1
Financialization,householdwealthandvoterattention:Thechangingpoliticsofregulatingsystemicallyimportantbanks
Paper prepared for panel on “Power of Finance; Instruments, Opportunities andPitfalls”,InternationalStudiesAssociationHongKongConference,15-18June2017.
Thisarticlearguesthatmuchoftheliteraturehasunderplayedtheroleofvotersandelectionsinpost-crisisregulatorypolitics.Instead,therealpoliticsoffinancialregulationaremostlyseenasanarenaofelitecontestationbetweenindustrylobbiesandspecializedbureaucraticagencies,resultinginregulatoryoutcomesthatsubstantiallyfavourglobalizedfinance.Iarguethattheinterestsandtheattentionofmiddleclasshouseholdshavesteadilybecomemorecloselylinkedtofinancialization,financialcrisesandlargefinancialinstitutionsinrecentdecades,andthatthishasinfluencedthetrajectoryofregulationofthemostglobalizedbanks.Iarguethatthiscanpushpoliticiansofvaryingpartisanaffiliations,particularlythoseinthemostfinancializedsystems,tosupportmoreregulatorytighteningthaninlessfinancializedsystems.Atthesametime,however,thisregulatorytighteningremainshighlycontestedanditssustainabilityisuncertain,inpartbecauseoftheheightenedinterestofhouseholdsinthepromotionaswellastheprotectionoftheirwealth.
AndrewWalterProfessorofInternationalRelations|MelbourneSchoolofGovernment|Schoolof
SocialandPoliticalSciences,Room217,WalterBoasBuilding,UniversityofMelbourne,Victoria3010,Australia
Tel.+61-(0)3-90359633DraftatJune10,2017.Commentswelcome.
2
“Itishardformetoimaginehavingausefulandinformativepopulardebateaboutbankcapital,butpeoplekeeptrying.ItseemstomethatbankcapitalregulationhasthreedrawbacksasasubjectforpublicdiscussioninU.S.politics:1. Itiscomplicated.2. Beyondthecomplexity,itisjustsortofconceptuallymysterious.Banking
isaweirdbusiness.Didyouknowthatbankdepositsareactuallydebt,forthebank?Ofcourseyoudid,comeon.Butwhenpoliticiansandpunditstrytohavepopulardiscussionsaboutbankcapital,theycan'tassumethatknowledge.Andsotheyhavetostartfromaweirdplaceofnot-quite-rightmetaphor.Capitalismoneysetasideforarainyday,orthedeliciousfrostingonalayercakeofdebt,orsomething.
3. Itisveryboring.”[MattLevine,MoneyStuff,May23,2016].
AsLevinesuggests,qualitypublicdebateaboutthedetailsofbanking
regulationisdifficulttosustain,butalmostadecadeaftertheonsetoftheglobal
financialcrisis(GFC),debatecontinuesnonetheless.DanTarullo,thehawkishFed
GovernorresponsibleforfinancialregulationandthemanthatWallStreetmost
lovedtohate,recentlyleftoffice.PresidentTrumpandhisRepublicanalliesin
CongresshavearguedforarepealtheDodd-FrankActandtoprovideWallStreet
bankswithan“off-ramp”intendedtoreducethe“burden”offinancialregulationvia
theFinancialChoiceAct(Richardson,Schoenholtz,Tuckman,&White,2017).In
Europe,Britishthreatstocuttaxesandregulationtoattractmobilefirmsweremet
withsuggestionsthatsomeEUcountrieswouldseektoattractbanksfleeingtheCity
ofLondon.1IntheBaselCommittee,progressonimportantdetailsofthepost-crisis
regulatoryagendahasstalled.2Post-crisisfinancialregulationthereforeseemstobe
inaprocessofpoliticizedretreat.
Manywouldgofurthertoarguethatthisretreatbeganmuchearlier,
reflectingthecontinuinginstrumentalandstructuralpowerofglobalizedfinanceand
itsabilitytoresistsubstantiveconstraint(Helleiner2014).Criticspointedtothe
internationalregulatoryproposalsthathaveemergedfromtheBaselprocesssince
2009asasubstantivewateringdownofearlyproposalsforradicalreformandre-
1“HowTrumpandBrexitcouldchangeglobalbankrules,”BloombergNews,28April2017.2“TheChairmanoftheBaselCommitteereaffirmscommitmenttofinalisepost-crisisBaselIIIreforms,”BISPressRelease,2March2017.
3
regulation.3Theyclaimedthatthebiggestbankshad(re-)capturedthepolicymaking
process,successfullyexercisedtheirstructuralpowerinmajorpolities,andemerged
moredominantthanever.4“WallStreet’spoliticalinfluence”,onesaid,“isjusttoo
strongandtoopervasiveforreformadvocatestoovercome.”(Wilmarth2013,
1295).Somepolicyinsidersconcurred,callingattentiontohow“…ahandfulofWall
Streetfinancialinstitutionsandtheirexecutives…wereabletoexerttheirpowerand
influencetoprotectandreinforceadangerousstatusquothatworkedbrilliantlyfor
thembuthaslefttherestofthecountrybehind.”(Barofsky2013,foreword).
Othersarguethatthefinancialcrisesof2007-9attenuatedthepolitical
influenceoffinanceandpermittedasignificantstrengtheningoffinancialregulation,
includingforthelargestglobalbanks(Drezner,2014).BellandHindmoor,for
example,arguethatthecrisisreducedthepolicyinfluenceoffinancebypoliticizing
regulation,promotingideationalrevisionbyelites,andempoweringthestateto
reassertitsauthorityoverlargefinancialinstitutions(Bell&Hindmoor,2015).Inthis
vein,TheEconomistopinedthat:
“Bankershadhopedthat,aftersevenyearsofpenancefortheirpartinthefinancialcrisis,theendofwrenchingoverhaulsforcedbyfiercenewregulationsmightbenigh.Buttotheirdismay,theregulators’zealisundimmed.Farfromgivingbanksrespite,theyaretougheningupoldrulesanddevisingnewones,perhapsheraldinganewwaveofrestructuring.”5
Hence,notonlyaretheresignificantdisagreementsconcerningthenature
andextentofpost-crisisfinancialre-regulation,therearealsobasicdisagreements
overhowthecrisisaffectedtherelativepowerofstateandmajorprivatesector
actors.
Thisarticlearguesthatmuchoftheliteraturehasunderplayedtheroleof
votersandelectionsinpost-crisisregulatorypolitics.Anumberofauthorspointto
howthecrisis“politicized”financialpractices,generatingpublicangerandincentives
forregulatoryagenciesandpoliticianstorespondwithmorestringentregulation
(e.g.BellandHindmoor2017:114).Butinmostaccounts“thepublic”tendstobe
3Foranextensiveandpopularcritique,seeAdmatiandHellwig(2013,186andinfra).4Gilens2013,ch.8;HackerandPierson2016,ch.9;JohnsonandKwak2010,207-232;Wilmarth2013,1298.5TheEconomist,“NoRespite,”September27,2014.
4
seenasadullmassexertingatemporarybackgroundeffectonpolicymaking.It
movesfrompre-crisispassivitytoaphaseofsuddenpost-crisiscollective“anger”
thatsoondissipatesasthesystemstabilizes,complexandtechnicaldiscussions
aboutregulationtakeover,andasvoterinterestrefocusesonthemorestandard
topicsofeverydaypolitics.Therealpoliticsoffinancialregulationaremostlyseenas
anarenaofelitecontestationbetweenindustrylobbiesandspecializedbureaucratic
agencies.
Whatislacking,Isuggest,isadeeperaccountofhowvoterinterestshave
steadilybecomecloselylinkedtofinancialization,financialcrisesandlargefinancial
institutionsinrecentdecades,andhowthisinfluencesthetrajectoryofregulation.
Wealthaccumulationfor“middleclass”householdshasincreaseddramaticallysince
the1970sinmanydevelopeddemocracies,whichhassharplyincreasedthestakeof
manyhouseholdsinfinancialmarketsandinpoliciesthataffectwealthheldas
savings,pensionassetsandhousingassets(Jordà,Schularick,&Taylor,2016;Knoll,
Schularick,&Steger,2017;Schwartz&Seabrooke,2009).Wehavearguedthatthis
hasbeenamajordriveroffinancialfragility,oftheincreasinglyextensive
interventionsthathaveoccurredduringsuccessivesystemicbankingcrises,andof
farhigherratesofpoliticalturnoverrelatedtothefinancialcycle(Chwierothand
Walter,forthcoming).Inthispaper,Iarguethatitalsohastwoimportant
consequencesforpost-crisisfinancialregulation.
First,thepoliticalsalienceofandpublicinterestinsuchregulationisnow
higherandmoresustainedthaninthepast.Thisispartlybecausefinancialization
increasesthestakeofmanyhouseholdsandvotersinfinancialregulation,butalso
becauseofotherconsequencesoffinancialization.Theseincluderisingeconomic
inequality,distributionalconflictandagrowingincidenceoffinancialscandal.Iargue
thatthiscanpushpoliticiansofvaryingpartisanaffiliations,particularlythoseinthe
mostfinancializedsystems,tosupportmoreregulatorytighteningthaninless
financializedsystems.
Second,thesepost-crisissurgesinfinancialre-regulationareoftenneither
politicallysustainablenorespeciallyradicalinnature.Structuralpowertheorieshave
oftenemphasizedtheimportanceofbanklendingtononfinancialfirmsandthusfor
jobsandgrowth,buttheinterestofmiddleclasshouseholdsintheirwealth
5
portfoliosandtheprovisionofcreditmakesthemanotherkeysourceofdemandfor
aliberalfinancialsystem.Theresultisthattighterpost-crisisregulationinhighly
financializedeconomiesdoesnotmeanareturntothepostwarmodeloffinancial
repression(Helleiner,1994).Callsfor“utilitybanking”ormaking“financethe
servantratherthanmaster”oftheso-called“real”economyoverlookhowthe
politicalgroundhasshifteddecisivelyagainstthisoption(e.g.BellandHindmoor
2017,Kashkari2016).Politically,highlyfinancializedcountriesarecaughtbetween
satisfyingwidespreaddemandsfortheprotectionofaccumulatedwealthand
demandsforitspromotion,includingviathecontinuedflowofcredit.Thisplaces
substantialpoliticallimitsonthepotentialforpost-crisisregulatorytighteningand
engenderscontinuingcontestationovertheregulatoryinnovationsthatareadopted.
