globally integrated, the logic of common accounting standards became even more compelling.”

MacLaren adds that events such as the Enron scandal, and the resulting exposure of weaknesses in U.S. standards, helped break down some of the resistance to further convergence.

“The current mess has just made it harder to pretend you aren’t following someone else’s lead on policy matters,” MacLaren says, adding that the crisis has fully exposed how closely linked markets have become, and made it apparent to regulators and politicians alike that their policies don’t operate in a vacuum.

Although it appears that this shift toward more globally formulated policy is an inevitability, the effects of this trend remain to be seen. For one thing, policy-makers can be forced to take actions that they otherwise wouldn’t if they had complete policy autonomy — last fall’s ban on short-selling and the recent moves to amend mark-to-market accounting were both driven by the U.S., and they forced responses from Canadian and international authorities.

Moreover, the plan to migrate to the IFRS has some concerned that Canadian policy-makers are giving up their flexibility to keep pace with U.S. accounting standards. Steve Sibold, former chairman of the Alberta Securities Commission and now general counsel with Bennett Jones LLP in Calgary, points out that Canada is in a different position than the other countries that have adopted the IFRS due to the number of issuers interlisted in Canada and the U.S.

“It is very important that Canadian interlisted companies not be disadvantaged vis-à-vis their US counterparts, which are vying for the same capital,” he says. That said, Sibold concedes that the Accounting Standards Board appears to be committed to the transition.

Additionally, Jack Mintz, Palmer Chair in Public Policy at the Univer-sity of Calgary, points out that some of the initiatives unveiled by central banks, and some of the fiscal policy responses, are giving rise to possible protectionism as policy-makers worry about protecting jobs and minimizing the risks to their taxpayers. When these worries take precedence, Mintz notes: “International co-ordination goes out the window.”

The upside, MacLaren suggests, is that the crisis may force regulators to address problems that they otherwise would ignore — such as the lack of regulatory structure around OTC derivatives and credit-rating agencies. And the increased attention that has been brought to financial-sector regulatory reforms gives policy-makers a laboratory to explore what works. She says that the intensified focus on these issues means that policy-makers now know exactly what their counterparts in other countries are doing: “…and can tell pretty quickly whether or not the policy actions have had the desired effect.”

Another consequence of this shift toward global rules is it gives increased importance to the organizations that are now setting the policy agenda.

“I have argued for some time,” notes Brown, “that given this growing inability for any country — especially one as small as Canada — to formulate domestic regulation that differs materially from those developed in international forums, it is imperative that we stay as actively involved in the international bodies as we can.”

Canada historically has had more than its fair share of representatives at many of the international groups dealing with financial-sector policy, and the relative outperformance of the Canadian banking sector in this latest crisis only strengthens that hand.

All politics may be local, but financial-sector policy is becoming increasingly global. IE