Internationalization and Financial Federalism

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Abstract
In this article, the authors examine some effects of economic internationalization on state structures, especially in regard to the distribution of power and authority within federalist systems. Using an institutional rational choice model, they analyze changes in financial regulation and market structures in Germany and the United States. The focus is on the financial realm because of its high degree of internationalization and because, in both countries, financial markets and regulation have historically exhibited federalist traits. The findings indicate that internationalization has led to significant convergence in financial market structures and regulation across the two countries and that in each case this convergence has been accompanied by centralization of financial regulatory authority. Although both the German type of cooperative federalism and the U.S. model of competitive federalism proved to be vulnerable to the growing international pressures, the two countries took different paths of change that reflected differences in domestic institutions. Thus, the authors conclude that convergence is, and will likely remain, of a limited nature.

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