Iassesstheseclaimsbycomparingthepost-crisisregulatorytrajectoriesof
thetwomostprominentandhighlyfinancializedcases,theUnitedKingdomandthe
UnitedStates.Ifocusontheirtreatmentoftheverylargest,“globalsystemically
important”banks(G-SIBs),sinceitispreciselythesefinancialinstitutionsthatmuch
oftheliteraturewouldexpecttopossessthegreatestabilitytoresistregulatory
tightening.Ishowthatinfactbothcountries,despitetheirpartisandifferences,have
adoptednewregulationsthathavegonefurtherthanthosethattheirless
financializedpartnershavesupported.Nevertheless,thisrelative“overcompliance”
hasdonelittletoreversetheextensivefinancializationthathasoccurredinboth
countries,ortoreducethedependenceofAmericanandBritishhouseholdsonthe
creditandfinancialmarketsonwhichmuchoftheirwealthdepends.Inbothcases,
overcompliancehasalsobroughtwithitrisingpoliticalcontestationoverthe
regulatorytighteningthathasoccurredsince2009.
Therestofthepaperisorganizedasfollows.Section1providesabrief
overviewofthepoliticaleconomyliteratureonpost-crisisfinancialregulationand
Section2outlineshowmyownargumentdiffers.Section3comparesthepost-crisis
regulatorytrajectoryinthesetwocountries,focusingonthetreatmentofG-SIBs.
Section4assessestheseoutcomesinlightoftheearliertheoreticaldiscussionanda
finalsectionconcludes.
6
1 Thepoliticaleconomyofpost-crisisfinancialregulation
Thereisalargeandvariedliteratureoncrisesas“criticaljunctures”
associatedwithpolicyandinstitutionalchange.Crisescandelegitimateexisting
practicesandtheideasthatsustainthem,whileprovidingopportunitiesforpolitical
entrepreneurstopromotenewsolutionsandinstitutionalforms(Blyth,2002;Boin,
Hart,&McConnell,2009;CollierandCollier1991;Capoccia2015;Haüsermann
2010).Theliteratureon“punctuatedequilibria”arguesthatcrisescanprovidenew
informationtoboundedlyrationalactorsthatsuddenlyshiftspoliticsintonew
territory(Jones&Baumgartner,2012;Weyland,2008).Anextensiveliteraturein
internationalrelations/politicaleconomyseesgreatpowerwarsandglobal
depressionsasdriversofdomesticpolicychange,institutionalinnovationand
systemicchange(Frieden1988;Gilpin1981,1987;Krasner1976;Widmeier,Blyth
andSeabrooke2007).Inaclassicexampleofcrisis-drivenchange,thefinancialcrises
oftheearly1930s,theassociatedGreatDepressionandtheexperienceofWorld
WarTwoarecommonlyseenashavingengenderedanewconsensusoneconomic
managementandandfinancialregulation(Helleiner,1994;Ikenberry,1992;Ruggie,
1982).
Manyscholarsseesuchchangeasexceptionalandemphasizetheabilityof
businesscoalitions,especiallythosefromindustriesessentialtothegenerationof
jobs,incomeandgrowth,toexercise“structuralpower”viaexitorcapitalstrikes
(Lindblom1977;Strange1994).Theabilityofreformopponentstoblockchangemay
alsodependontheiraccesstoinstitutionalvetoes(Tsebelis2002).Theroleof
institutionalformsofinfluencesuchas“regulatorycapture”byindustrydueto
revolvingdoors,lobbyingandcampaigndonationshavebecomecommonclaimsin
relationtothefinancialsectorandsourcesofdeeppessimismregardingpost-crisis
reforminhighlyfinancializedpoliticaleconomies(HackerandPierson2010,2016;
Igan,MishraandTressel2012).6Pastpoliciescanalsoshapeindustrystructure,
whichinturncanaffecttheabilityofbusinesstomobilizeandbuildpolitical
coalitions.Ashistoricalinstitutionalistsemphasize,distinctpastnationalpolitical
6Thisisalsoacommonpositionamongactivists,journalistsandradicaltheoristsonthepoliticalleftandtheright.E.g.,seeMattTaibbi,“WhytheBanksShouldbeBrokenUp,”RollingStone,April8,2016.
7
bargainsandinstitutionalchoicescanconstrainthepossibilitiesforchangeinthe
present.
Culpepper(2010)noteswithotherscholarsthatthestructuraland
instrumentalpowerliteraturesfailtoexplainwhybusinesssometimeslosesmajor
policybattles,andbuildsonanearlierliteraturetoarguethatthepotentialfor
regulatoryreformwilldependonthepoliticalsalienceandcomplexityofparticular
issueareas.Disruptivepolicyandinstitutionalchangeismorelikelyinpolicy
domainswithhighpoliticalsalience,sincethistendstomovecontestationfromthe
“quietpolitics”thatprevailsinareasoflowsalienceandhighcomplexitytothe
“noisypolitics”inwhichindustryandbureaucratsloseinfluence,andpoliticiansofall
stripesmustrespondtovoterconcern.Crisescandelegitimisetheclaimsofbusiness
groupstospecialexpertise,increasetheincentivesofpoliticiansandthemediato
investintheacquisitionofexpertise,andopenupnewpossibilitiesforreform
(Culpepper,2010;Gormley,1986;Meier,1988).Inareaslikefinancialregulationin
which“quietpolitics”usuallyprevailsinnormaltimes,theeffectsofcrisesin
increasingtheirpoliticalsaliencecanbesignificantbuttemporary(Coffee2013,
1029).Aspublicattentionwanes,regulatorypoliticsinthisviewgraduallyshiftsback
tocontestationbetweenindustryandpolicytechnocrats,wherebusinesstendsto
bemorepowerful.
BellandHindmoor(2015)addthatideationalinnovationintheaftermathof
crisescanreducethepotentialfortheexerciseofstructuralpowerbyindustry
opponentsofregulatoryreform,bypoliticizingregulationandrevisingpolicymaker
understandingsaboutthecostsandcredibilityofbusinessexitthreats.Structural
power,theyargue,doesnotsimplyderivefromthematerialpositionoffinancein
theeconomy,butismediatedbyideasthatarepronetoberevisedintheaftermath
ofcrises.Theygofurthertoarguethatthiscangenerateinstitutionalchangethatat
leasttosomeextentlocksinpost-crisisregulatorytightening(Bell&Hindmoor,
2017,pp.115–116).
Financialglobalizationcanalsoalterthenatureofpost-crisisregulatory
responsesinimportantways.Singer(2007,21-32)arguesthatitrequiresregulators
seekingtorestabilizebankingsystemsaftercrisestoforgeapproximately
harmonizedregulationswiththeirinternationalcounterparts,removingthe
8
incentiveofpoliticalprincipalstoobjectonthegroundthattighterregulationwould
underminethecompetitivenessofnationalfirms.7Sharedcrisesandfinancial
globalization,inthisview,produceconvergentpolicytrajectoriesshapedby
internationalnegotiation.Theprospectsforregulatoryconvergencearealso
increasedbythepotentialfornewideastospillacrossbordersandtobeclarified
anddisseminatedintheinternationalinstitutionsinwhichpolicymakersnowso
oftencollaborateintensively,especiallyintheaftermathofshared,deepcrises.
2 Financialization,regulation,andvoterinterests
Theroleofelectoralpoliticsinthisliteratureisusuallymodestandoftennon-
existent.Culpepper(2010)emphasizesthisfactormost,arguingthatcrisesand
scandalsacttoraisetemporarilythepoliticalsalienceofarcanepolicymatterssuch
asfinancialregulation.Thisrequirespoliticiansofallpartisanpersuasionstopay
attention,reducingthedominanceofindustryandbureaucraticinterlocutors,
providinga(perhapsbrief)windowofopportunityforreformers.Duringsuch
periods,governments–includingthosemostcloselyassociatedwithbusiness
interests–havestrongincentivestoalignpolicieswiththedominantpolicy
preferencesofvoters.8
Buildingonthis,Iemphasizethewayinwhichprocessesoffinancialization
andassociatedwealthaccumulationhavesteadilyincreasedtheimportanceof
financialmarketsandtheirregulationformanyhouseholdsandvotersindeveloped
democracies.Financializationisaprocessoffinancialdeepeningandincreasing
complexity,characterizedby‘thesubstitutionoftradingandtransactionsfor
relationships,andthe[associated]restructuringoffinancebusinesses.’9Bankshave
7Analternativetheoryisthatregulatorydivergenceissustainableifitreflectsintra-industrypreferences.“Tieboutsorting”occurswhendifferentfirmslocateactivitiesindifferentregulatoryjurisdictionsinwaysconsistentwithnichestrategies(e.g.,bankscultivatingareputationforsafetymightgravitatetowardsmorestringentlyregulatedjurisdictions)(CarruthersandLamoreaux2016,78-82).8SeealsoJohnFerejohn,‘IncumbentPerformanceandElectoralControl’,PublicChoice50(1986),pp.5-25;LeonardSeabrooke,‘Theeverydaysocialsourcesofeconomiccrises:FromgreatfrustrationstogreatrevelationsininterwarBritain’,InternationalStudiesQuarterly51:4(2007),pp.795-810;BenjaminI.PageandRobertY.Shapiro,‘EffectsonPublicOpiniononPolicy’,AmericanPoliticalScienceReview77:1(1983),pp.175-190.9JohnA.Kay,OtherPeople’sMoney:MastersoftheUniverseorServantsofthePeople?(London:ProfileBooks,2015);SeealsoGretaR.Krippner,‘TheFinancializationoftheAmericanEconomy’,
9
becomesteadilymoreimportantinmoderneconomiesasfacilitatorsofthe
paymentssystem,asbrokerswhomatchlenderswithborrowers,andasmanagers
ofotheractors’savingsandfinancialrisk.Thisrisingcomplexityraisesthepotential
forsystemicriskinthefinancialsystem,or‘theriskthattheinabilityofoneormore
participantstoperformasexpectedwillcauseotherparticipantstobeunableto
meettheirobligationswhendue.’10
Manymiddleclasshouseholdshavegrowingstakesinthisinterconnected
system,includingsavingsinmoneymarketandinvestmentfundsandhousingequity
leveragedbymortgagefinance.Thegrowthofhousingequityandthemovetowards
definedcontributionpensionschemeshaveincreasedhouseholds’stakeinamuch
broaderclassofunderlyingfinancialassets.11Sincesystemicbanksandother
financialinstitutionsaresocloselyinvolvedinthefinancing,managementand
tradingofhousingandfinancialassets,thestakeofthemiddleclassesinthe
activitiesofthesefirmshasgrownsignificantly.
Figure1showsthesharpriseinrealnetprivatewealthpercapitaina
numberofadvancedcountriessince1970.Muchofthewealththathasbeen
accumulatedbythemiddleclasseshasbeenintheformofhousingequityand
pensionassets,withthelatterheldincreasinglyinmarket-sensitivedefined
contributionschemes.12Oneindicationoftheextentofthisshiftoverthelongrunis
inratesofowner-occupiedhousing,whichincreasedinBritainfromaboutone-fifth
tomorethantwo-thirdsofhouseholdsoverthetwentiethcentury.13Similartrends
occurredelsewhere.14
Socio-EconomicReview3:2(May2005),pp.173-208;AndrewG.HaldaneandRobertM.May,‘SystemicRiskinBankingEcosystems’,Nature469:7330(January2011),pp.351-355.10BaselCommitteeonBankingSupervision,‘Glossary’,16June2015.http://www.bis.org/cpmi/publ/d00b.htm?&selection=68&scope=CPMI&c=a&base=term.11SarahM.Brooks,‘WhenDoesDiffusionMatter?ExplainingtheSpreadofStructuralPensionReformsAcrossNations’,JournalofPolitics69:3(August2007),pp.701-715;OrganisationforEconomicCooperationandDevelopment,‘PensionsataGlance2015-OECDandG20Indicators’,2015,http://www.oecd.org/publications/oecd-pensions-at-a-glance-19991363.htm.12PikettyandZucman,‘WealthandInheritanceintheLongRun’.13OfficeforNationalStatistics,ACenturyofHomeOwnershipandRentinginEnglandandWales(UKGovernmentWebArchive-TheNationalArchives,19April2013).14UnitedNationsHumanSettlementsProgram,UnitedNationsHumanSettlementsProgramme2005AnnualReport(ReliefWeb,1June2006).
10
Figure1:Realnetprivatewealthpercapita,selectedcountries1870-2014,constant2015USdollarsandPPPexchangerates.Source:www.WID.world,accessed6March2017.
Mortgagelendinginparticulargrewrapidlyoverthecourseofthetwentieth
century,facilitatingwhatJordà,Schularick,andTaylorrefertoasthe
‘democratizationofleverage’:‘Nearlyalloftheincreaseinthesizeofthefinancial
sectorsinWesterneconomiessince1913stemsfromaboominmortgagelendingto
householdsandhaslittletodowiththefinancingofthebusinesssector.’15
Theresulthasbeenrisinghouseholdsectorleverageandgreaterfinancial
fragilityinmanyadvancedeconomies.16Thedependenceonleveragetoacquire
housingassetshasbeenparticularlymarkedincountriesexperiencinghouseprice
boomsandincreasinginequality.17Figure2showsthegeneralincreaseinmortgage
15OscarJordà,MoritzSchularickandAlanM.Taylor,‘TheGreatMortgaging:HousingFinance,CrisesandBusinessCycles’,EconomicPolicy31:85(January2016),pp.107-140.16CharlesA.E.GoodhartandPhilippErfurth,‘MonetaryPolicyandLong-TermTrends’,VoxEU.org,3November2014,http://voxeu.org/article/monetary-policy-and-long-term-trends;ÒscarJordà,MoritzSchularickandAlanM.Taylor,‘LeveragedBubbles’,JournalofMonetaryEconomics,76,Supplement(December2015),pp.1–20;Jordà,SchularickandTaylor,‘TheGreatMortgaging’.17RobertH.Frank,Fallingbehind:HowRisingInequalityHarmstheMiddleClass(Berkeley:UniversityofCaliforniaPress,2013),Chapter5;AvnerOffer,‘NarrowBanking,RealEstate,andFinancialStabilityintheUK,1870-2010’,inNicholasDimsdaleandAnthonyHotsoneds,BritishFinancialCrisessince
0
50,000
100,000
150,000
200,000
250,000 Australia
Canada
France
Germany
Italy
Japan
Netherlands
Sweden
USA
UnitedKingdom
11
debtinadvancedcountries,whichinmanycasesacceleratedsharplyfromthe
1980s.
Figure2:Mortgageloanstonon-financialprivatesector,selectedcountries1945-2014,percentofGDP.
Source:ÒscarJordà,MoritzSchularick,and
AlanM.Taylor.2017.“MacrofinancialHistoryandtheNewBusinessCycleFacts.”InNBERMacroeconomicsAnnual2016,volume31,editedbyMartinEichenbaumandJonathanA.Parker.Chicago:UniversityofChicagoPress.
AsAnsellpointsout,thesetrendshavehadimportantconsequencesfor
individualsocialpolicypreferences.18Householdsindevelopedandmanydeveloping
countrieshaveacquiredamuchgreaterinterestinthemaintenanceoftheflowof
credit,particularlymortgagecredit,thanbeforeWorldWarTwo(Chwierothand
Walter,forthcoming;SchwartzandSeabrooke2009).Therapidgrowthinhousehold
wealththatbeganinthe1980shasalsotiedtheirinterestsmorethaneverbeforeto
1825(Oxford:OxfordUniversityPress,2014),pp.158-173;RaghuramRajan,FaultLines:HowHiddenFracturesStillThreatentheWorldEconomy(Princeton:PrincetonUniversityPress,2010).18BenAnsell,‘ThePoliticalEconomyofOwnership:HousingMarketsandtheWelfareState’,AmericanPoliticalScienceReview,108:2(2014),pp.1-20.
12
theactivitiesofSIBs,whooperateatthecoreofthesefinancialmarkets.Relevant
householdsurveysinadvanceddemocraciesreflectthishighconsumerdemandfor
financialstabilization.19
Thesedevelopmentshavealsoincreasedthepoliticalsalienceoffinancial
regulationovertime,especiallyincountriesinwhichfinancializationismost
extensive.Aplausiblemeasureofthis,asEpsteinandSegal(2000)andCulpepper
(2010)haveshown,isfrontpagecoverageofthetopicinmajornational
newspapers.Suchcoverageindicatesinvestmentbyjournalistsinrelevantexpertise
andanexpectationofheightenedpublicinterestandpoliticalrelevance.Figure3
providescountsbydecadeandyearoffrontpagearticlesrelatedtofinancial
regulationintheNewYorkTimessincethe1920s.
[N.B.:IamstillcompilingsimilarcountsforTheTimes(London)asaUK
comparator].
19CarinVanderCruijsen,JakobdeHann,David-JanJansenandRobertMosch,‘KnowledgeandOpinionsaboutBankingSupervision:EvidencefromaSurveyofDutchHouseholds’,JournalofFinancialStability9:2(2013),pp.219-229;FinancialServicesAuthority,ConsumerAwarenessoftheFSAandFinancialRegulation(London:FSA,2012).
13
Figure3:Frontpagestories,countbydecade/years,NewYorkTimes:“regulationAND(financeORfinancialORbank)”
Note:2010-2019includesonly4years.
Min=343(1920s);Max=983(1930s)
Note:2010-2019includesonly4years
Min=373(1950s);Max=951(1990s)
Min=1(2000);Max=82(2011).
ThesedatasuggestthatfinancialregulationintheUnitedStatessuddenly
becamepoliticallysalientinthe1930sduringtheGreatDepressionyears.Salience
14
thendeclinedsignificantlyinduringtheBrettonWoodsera,thenroseagainfromthe
1970s.Thereisastrongcorrelationwithsystemicbankingcrises,withasudden
increaseinfrontpagenewspapercoveragein2008;salienceremainedhighforfour
yearsafterthepeakofthecrisisbeforetailingofffrom2012.Itremainssubstantially
highertodaycomparedtotheearly2000s:therewerestill21NewYorkTimesfront
pagestoriesonthistopicin2016comparedtoonly1inthewholeof2000.
Thereisalsoconsiderableevidencethatfinancializationisstronglyassociated
withmorefinancialfraudandscandalsthathitstheheadlines.Figures4and5
indicatetheincidenceoffinancialfraudorscandalsinnewspapersandbooks
respectivelyoverthelongrun.ThesefelltolowlevelsintheBrettonWoodseraof
financialrepressionandreachednewheightsfromthe1980s.
Figure4:Decadecountsoffinancial“fraud”or“scandal”,NewYorkTimes
Note:SearchtermonProquest:(financeORfinancialORbank)AND(fraudORscandal).Allarticlesareincluded.Notethatthefinaldecadeincludesonly4yearsofdata.Min=2,357(1940s),Max=13,472(2000s).
Figure5:GoogleNgram:relativeincidenceof“financialscandal”,allEnglishbooks,1860-2000
15
Tosummarize,financializationandtheassociatedincreasesinhousehold
wealthandfinancialleveragehaveincreasedthepoliticalsalienceofandpublic
interestinfinancialregulationasameanstotheprotectionandpromotionof
wealth.Althoughcrisesandfinancialscandalsarestronglyassociatedwithperiodsof
relativelyhighpoliticalsalienceoffinancialregulation,thereisalsoanunderlying
trendforsuchregulationandscandalstobecomeincreasinglysalientovertime.Itis
alsopossiblethatthehighcostofbailoutsandheadlinesconcerninghighfinancial
sectorcompensationhaveplayedaroleinincreasingthepoliticalsalienceof
financialregulation(ChwierothandWalter,forthcoming).
Theimplicationofthisargumentisthatdeepcrisesshouldinducepoliticians
torespondtohighvoterinterestinthisdomaintodelivermorestringentpost-crisis
regulationthantheirpeersinlessfinancializedsystems.Thisexpectationisdifferent
fromthosetheoriesthatpredictinternationalharmonizationofpost-crisisregulation
inmajorjurisdictions(Singer2007),andfromtheoriesthatemphasizetheabilityof
majorbankstodeployeffectivelytheirstructuralpoweror“capture”ofthepolitical
processinthemostfinancializedpoliticaleconomies.
Iamnotclaimingthataveragevotershaveastronginterestinorunderstand
thedetailoffinancialregulation.Asfinancialcomplexityhasgrownsharplyinrecent
decades,sotoohasthecomplexityoffinancialregulation.Mostvotersareunlikely
tosustainastronginterestinthetechnicaldetailsoffinancialregulationinthe
aftermathofcrises,eveniftheyhaveastronginterestinaregulatoryresponsethat
protectsandpromotestheirwealth.Asthepoliticalsalienceofsuchregulationtails
offintheaftermathofcrises,wewouldexpectindustryexpertstogainmore
influenceoverregulatoryoutcomes(Culpepper2010).Whetherthisissufficientto
reversethetendencyformorefinancializedeconomiestoadoptrelativelystringent
post-crisisregulationisunclear.Suchreversalsmaydependonthescaleand
frequencyofpost-crisisscandals,variationsintherelativestructuralpowerofthe
financialsectoracrossdifferentjurisdictions(CulpepperandReinke2014)andinthe
relativeautonomyofnationalregulatoryagencies(KeeferandStasavage2003).But
16
italsodepends,Isuggest,intheconflictingpreferencesofhouseholdsinboth
protectingandpromotingtheirwealth.
3 G-SIBregulationintheUKandUSA
Inowturntoassesstheseexpectationsbycomparingthepost-crisis
regulatorytreatmentofG-SIBsinthetwomostfinancializedmajoreconomies,the
UnitedKingdomandtheUnitedStates,comparedtotheirmajorpeers.Ifocus
primarilyonformalregulatorystandardsandrules,thoughIalsopayattentionto
bank-leveloutcomes.Ishowthattherehasbeenabroadincreaseinregulatory
stringencysince2012-13inbothcountriesthatgoesbeyondtheregulatoryphase-
insassociatedwithnewBaselIIIregulatorystandards,butthattrendwasmore
markedintheUSthanintheUKcase.
Asinothercrisis-affectedcountries,incumbentgovernmentsintheUKand
USArespondedtopublicpressurebothtostabilizetheirbankingsystemsthrough
extensiveintra-crisisinterventionsandtodeliversignificantincreasesinregulatory
stringencyforsystemicallyimportantbanks.Obama’svictoryoverhisRepublican
counterpartasarelativepoliticaloutsiderintheNovember2008Presidential
electionsowedagooddealtothecrisisthathadreachedapeakonlytwomonths
earlier.ItisimportanttorecognizethattheRepublicancandidate,JohnMcCain,was
alsoforcedtoadoptamoreinterventioniststanceinthewakeofthecrisis.Hedidso
explicitlyinthecontextofprotectinghouseholdwealth:
“wealsoneedtodomoretobuildconfidencethatAmericaninvestmentsandretirementaccountsaresafe,soIwillreformthemarketsandWallStreet.IwillmakesurethattheSECenactsandenforcesrulesthatkeepourmarketssafeandcompetitive.Iwilldemandcompletetransparencyintotheaccountsandactivitiesatallbanksandinsurancecompaniessotheycannottakeonthekindofriskthatbroughtdownthefinancialsystem.WewillhavestrictrulesofconductonWallStreetandiftheyarebrokenexecutiveswillbeseverelypunished.Iknow--andthesmartestpeopleinbusinessandindustryagree--thattheseactionswillrestoreconfidence,getstockpricesmovingupagainandincreasethevalueofyourhardearnedsavingsandinvestments.20
Althoughitmaynotbesurprisingforacentre-leftObamaadministrationto
pursuefinancialre-regulation,GordonBrown’sLabourgovernmentintheUKalso 20JohnMcCain,RemarksAfterHoldingaMeetingontheStateoftheEconomyinCleveland,Ohio,October27,2008.
17
committeditselftomajorregulatoryreforminthewakeofthecrisis.Itssubsequent
lossofofficeintheMay2010electionsalsoowedmuchtothecrisis.Thevictorsin
thiselection,DavidCameron’straditionallyverypro-CityConservativeParty,
respondedtopublicpressurebycommittingthemselvesto“reformtheregulation
andstructureofthebankingsystemtoensurelowerlevelsofleverage[and]less
dependenceonunstablewholesalefunding.”(TheConservativeParty(UK),2010,p.
5).Respondingtoanti-bankpublicsentiment,theyalsopledgedtogivetheBankof
EnglandauthoritytoempowertheBankofEngland“tocrackdownonriskybonus
arrangements”andtoimposeataxlevyonbanks(ibid.29).Therewas,inshort,
substantialcross-partyconsensusontheneedtore-regulatefinanceinwaysthat
hadnotbeencontemplatedsincethe1970s.
BothnewlyelectedgovernmentsintheUKandUSAwerealsowillingtogive
independentregulatoryagencieslocatedintheircentralbankssubstantialdiscretion
toimplementthesepolicies,againstthewishesofmajorbanksandtheirlobby
groups.AsIoutlinebelow,theBritishandtheAmericanregulatoryauthoritieschose
togosomewhatfurtherthanagreedinternationalregulatoryminima,whichsenior
figuresinboththeBankofEnglandandtheUSFederalReservesawasinsufficiently
stringent.
a. Baselbenchmarks
AseriesofproposalsemergedintheBaselCommitteeforBanking
Supervision(BCBS)toincreasecapitalrequirementsforallbanksaspoliticaland
policyelitesrevisedtheirviewsabouttherisksposedbyfinancialization,especially
forthelargeandoftencomplex“systemicallyimportantbanks”.Thisrepresentsa
substantialdivergencefrompre-crisisconsensus,whenpolicymakersencouraged
theadoptionof“internalmodels”ofriskassessment,pioneeredbysomemajor
globalbanks,danglingthecarrotofpotentiallylowerfuturecapitalrequirementsfor
banksthatdeployedsuchtechnologies.21Sincethecrisis,majorbankswentgone
21TheBaselCommitteehedgeditsbetsbyapplyingtransitional“capitalfloors”tobanksusingadvancedinternalapproachestoensurethattheircapitallevelsdidnotfallsharply–inparttoassuagetheobjectionsofsmallerbanksthatBaselIIwouldplacethematacompetitivedisadvantage(BCBS2006,13-14;Herring2007).However,theimplicationofBaselII,asfortheearlier(1996)MarketRiskAmendmentthatpermittedtheuseofinternalmodelsforthecalculationoftradingbook
18
frombeingrelativelyfavouredinregulatorytermstobeingpenalizedfortheir
systemicimportanceandtheassociated“systemicrisk”theypose.22
Therearethreemainareasofregulatoryinnovationofspecialrelevance
since2008:capitalsurchargesforG-SIBs,lossabsorbingcapital,andriskweighting
practices.Allthreewereforeshadowedintheearlyphaseofpost-crisisinternational
regulatoryreform,butmorerecentproposalsfromtheBaselprocesshave
contributedtoagrowingperceptionofregulatorytightening,especiallyforG-SIBs.
Banks,theirlobbygroups,industryconsultantsandmanyjournalistsnowcommonly
refertothesepost-2010standardsonG-SIBcapitalsurchargesandTLAC
requirementsasanew“BaselIV”,withthestrongimplicationthattheyare
significantlymoreonerousthanBaselIII.23Althoughthisisanexaggeration,
tighteninghasbeensignificantregardingtheregulationofrisk-weightingsince2013.
New“capitalsurcharges”forSIBs(includingG-SIBsandtheirdomestic
counterparts,“D-SIBs”)wereprefiguredinBaselIIIin2010(BCBS2011,7).Atthe
requestoftheG20leaders,theBCBSandFSBsubsequentlynegotiatedandagreed
thedetailsover2011-12.InNovember2011,theFSBannouncedagreementon,
amongotherthings,capitalsurchargesfrom1%to3.5%foralistof29G-SIBsand
calledfor“moreintensiveandeffectivesupervisionofallSIFIs”(FSB2011).24These
capitalsurchargeswouldbephasedinbetweenJanuary2016andJanuary2019,
whentheywillbecomefullyeffective,andappliedasanadditiontotherequired
capitalconservationbuffer(CCB)containedinBaselIII.BCBSmembersagreedthat
implementinglegislationandregulationswouldbeadoptedby1January2014.
TheG-SIBcapitalsurchargemustconsistofCommonEquityTier1(“CET1”)
capitalandbecalculatedasapercentageofrisk-weightedassets(RWAs).
Accordingly,theminimumCET1BaselIIIcapitalrequirementcouldinprinciplebeas
risk,wasthatbanksadoptingadvancedinternalapproacheswouldovertimereceivefavourableregulatorytreatmentoncetransitionaluncertaintieswereresolved.Oneindicationofthisexpectationwasthatbefore2008majorbanksheldsignificantlylower“capitalsurpluses”overminimumrequirementsthansmallerbanks.By2016thiswasnolongertrueformajorUKbanks,forexample(PeterEckley&LiamKirwin,2016).22G20Leaders’Statement,September24-25,2009,Pittsburgh.23“BaselIVSpectreLoomsforBattle-WornBankers,”FT.com,March14,2016.24ThelistofdesignatedG-SIBsisnowupdatedannually.
19
highas10.5%forsomeG-SIBs.25Table1providestheG-SIBlistfromlate2015,which
allocateseachbanktospecific“riskbuckets”andassociatedcapitalsurcharges.26
Figure6showshowtheyvarybyriskbucketandassetsize.AsofNovember2015,
thehighestsurchargewas2.5%,appliedtoHSBC(UK)andJPMorganChase(US),
implyingaminimumCET1requirementof9.5%ofRWAsforthesetwobanks.Thisis
wellabovetheeffectiveBaselIIminimumequitycapitalrequirementofonly2%of
RWAs,thoughthisunderstatestheincreaseinequitycapitalrequirementsbecause
theRWAcalculationmethodologyhasalsobeentightened.27
25I.e.thestandard4.5%CET1minimumplusthe2.5%CCBthatappliestoallbanks,plusanyapplicableG-SIBsurcharge.26www.financialstabilityboard.org/wp-content/uploads/2015-update-of-list-of-global-systemically-important-banks-G-SIBs.pdf,3November2015.27Cecchetti(2015,133)estimatesthatusingBaselIIIdefinitions,theminimumrequiredcapitalunderBaselIIwasamere0.50-0.75%ofRWAs.
20
Table1:G-SIBsinalphabeticalorderwithineachsystemicriskbucket(November2015FSBlist)Bucket(andrelevantG-SIB
capitalbuffer)Bank[andparentnationality]
5(3.5%)
(Empty)
4(2.5%)
HSBC[UK]JPMorganChase[US]
3(2.0%)
Barclays[UK]BNPParibas[FRANCE]Citigroup[US]DeutscheBank[GERMANY]
2(1.5%)
BankofAmerica[US]CreditSuisse[SWITZ.]GoldmanSachs[US]MitsubishiUFJFG[JAPAN]MorganStanley[US]
1(1.0%)
AgriculturalBankofChina[CHINA]BankofChina[CHINA]BankofNewYorkMellon[US]ChinaConstructionBank[CHINA]GroupeBPCE[FRANCE]GroupeCréditAgricole[FRANCE]IndustrialandCommercialBankofChinaLimited[CHINA]INGBank[NETH.]MizuhoFG[JAPAN]Nordea[SWEDEN]RoyalBankofScotland[UK]Santander[SPAIN]SociétéGénérale[FRANCE]StandardChartered[UK]StateStreet[US]SumitomoMitsuiFG[JAPAN]UBS[SWITZ.]UnicreditGroup[ITALY]WellsFargo[US]
Source:FSB,UpdateofListofGlobalSystemicallyImportantBanks,www.financialstabilityboard.org/wp-content/uploads/2015-update-of-list-of-global-systemically-important-banks-G-SIBs.pdf,3November2015.
21
Figure6:G-SIBs:Capitalsurcharges(%),IFRSestimatedtangibleassetsandrisk-weightedassets($bn),December31,2015
Source:FDIC(2016),FSBwebsite.
Itisclearthattherehasonthisimportantmeasurebeenasubstantial
increaseinregulatorystringencyforthesebankssincethecrisis.Vocalcomplaintsby
majorbanksareconsistentwiththis.Forexample,JPMorgan’schiefriskofficer
calledthecapitalsurcharge“abridgetoofar,andcreatescoststhatriskexceeding
thediminishingbenefitsofhighercapitalrequirementsaboveBaselIIIminimums”
(Zubrow2011,4).TheInstituteforInternationalFinance,amajorbanklobbygroup,
alsoopposedthesurchargeonprinciple,arguingthatithad“fundamentalconcerns
aboutdesignatinggroupsoffirmsaspotentiallysystemicandapplyingadditional
lossabsorbencyrequirementstothese”(IIF2011,13).
AlsoprefiguredinBaselIIIwasanewrequirementthatallSIBsissue
additional“lossabsorbingcapacitybeyondtheminimumstandards”(BCBS2011,7).
Asopposedtostandardcapitalrequirements,whichareintendedtoensurethat
banksissuesufficientcapitaltomaintaintheirbusinessesas“goingconcerns”,loss-
absorbingcapitalisintendedtoprovideanextracapitalbufferfor“goneconcern”
banksthathavefailedsoastoavoidtheneedforpublicbailouts.Thisisone
componentofahostofnewrulesrelatingtotheresolutionofinsolventlarge
financialinstitutions.InSeptember2013,theG20leaders’meetingatStPetersburg
welcomedanFSB(2013)reportonastrategyforendingTBTFandaskeditto
22
developproposalstoensurethatG-SIBshadadequateloss-absorbingcapacityinthe
eventoffailuresoastoensureorderlyresolution,continuityofcriticalfunctions,
andavoidtaxpayerlosses.28RegulatorsnegotiatednewstandardsonTotalLoss-
AbsorbingCapital(TLAC)requirementsforG-SIBsover2014-15.TLACwillconsistof
“bailin”debtthatcanbewrittendownorcanbeconvertedintoequityduringthe
resolutionofafailedG-SIB.Minimaweresetat18%ofRWAs,6.75%oftheBaselIII
leverageratiodenominator,andonethirdmustbelongtermunsecureddebt–allto
beimplementedby2022and2028foremergingcountries(FSB2015,10).29
Athirdareaofincreasingregulatoryscrutinyisassetriskweightingpractices.
Thiswasalsoprefiguredbefore2013.Thecrisisrevealedseriousweaknessesinthe
internalvalue-at-risk(VAR)modelsthatwereusedtomeasurerisksinbanks’trading
portfoliosfromthemid-1990s.Inmid-2009,theBCBSissuedmodificationstoBaselII
thatsubstantiallyincreasedaverageriskweightsforbanks’tradingbooks(BCBS
2009).Theresultsoftheirinvestigationsofbanks’internalriskmodellingforthe
bankingbookincreasedregulatorconcerns(BCBS2014;seealsoBCBS2013;BoE
2011,51;BIS2013,54-65;Haldane2013).TheBCBS’sown“studiesconfirmedthat
therearematerialvariancesinbanks’regulatorycapitalratiosthatarisefromfactors
otherthandifferencesintheriskinessofbanks’portfolios.Thesevariances
undermineconfidenceincapitalratios”.Somemajorbanksweresuspectedof
engagingin“windowdressing”bymanagingdownwardstheriskweightson
substantialportionsoftheirassetportfoliossoastoreducetheiraggregatecapital
requirements(BIS2013,54-55).
Unexpectedeventscontributedtothisgrowingscepticism.TheUSSenate
subcommitteethatinvestigatedthelargetradinglossessufferedbyJPMorganChase
inits“LondonWhale”unit,whichfirstsurfacedpubliclyinApril2012,foundthatthe
bankengagedindeliberateattemptstomanagedownitsRWAs.Thiswas
disconcertingbecauseJPMorganChasehadbeenconsideredoneofthebest
managedandmoreconservativeofthemajorUSbanks,andoneofthefewthat
mighthaveweatheredtheGFCwithoutgovernmentassistance(USSenate2013,14,
28G20Leaders’Declaration,September6,2013,StPetersburg.29TheTLACrequirementisinadditiontotheCET1minimumof4.5%;CET1capitalabovethisminimumcannotnotcounttowardsTLAC.
23
52-53).Unsurprisingly,marketinvestorshavealsobecomeincreasinglyscepticalof
thevalueofinternalmodels(Haldane2013).
Thepolicyresponsestotheseconcernshavebeensignificantandcumulative
intheirimpactandofsubstantiveconsequenceforSIBs(BCBS2014b).Thefirsthas
beentoimposeaminimumunweightedleverageratio(TierIcapitalof3%of“total
exposures”)asabackstoptorisk-basedcapitalratios,asproposedin2010inBasel
III.30Perhapsmoreimportantly,theBCBShasincreasinglyrestrictedtheuseof
internalmodelsforriskassessment.Thisincludeseliminatingitsuseinanumberof
importantareas(includingmostrecentlyforassessingoperationalrisks),andplacing
permanent,higher“floors”underinternalriskweightsinboththebankingand
tradingbooks.31Inshort,majorbanksareincreasinglybeingrequiredtorelymuch
moreheavilyonthestandardizedapproachtoriskassessment,makingitmuchmore
difficultforthemtouseinternalmodelstoachievelowercapitalrequirementsthan
otherbanks.32Onthetradingbooksidealone,whichparticularlyaffectsthemajorG-
SIBs,theBCBSestimatesthatcomparedwiththeexistingframework(itselfrevised
substantiallyin2009),thenewmarketriskframeworkwillrequireaweighted
averageincreaseof40%inbanks’marketriskcapitalrequirementsby2019(BCBS
2016b,7).33
Insum,theBaselprocesshasproposedasubstantialcumulativeand
coordinatedtighteningofregulationsince2009thatistargetedspecificallyatthe
largestbanks,especiallytheG-SIBs.Criticsarguethatthisincreasedregulatory
stringencyissub-optimal,butthedirectionofchangeisnotindoubt. 30CriticslikeAdmatiarguethisisfartoolow.“Totalexposures”includesameasureofoff-balancesheetassets,asspecifiedinBCBS(2010,61-63)andclarifiedinBCBS(2014a).TheBCBSaskedforcommentsonwhetherthereshouldbeahigherleveragerequirementforG-SIBstomaintainproportionalitybetweentheirrisk-weightedcapitalrequirementsandtheleverageratiorequirement,thoughasyetthereisnoagreementtodoso(BCBS2016f,8).31Thefloorsaresetwiththe“standardizedapproach”toriskweightingthatisusedbylesssophisticatedandusuallysmallerbanks.Furthermore,theBCBShasincreasedsomeriskweightingsinthestandardizedapproach(BCBS2014b,2015,2016a,2016d,2016e).TheBCBSisalsoconductingaseparatethoughhighlycontentiousreviewofhowbanksshouldcalculateriskweightingsforsovereignexposures,whichcurrentlyremainatzeroforOECDexposures(including,forexample,exposuretoGreekdebt).AftertheEurozonedebtcrisis,whichreachedapeakafteragreementonBaselIII,thestatusquointhisareaisunlikelytostand.32SeetheresponsestothestandardizedcapitalfloorsproposalbytheInstituteforInternationalFinanceetal.(2015).33Thiscompareswithanestimatedimpactofa74%increasefortheBCBS’searlierproposals,suggestingsomereductioninthelevelofstringencyinthefinalversion,butstillasubstantialincreaseonthe“Basel2.5”2009revision.
24
b. G-SIBregulation:USandUKcases
How,ifatall,hasG-SIBregulationintheUSandUKcasesdifferedfromthe
minimumharmonizationachievedintheBaselprocess?Iarguethatthetrendinthe
UScasehasuntilveryrecentlybeentowardsfurtherregulatorytighteningsince
2013,includinggoingbeyondBaselminimainanumberofkeyareas.IntheUKtoo,
earlypost-crisisproposalssuggestedthattheBritishauthorities–withthesupport
oftheConservative-dominatedgovernment–wouldalsoexceedBaselminimain
theirregulationofSIBs,thoughtherewasmoresubstantialbacktrackingonthese
earlypledgesthanintheUScase.
TheUnitedStates
InDecember2014,theUSFederalReserveBoard(FRB)outlinedhowitwould
implementtheBCBSframeworkforUSG-SIBs.Itproposedchangestothecalculation
methodologythatofficialandprivateanalystsbelievewillrequire“significantly
higher[capital]surchargesforUSG-SIBscomparedwiththeirglobalpeers”(PwC
2014,1).34ThefinalrulewasissuedinAugust2015.35Theserequirementswouldbe
phasedinover2016-2019alongwiththecapitalconservationbuffer.Together,they
implythatsomeUSG-SIBswillbesubjecttominimumCET1requirementsofupto
11.5%ofRWAs(plusanycountercyclicalcapitalbufferrequiredbyauthorities),orup
to2%morethanBaselminima.
USregulatorsalsoproposedinJuly2013anewminimum5%leverageratio
forthelargestUSbankholdingcompanies(BHCs),includingallcurrentUSG-SIBs,
anda6%requirementfortheirbanksubsidiaries.36Allotherbanksthatqualifyfor
34TheproposalistocalculatethecapitalsurchargeapplicabletoG-SIBsbythehigheroftwomethods.ThefirstmethodisalignedwiththeBCBSframework,basedonabank’ssize,interconnectedness,cross-jurisdictionalactivity,substitutabilityandcomplexity.ThesecondmethodisaUS-specificcalculationthatreplacesthesubstitutabilityfactorwiththebank’srelianceonshort-termwholesalefunding.TheFRBestimatesthatthissecondmethodwouldleadtoanadditionalcapitalrequirementof1%-4.5%ofrisk-weightedassets,whereasthefirstmethodwouldadd1%-2.5%(consistentwiththeBaselstandard).Seealso(US)OfficeofFinancialResearch(2015,1).35FederalRegister,“RegulatoryCapitalRules:ImplementationofRisk-BasedCapitalSurchargesforGlobalSystemicallyImportantBankHoldingCompanies,”August14,2015:https://www.federalregister.gov/articles/2015/08/14/2015-18702/regulatory-capital-rules-implementation-of-risk-based-capital-surcharges-for-global-systemically.36“AgenciesAdoptEnhancedSupplementaryLeverageRatioFinalRuleandIssueSupplementaryLeverageRatioNoticeofProposedRulemaking,”http://www.fdic.gov/news/news/press/2014/pr14025.html,accessed20April2016.Theenhanced
25
theadvancedapproachtocapitalcalculationwillbesubjecttotheminimum3%
BaselleverageratioandtotheUSminimumTier1leverageratiominimum
requirementof4%ofTier1capitaltototalon-balance-sheetassets(USGAAP
definition)thatappliestoallUSbanks.USregulatorsfinalizedthisproposalinApril
2014despiteconcertedoppositionfrommajorbanks.37InSeptember2014,
regulatorsbroughtthedenominatorcalculationforthisleverageratiointo
conformitywithchangesagreedtointheBCBSinJanuary2014,ensuringthatthe
higherUSleveragerequirementwouldhavepracticaleffect.38
InOctober2015,theFederalReserveissueditsTLACproposals.39These
calledforUSG-SIBstoissueTLACofnolessthanthegreaterof18%ofRWAs
(consistentwiththeFSBstandard)and9.5%oftheBHC'stotalleverageexposure
underthesupplementaryleverageratiorule.Thelatterissignificantlymore
stringentthantheFSBstandardof6.75%oftotalleverage,withthesame
implementationschedule.BHCswouldalsohavetomaintainanadditionalexternal
TLACbufferthatisnotcontainedintheFSBstandard.40TheFed’sjustificationfor
leverageratiowillapplyfrom2018toallBHCswithmorethan$700billioninconsolidatedtotalassetsormorethan$10trillioninassetsundercustodyandtotheirinsureddepositoryinstitutionsubsidiaries.37Bankscomplainedthattheenhancedleverageratiowillbecomea“frontstop”forminimumTier1capitalrequirementsratherthanabackstop,reducinglending,growth,andputtingthematadisadvantagevis-à-visforeignbanks(TheClearingHouse2013;“LeverageRatioRuleputsU.S.BanksatInternationalDisadvantage,”FinancialServicesRoundtable,April8,2014).AfailuretomeettheenhancedratiowouldleadtorestrictionsontheabilityofUSG-SIBstopaydividendsortomakediscretionarybonuspaymentstostaff.38FDIC,“AgenciesAdoptEnhancedSupplementaryLeverageRatioFinalRuleandIssueSupplementaryLeverageRatioNoticeofProposedRulemaking,”April8,2014,https://www.fdic.gov/news/news/press/2014/pr14025.html,and“RegulatoryCapital,RevisionstotheSupplementaryLeverageRatio,”https://www.fdic.gov/news/news/financial/2014/fil14045.html,September9,2014,accessedApril20,2016.ThesemodifiedruleswouldapplytoallinternationallyactivebanksintheUSfrom2018(andthustothosewithsignificantderivativesportfolios),notonlytothosebankssubjecttotheenhancedsupplementaryleverageratio.39FederalReserve,“NoticeofProposedRulemaking,TotalLoss-AbsorbingCapacity,Long-TermDebt,andCleanHoldingCompanyRequirementsforSystemicallyImportantU.S.BankHoldingCompaniesandIntermediateHoldingCompaniesofSystemicallyImportantForeignBankingOrganizations;RegulatoryCapitalDeductionforInvestmentsinCertainUnsecuredDebtofSystemicallyImportantU.S.BankHoldingCompanies,”80FederalRegister74926,November30,2015.40Thisbuffermustbeatleast2.5%ofRWAsplusbanks’Method1G-SIBsurcharge,plusanyapplicablecountercyclicalcapitalbuffer(potentiallyupto8%intotal,aprovision).TheBHCwouldalsoberequiredtomaintainoutstandingeligibleexternallongtermdebtofnotlessthanthegreaterof6%ofRWAsplustheapplicable(Method2)G-SIBcapitalsurchargeand4.5%oftotalleverageexposure(theFSBstandarddoesnotaddtheG-SIBsurchargetotherequirement).ThisistheequivalentofthestandardG-SIBBHCminimumCET1andleveragerequirements,lessastandardallowanceof1%and0.5%respectivelyfor“balancesheetdepletion”intheeventoffailure.
26
thisstandardwasinpartthatthisgreaterstringencywasneededtoensurethat
TLACwouldhavebeensufficienttoexceed“asubstantialmajorityofthe[historical]
loss-and-recapitalizationexperiencessurveyed.”41ThefivemajorUSbanklobbies
objectedcollectivelytotheproposals.42Thefinalizedruleisyettobeissued,but
pastexperiencesuggeststheUSagenciesareunlikelytograntthebanks’wishes.
TheUSauthoritieshavealsobeenrelativelyaggressiveinactingagainst
perceivedmisuseofinternalriskmodels.DanielTarulloarguedvocallyinsteadfor
greaterreliance–includingamongallBCBSmembers–onacombinationofthe
leverageratioandstringentstress-testing,whichithaspioneered.43
TheFedhasalsoappliedrelativelystringentComprehensiveCapitalAnalysis
andReview(CCAR)annual“stresstests”toallUSG-SIBs.JPMorgancomplainedthat
thesescenariosenvisagedlossesforitexceedingthoseofthe2008-9crisisandona
parwiththoseintheGreatDepression.44Inthe2016CCARexercise,theminimum
requiredleverageratioforBHCsis4%andtheminimumCET1ratiowas4.5%,asin
2015,butallbanksarerequiredtousestandardizedapproachestocalculateRWAs
(FRB2015,2016).InJune2016,GovernorTarulloannouncedthattheFedwouldadd
capitalsurchargesintotheG-SIBpost-stresstestminimumcapitalrequirementfrom
2018–afurtherindicationofincreasingregulatorystringencyforthelargestbanks.
Atthesametime,stresstestrequirementsformid-sizeUSbankswereslightly
relaxed.45
Inshort,since2013theUSregulatoryagencieshavebeenwillingandableto
imposeincreasinglytightregulatoryrequirementsonitsG-SIBsthanBaselminima.
Theyhaveconcentratedthistighteningofregulationontheseeightlargestbanks,
reflectingaconcerntodealwiththeverylargestbanksfirstandperhapstoeffecta
divideandrulestrategy.
4180FR74932.42TheClearingHouseetal.,“CommentLetterontheNoticeofProposedRulemakingonExternalTLAC,Long-TermDebt,CleanHoldingCompanyandOtherRequirementsApplicabletoU.S.G-SIBs,”February19,2016,12.Onthelatter,theyarguethatbanksshouldbefreetomeettheTLACrequirementwithequityiftheychoose.43GovernorDanielK.Tarullo,“RethinkingtheAimsofPrudentialRegulation,”SpeechattheFederalReserveBankofChicagoBankStructureConference,Chicago,Illinois,May8,2014.44“JPMorganchiefDimonwarnsondangersofunderminingUSbanks,”FT.com,April7,2016.45“FederalReservetotoughenstresstestsforbigUSbanks,”FT.com,June2,2016.
27
TheUnitedKingdom
TheUK,whileitremainsamemberoftheEU,hassomewhatlessautonomy
insettingitsdomesticfinancialregulationthantheUnitedStates.Itissubjecttothe
requirementsoftheEU’sCapitalRequirementsRegulation(CRR)andtherevised
CapitalRequirementsDirective(CRD),collectivelytermedthe“CRDIVpackage”,in
forcesince1January2014(withvariousprovisionsphasedto2019).TheCRR,which
isbindingacrosstheEU,containscommonrulesforallEUcreditinstitutionsand
investmentfirms.TheCRDcontainsprovisionsthatmustbeimplementedby
memberstatesinwaysrelevanttotheirnationalcircumstances,andthusallowsan
elementofnationaldiscretion.
AsregardsG-SIBs,Article131oftheCRDon“globalandothersystemically
importantinstitutions”isthemostrelevant;theCRR(Article441)onlydealswitha
fewreportingrequirements.Thus,nationalimplementation,asintheUScase,
remainscrucial.Article131section4,inforcesince1January2016,implementsthe
BCBS/FSBregimeonG-SIBs.NationalauthoritiescanchoosetoreallocateaG-SIBto
ahigherrisksub-category.Article133alsoallowsnationalauthoritiestherightto
introduceaCET1systemicriskbufferappliedtothewholeorpartofthefinancial
sectortopreventandmitigatelongtermnon-cyclicalsystemicormacroprudential
risksnotcoveredbytheCRR.46Thus,theUK’scapitalsurchargesforG-SIBsare
currentlylargelysetattheEUlevel.
However,significantnationaldiscretionremains,andkeyfiguresintheBank
ofEnglandpushedstronglyforhigherdegreeofregulatorystringencyforSIBsinthe
UKcomparedtoelsewhereintheEU.ThisincludedMervynKing,formerGovernor,
AndyHaldane,formerExecutiveDirectorofFinancialStabilityandnowitsChief
Economist,andDavidMiles,aformermemberofitsMonetaryPolicyCommittee
(Haldane2012;King2016,280;Milesetal.2012).ThiswasalsosupportedbyJohn
Vickers,whochairedthepost-GFCIndependentCommissiononBanking(ICB),and
othermembersofthiscommittee.TheresultinpracticehasbeenthattheUKG-SIB
regimehasevolvedtowardsasomewhatgreaterstringencythantheBasel
benchmarks,butlesssothanintheUScase.
46ForSIBs,thehigherofthisandanyinstitution-specificadditionalcapitalbufferapplies,thoughauthoritiesmayapplybothifthesystemicriskbufferonlyappliestodomesticexposures.
28
InApril2015,theUKgovernmenthandedtheBankofEngland’sFinancial
PolicyCommittee(FPC)formalpowersofdirectionovertheleverageratioand
relatedcapitalbuffersapplyingtoallUKfinancialinstitutions.47TheUKgovernment
gavetheFPCauthoritytosetrequirementsinthisareaaheadofagreementwithin
theBCBSonthefinalcalibrationoftheleverageratioin2017,andaheadoftheEU’s
adoptionofaleverageratio,onthegroundsthattheUKishometoarelativelylarge
numberofG-SIBs(four),thelargesizeofitsfinancialsector,andtherisksthesepose
tofinancialandeconomicstability.
InJuly2015theFPC(2015,8)proposedaminimum3%leverageratioforUK
banksfrom2018andasearlyaspracticableforUKSIBs,thesameastheBasel
benchmark.Italsoproposedsupplementaryleverageratiobuffersanda
countercyclicalleverageratiobufferat35%oftherelevantcapitalsurcharge
requirementforSIBs,tomaintainastablerelationshipbetweentheleverageratio
andthevariousrisk-weightedcapitalrequirements.Theproposedsupplementary
leverageratiobufferratesforUKG-SIBswouldreflecttheiradditionalCET1
supplementaryrisk-weightedcapitalrequirements.Sincethesecurrentlyrangefrom
1%to2.5%,theFPChasproposedsupplementaryleverageratiosforcurrentUKG-
SIBsofbetween0.35%and0.875%(35%x2.5%=0.875%),orupto3.875%intotal.48
ThisisabovetheBaselminimumbutbelowthatappliedtomajorUSbanks.
Overall,theBritishauthorities’viewontheamountoftotalTier1capital
requiredbymajorUKbanksappearstohavesettledon11%ofRWAs(excludingany
CCBrequirements)as“abouttherightamount”(FPC2016,5).Ofthis,9.5%should
beCET1capital.ThisislowerthantheBoE’sownearlierestimatesofthedesirable
leveloflargebankcapital,butsignificantlyabovetheBaselminimum(BoE2015b,4).
TheFPCalsoarguesthatgreaterrelativestringencycanbeachievedviabank
resolutionregimesandbyimposingadditionalcountercyclicalcapitalrequirements
(FPC2015,15-16;FPC2016,9). 47TheseincludeasupplementaryleverageratiobufferforUKG-SIBsandotherD-SIBssubjecttoasystemicriskbuffer,aswellasacountercyclicalleverageratiobuffer(CCLB)applyingtoallregulatedfirms.Theformeristobephasedinover2016-2019forG-SIBsalongsidetheircapitalbuffersandforD-SIBsfrom2019.48SoHSBCwouldcurrentlyfaceaminimumleveragerequirementof3.875%(asofend-2015,itsactualBaselIIIleverageratiowas5.0%),andminimumCET1andTier1ratiosof9.5%and11%ofRWAsrespectively.Elsewhere,theBoEhassaidthatUKbanksshouldholdTier1capitalofnolessthan3.75%oftotalassets(Brazier2016).
29
TheFPCisproposingacapitalsurchargeforring-fencedbanksof1.3%of
RWAsonaverage,comparedtothe3%recommendedbytheICB,whichalso
proposedin2010amuchlowerassetthresholdforsuchsurcharges.Regulators
arguethatthisisnotaregulatoryretreat,butJohnVickersisdoubtful(Carney2016,
6;Vickers2016b).49InOctober2015thePrudentialRegulatoryAuthority(PRA),
housedwithintheBankofEngland,alsoissuedmoreflexiblerulesregardingthe
abilityofRFBstotransfercapitaltootherpartsoftheirbusiness,dilutingthestricter
separationproposedbytheICB.50
RegardingTLACrequirements,theBankofEnglandhasindicatedthatit
expectstoapplytheminimumBaselstandardstoUKG-SIBs(BoE2015a,11).
Asforriskweighting,theBankofEnglandhasbeenaprominentcriticofthe
largevariationininternalriskmodellingandissupportiveoftheongoingreviewof
theiruseintheBaselprocess.ItappearslikelytoimplementthevariousBCBS
proposals.Likeothermajorregulatoryauthorities,theBanknowconductsannual
stress-testingexercises.The2016stressscenariooutlinesadownturnsimilartothat
experiencedover2008-9withalarger(30%)fallinUKhouseprices(BoE2016).
However,thecapitalhurdlesrequiredofmajorbanksaresomewhatlowerthan
thoseforUSG-SIBs.In2016,theminimumhurdleleverageratiowas3.13%,andthe
minimumCET1ratiois4.5%plusindividualbanks’pillar2acapitalsurcharges.51The
BankusesG-SIBcapitalbuffersasa“referencepoint”initsassessments.Butin
contrasttotheFeditisexplicitthatthesebuffersareavailableforuse(i.e.canbe
rundown)instressedconditions.
Insum,UKregulatoryagenciessettledonapositionthatexpressesgeneral
satisfactionwiththecurrentlevelofrisk-weightedcapitalinmajorUKbanksatlevels
higherthanBaselminima,butwhichplaceslessemphasisthanUSregulatorsonthe
alternativesofmorestringentstresstestingandleverageratios.Therehasalsobeen
someretreatinsomeimportantareasfromearlierproposals,notablythoseofthe
ICBonringfencedbanks.Thus,astable2summarizes,USauthoritiesadoptedrules
49TheFPCproposalisalsoliberalregardingtheabilityofG-SIBsto“downstream”theirG-SIBsurchargetotheirRFB(Vickers2016a,2016b).50“BanksScoreVictoryonRingfencingRules,”FT.com,October16,2015.51SoforBarclays,theminimumCET1ratioiscurrently6.57%andforHSBC,5.72%.
30
thatsignificantlyexceededBaselminima,especiallyregardingG-SIBs,whiletheUK
hasdonesomoremodestly.
Table2:RegulatoryminimumrequirementsforSIBscompared:Basel,USandUK(percentageofrisk-weightedassetsexceptwherespecified)Minimumrequirement Basel US UKCET1+CCB 7.0% 7.0% 7.0%G-SIBcapitalsurcharge 1.0-2.5% 1.0-4.5% 1.0-2.5%D-SIBcapitalsurcharge unspecified notfinalized 1.0-2.5%
TLAC(banks) 18%&6.75%oftotal
exposures
18%plus2.5%+(1.0to4.5%)+(0to2.5%),&9.5%oftotalexposures
18%&6.75%oftotalexposures
Leverageratio(G-SIBs) 3%oftotalexposures
6%oftotalexposures
3.35-3.85%oftotalexposures
Stresstests(G-SIBs)
unspecified
CET1:4.5%(standardized
approach),plusG-SIBsurchargesfrom
2018;Tier1leverageratio:4%(2016)
CET1:4.5%+53%ofpillar2a
requirement;Tier1leverage
ratio:3.13%(2016)Source:Regulatorwebsitesanddocuments(seetextfordetails).CCB=countercyclicalcapitalbuffer.
HaveBritishandUSG-SIBsrespondedbymanipulatingRWAstoachieve
higherreportedcapital?ThisisunlikelyasthereisanupwardtrendinG-SIBTier1
unweightedleverageratiosoverthesameperiod.Marketpressureseemsalsoto
haveencouragedmajorbankstoexceedminimumrequirementswellaheadof
requiredregulatoryschedules.Figure7comparesa“tangible”IFRSleverageratiofor
USandUKG-SIBswiththeircounterpartsintheBCBScountries.Withtheexception
ofChinesebanks,whicharefarlessglobalizedandarguablynotcomparable,USand
UKG-SIBshavesimilarandrisingleverageratiosthatexceedthoseoftheir
counterpartsinothercountries,particularlythoseofmostmajorEuropeanG-SIBs.In
short,USandUKauthoritiesappeartohavebeensuccessfulinpromotingadegree
ofgreatercapitalstringencythaninothermajordemocracies.
31
Figure7:AverageIFRSleverageratios,G-SIBsbycountry,2012-2016.
Source:FDIC,GlobalCapitalIndexarchive,
https://www.fdic.gov/about/learn/board/hoenig/global-archive.html.
Theseoutcomesdivergefromtheexpectationthatcommoncrisesina
globalizedfinancialsectorprovidesnationalregulatorswithanincentivetoagreeto
harmonizedregulatorytighteningwiththeirpeers(Singer2007).Theyalsodiverge
fromtheexpectationofthosetheoriesthatsuggestthattheextensiveregulatory
captureofpoliticsbyUSbanksinparticularwillresultinlittlerealincreasein
regulatorystringencyforthelargestandmostglobalizedbanks.Itisalsoatodds
withthoseversionsofstructuralpowertheorythatclaimthatnorealincreasein
post-crisisregulatorystringencytowardsthelargestandmostglobalizedbanksis
possible.
Morenuancedtheoriesofstructuralpowerdohaveexplanatoryvalue.
CulpepperandReinke(2014)arguethatlargeUSbankspossesssignificantlylower
structuralpowervis-à-visthestatebecauseoftheirmuchheavierrevenue
dependenceonthelargerUSeconomy.ThisisplausiblereasonwhyUSregulatory
authoritieshaveultimatelyhadmorescopeforgreaterregulatorytighteningfor
theirG-SIBscomparedtotheirBritishcounterparts.
32
Nevertheless,overalltheseoutcomesreflectthesharpincreaseinthe
politicalsalienceoffinancialregulationsince2007andtheperceivedneedof
governmentsofdifferentpartisanorientationstorespondtopublicconcern(Bell&
Hindmoor,2017,p.114).AsCulpepper(2010)argues,insuchcircumstances
businesslobbiescansufferaseriousreductionintheircapacitytopreventthe
adoptionofmoreonerousregulation.Thatthisincreaseinregulatorystringencyas
appliedtothelargestglobalbankshasbeensharperintwooftheworld’smost
financializedeconomiessuggeststhatfinancializationcanhavepoliticalcostsfor
thesebanks.
Thispoliticizationwasalsosustainedinpartbyaseriesofscandalsthat
continuedtomaintainpublicinterestinfinancialactivitiesandregulationwellafter
thecrisishaddissipated.WoolleyandZiegler(2011,2016)arguethatthesescandals
bolsteredthepoliticalpositionofUSregulatoryhawksbymobilizinga“stability
alliance”ofactivists,policyentrepreneursandthinktanks,andby“mainstreaming”
anti-bigbankandinequalityrhetoricpreviouslychampionedbytheOccupy
movement.52JPMorganChase’sLondonWhalelossesandtwolargefinancialtrading
scandalsregardingLibor-fixingandforeignexchangekeptbigfinanceinthenewsin
theUKandtheUSandfurthererodedbanks’reputationfortechnicalcompetence.
ThattheLondonWhalescandaloccurredinJPMorganChase,untilthenviewedas
thebestriskmanageramongmajorUSbanks,mayhavebeenparticularlyimportant
(USSenate2013,1).Thescandalsalsosustainedfinance-focusedreformgroupsand
thepersistenceofanti-financerhetoricinelectioncampaignsinbothcountriesas
lateas2017.53
Certainly,asthepoliticizationoffinancialregulationbegantowaneafter
2012,adegreeofregulatoryretreatemergedinbothcountries.Itwasapparentfirst
intheUKcase,wheretheearlyproposalsforgreaterregulatorystringencythan
internationalminimumstandardswerewatereddownbythegovernment.The
52TheOccupymovementemergedwellafterkeylegislativereformsandrapidlydispersedafter2012.53TheseincludeindependentexpertbodiessuchasEuropeanShadowFinancialRegulatoryCommittee,NGOssuchasFinanceWatchandtheTaxJusticeNetwork,thinktankssuchasNewCityAgenda(London),andspecialistacademicresearchcentressuchastheLSE’sFinancialMarketsGroupandSystemicRiskCentre.
33
ConservativeParty’sunexpectedvictoryintheMay2015electionsenabledittoform
asingleparty,morepro-business,governmentmorecloselyalignedwithCity
interests.ThepreviouscoalitionwiththeLiberalDemocrats,inwhichministerssuch
asVinceCablesupportedtheICBapproach,hadprojectedatougherregulatory
policystance.54Publicly,MrOsborneannounceda“newsettlement”withtheCity
aftertheelection,sayingthat“IwantBritaintobethebestplaceforEuropeanand
globalbankHQs.”55Weshouldalsoremember,however,thatthisisthesame
governmentthattookthedecisiontoholdanationalreferendumonUK
membershipoftheEU.Thisdecision,andparticularlythereferendumresult,was
diametricallyopposedtothedominantpreferenceoftheCityofLondon.
TherelativelycentralizedinstitutionalstructureoftheBritishpoliticalsystem
allowedthegovernmenttoplacepressureontheregulatoryagenciestoadapt.The
newFinancialPolicyCommittee(FPC)ischairedbytheGovernoroftheBankof
England,whoisappointedbytheChancellor,asaretwootherseniormembers(the
chiefexecutivesoftheFCAandPRA)andfiveotherexpertmembers.TheFPCisalso
subordinatedtogovernmentpolicybystatute:
“[T]heFPCisnotrequiredtoachieveresilienceatanycost.Itsactionsmustnot,intheprovisionsofthelegislation,havea‘significantadverseeffectonthecapacityofthefinancialsectortocontributetothegrowthoftheUKeconomyinthemediumorlongterm’.Subjecttoachievingitsmainobjective,theFPCisrequiredtosupporttheGovernment’seconomicpolicy,includingitsobjectivesforgrowthandemployment.”(FPC2015,5).56
Atleastuntilrecently,thegreaterinstitutionaldecentralizationintheUScase
allowedtheUSregulatorsgreaterdiscretiontotightentheregulationofG-SIBs.
Obama’sre-electionvictoryin2012ensuredmoreconsistencyofexecutivebranch
supportforapolicyofincreasedregulatorystringencyformajorbanksdespitethe
continuedsupportofRepublicansforthedismantlingofDodd-Frank.57TheDodd-
FrankAct(section165)alsodelegatesmoreextensivelythantheUKFinancial 54“GeorgeOsbornetoSignalEndto‘BankerBashing’,”FT.com,June6,2015.MansionHouse2015:SpeechbytheChancelloroftheExchequer,https://www.gov.uk/government/speeches/mansion-house-2015-speech-by-the-chancellor-of-the-exchequer,June10,2015.5556SeetheUKFinancialServicesAct2012,section9C.TheFPC’sformalpowersofdiscretionarealsonarrow,concerningtheimplementationofthecountercyclicalcapitalbuffer,thesettingofsectoralcapitalrequirements,measuresrelatingtoresidentialpropertylending,andtheleverageratio.57“TopRepublicanoutlinesplanstoripupDodd-Frank,”FT.com,June7,2016.
34
ServicesAct(2012)inassigningresponsibilitytotheregulatorsforthesettingof
prudentialstandardsforSIBs.TheBoardofGovernorsoftheFedthemselves,or
actingonarecommendationoftheFinancialStabilityOversightCouncil(FSOC),
determineswhichprudentialrulesareappropriate.Dodd-Frankdoesnotlimitthe
Fed’sabilitytoimposerulesonSIFIsbyrequiringasexplicitlyasintheUKcasethat
theserulestotakeaccountofthegovernment’seconomicpolicyandtheirwider
effectontheeconomy.58
TheclearestexampleofthisgreaterFedpolicyautonomyhasbeenonthe
leverageratio,onwhichFrenchandGermannegotiators,pressuredbytheirown
largerelativelyhighlyleveragedbanks,stronglyresistedamorestringent
internationalagreementover2013-14.59USregulatorsreactedbychoosingto
imposealeverageratiodoubletheinternationalminimumforAmericanG-SIBs,
despitethefearsofsomeinsidersthatthebankswouldregaininfluenceafterthe
Republicanelectoralsurgein2012(Bair2012,357).
ItisimportanttorecallinthisregardthatboththeFedinDanTarulloandthe
BankofEnglandinAndyHaldanehadprominentregulatoryhawksinchargeof
financialregulationfrom2009.BothlookedworryinglyradicaltoG-SIBs.Haldane,
theBankofEngland'sExecutiveDirectorofFinancialStabilityfrom2009untilJune
2014,wasamongthemostoutspokenregulatoryofficialsregardingtheneedto
reigninsystemicrisk(Haldane2012,2013).60Individualpolicyentrepreneursandthe
ideastheydeploycertainlymatter,butsince2009theUSinstitutionalframework
allowedthemgreaterscopetoundertakemoresustainedregulatorytighteningfor
largebanks.WhetherthiswillpersistaftertheRepublicanvictoryinNovember2016
isnowuncertain.
4 Conclusion
Thispaperarguesthatmuchoftheliteraturehasunderplayedtheroleof
votersasanimportantfactorinpost-crisisregulatorypolitics.Almostallmajorcrisis-
58Section120ofDodd-FrankrequiresFSOCtotakeintoaccounttheimpactofitsrecommendationsonlongtermgrowth,andtheActspecifiestheneedforsomespecificcost-benefitstudies.59“Leavened,”TheEconomist,January18,2014;“Europebankscheereasinginleveragerules,sharesrally,”Reuters,January13,2014.60Infact,seniorfiguresinBritishregulatoryagenciesintheearlyyearsaftertheGFC(includingHaldane,MervynKing,andAdairTurner)madetheUKlooklikeahotbedofregulatoryradicalism.
35
hitcountriessawincumbentgovernmentsloseofficeafterthecrisis,61andvoters
generallyelectedgovernmentsthatfavouredmorestringentfinancialregulation.
TheUSandUKcaseswerenotexceptionalinthisregardandbothnewgovernments,
despitetheirunderlyingideologicaldifferences,acceptedtheneedformore
stringentregulationoftheirlargest,globalbanks.Bothallowedhawkswithintheir
regulatoryagenciestoproposesignificantlymorestringentregulationthanthey
wereabletoachievewiththeircounterpartsintheBaselCommittee.Thishashad
realeffectsonmajorbankcapitalization.
Manyscholarsacceptthatthecrisisforcedpoliticianstoaccept,atleastfora
time,thatbigfinanceneededmorestringentregulation.Butinfocusinglargelyon
theeffectofthecrisisof2007-9onthesudden“politicization”offinancialpractices
andregulation,andtheroleofpost-crisisscandalsinsustainingit,manymissa
longerruntrend.Thepoliticalsalienceoffinancehasbeenrisingsteadilysincethe
1970sandreachednewheightsin2008andafter.
Ihavearguedthatthisisconnectedtothewiderprocessoffinancialization,
whichhasgeneratedincreasinglyfrequentandvirulentfinancialcrisesand
prominentfinancialscandals.Middleclasswealthaccumulationsincethe1970sin
developeddemocracieshassharplyincreasedthestakeofmanyhouseholdsin
financialmarketsandinpoliciesthataffectthiswealth.Financializationhasbeen
especiallyassociatedwitharapidgrowthofhousingfinanceandagrowingobsession
ofhouseholdsandthemediawithhouseprices.Ithasalsohelpedtodriverising
economicinequalityandperceptionsofdistributiveunfairness,asexpensive
financialsectorbailoutsandhighfinancialsectorcompensationarecontrastedwith
post-crisisfiscalausterityandhouseholdwealthlosses.Thishasforcedgovernments
inthemostfinancializedandadvancedeconomiestorespondwithmuchmore
stringentregulationoftheirmajorbanksthanwasconceivablebefore2008.
Thisanalysisalsosuggeststhattherisingembeddednessoffinanceinmiddle
classlives(cf.Seabrooke2007,2008)placesconsiderablelimitsonthere-regulation
ofglobalizedfinance.Thefargreaterdependenceofmiddleclasshousingand
definedcontributionpensionassetvaluesonthiscomplexfinancialsystemlimits
61Germany(inpart)andSwedenwereexceptions.
36
politicalsupportforanymovebacktoextensivefinancialrepression.Muchpolitical
economyliteraturesuggeststhatresistancetoareturntothefinancialrepressionof
theBrettonWooderaisduetothepoliticalpowerofthefinancialsectoritself.Our
analysissuggests,however,thatfinancializationhasdeeper,evendemocraticroots,
andthattoomanyhouseholdswouldloseformainstreampoliticalpartiestoadopt
moreradicallyrestrictivepolicies.Thisalsohelpstoexplainwhyfinancialregulation
remainsamatterofdeepcontentionincontemporarypoliticsinthemajorcountries.
37
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