Fiscal policy and capital mobility: the construction of economic policy rectitude in Britain and France

This research examines the regulatory response of the European Union to the global financial crisis, addressing the questions of whether, how and why the global financial crisis has changed the ‘old’ politics of financial services regulation in the EU and resulted in the emergence of a ‘new’ politics. It is argued that, with a good dose of political opportunism and ‘anti-free market’ rhetoric, a continental advocacy coalition sponsoring a ‘market-shaping’ regulatory approach has capitalised on the crisis, tipping the balance of regulatory power in the EU in its favour, as compared to the pre-crisis situation.     

The symbolic politics of delegation: macroprudential policy and independent regulatory authorities

This paper investigates the motivations that led policy-makers to delegate macroprudential authorities to newly created independent systemic regulatory authorities (SRAs). Three case studies are examined: the US Financial Stability Oversight Council, the European Systemic Risk Board and the UK’s Financial Policy Committee. Policy-makers’ motivations are captured by examining the specific institutional features of the newly created SRAs and by tracing the legislative debates that surrounded their creation. The findings of this empirical analysis call into question several of the conventional claims that are used to justify delegation to technocratic agencies from the functionalist and ideational scholarship. Given the limitations of the explanations based on efficiency considerations and socialisation of welfare losses, this paper suggests that the delegation of powers to SRAs was ultimately motivated by what is referred to as the ‘logic of symbolic politics.’ It is argued that the main motivation that emerges from the legislative debates for delegating this important task is that the SRAs provided a quick institutional ‘fix’ to signal to the public that in the wake of the international crisis of 2007–2009, policy-makers were redressing regulatory mistakes made prior to and during the crisis that had caused a severe deterioration of public’s wealth.     

Projecting from a Fiction: The Case of Denmark and the Financial Crisis

Institutional and ideational crises are characterised by fundamental uncertainty about the world, and at the same time require swift action on part of decision makers. How do political actors overcome uncertainty to enable collective action? The paper argues that actors use the ideas of the pre-crisis regime and through processes of bricolage seek to fit them to radically different circumstances. This enables action, but it also privileges the actors that benefited from these ideas before the crisis. This helps explain why so relatively few changes to financial regulation are appearing from the recent crisis. The argument is illustrated through the case of financial crisis in Denmark, demonstrating that the Danish authorities used ideas developed since the banking crisis of the 1980s concurring on the discourse that the best solution to the crisis would be a further ‘consolidation' of the sector, that is, fewer small banks and stronger large banks. This shows both the strength and weakness of using old ideas for radically new problems: it enables actors to act in concert, but changes are incremental and the weaknesses of the previous regime may thus live on in the new regime.     

A Crisis of the Overcrowded Future: Shadow Banking and the Political Economy of Financial Innovation

This article focuses on the role the shadow banking system played in the financial crisis of 2007–9. Engaging with emergent theories of shadow banking, I inquire into its structural role in contemporary capitalism. My main premise here is that the crisis of 2007–9 is distinct in financial history because it did not centre on any organised market. Rather, it was crisis of the overcrowded financial channels bridging the present and the future, which have become congested because of the massive concentration of financial values generated, yet not sustained, through the shadow banking network. My analysis suggests that shadow banking has determined the nature of financial crisis of 2007–9 and continues to play a necessary role in financial capitalism based on futurity. Drawing on scholarship in financial Keynesianism, contemporary legal studies and early evolutionary political economy, I argue that shadow banking is best seen as the organic institutional infrastructure of financialised capitalism based on debt and geared towards futurity, a concept originally developed by John Commons.     

Globalisation and the Institutional Re-embedding of Markets: The Political Economy of Price Formation in the Bordeaux En Primeur Market

Contemporary analyses commonly attribute the global credit crisis to faulty regulation. What have been the roots of these deficient rules, particularly in Europe, where rapid spill-over from US markets took policy makers and observers by surprise? This article focuses on regulatory liberalism as the paradigm guiding European Union (EU) regulation. It has dominated regulatory thinking for decades, but it has been implemented throughout Europe only since the mid-1990s. This shift can be traced to political institutions that have filtered policy ideas. EU financial reforms have pushed policy from pragmatism, under which it was adapted to political contingencies, to dogmatism, which adapts it to the intellectual exigencies of rigid policy paradigms. Inadvertently, reforms had created an epistemic community in which ‘professional’ rule setters systematically ignored external criticisms. The institutionalised ambition to craft ‘intellectually sound’ policy–rather than policy that simply ‘works’ –generated rules that persistently ignored the financial markets' self-reflexivity and thereby aggravated the crisis.     

The effect of financial liberalization on banking sector stability

Several studies indicate that financial liberalization increases likelihood of a financial crisis without distinguishing between a normal period, unstable period preceding the onset of banking panics and crisis/post period. We explain in this paper the relationship between financial liberalization and banking sector vulnerability. Then, we argue that banking sector turmoil is most likely to occur after an intermediate degree of liberalization. Using a recently updated dataset for financial reforms, we find an inverted U-shaped relationship between liberalization and the likelihood of banking crisis for a sample of 49 countries between 1980 and 2010. We used a multinomial logit model in order to take into account what is called the ‘post crisis bias’. We ask whether the relationship remains when institutional characteristics of countries and dynamic effects of liberalization are considered. The empirical results indicate that the relationship between liberalization and banking sector stability depends strongly on the strength of capital regulation and supervision. With very weak regulation and supervision, the probability of banking crises is increasing with liberalization but this relationship is reversed as regulation and supervision become significant. The most important type of liberalization in relation to banking crises seems to be operational. A policy implication is that positive growth effects of liberalization can be achieved without increasing the risk of a banking fragility if appropriate institutions are developed.     

Liberalization,Regulatory Delays and Vulnerability to Systemic Banking Crisis

This work aims at contributing to the improvement of the early warning systems of banking crises using a new approach accounting for model uncertainty. We show that a multinomial logit model based on Bayesian model averaging (BMA) is a good strategy to predict banking crisis. To do this, we argue that differences in vulnerability to banking crisis can be largely explained by an asymmetry between financial market evolution and regulation update on a sample of 49 developed and developing countries between 1980 and 2010. When markets are liberalized, competition pushes bankers to take more risks and take advantage of regulatory delays thus increasing crises probabilities. Our empirical evidence supports that crisis probability is higher in country liberalizing their banking system when regulation is not updated. We developed an early warning system for systemic banking crises based on the multinomial logit model. Its main difference to existing prediction models and its contribution to the literature is that it is intended to identify and resolve what is called by Bussiere and Fratzscher [(2006). Towards a new early warning system of financial crises. Journal of International Money and Finance, 25(6), 953–973] as post-crisis bias in binomial models and to develop a new methodology of leading indicators selection based on BMA. Overall, our model predicts all banking crises during our sample period.     

Tracing the causes of the banking crisis

We add the Bernanke–Gertler–Gilchrist model to a modified version of the Smets–Wouters model of the U.S. in order to explore the causes of the banking crisis. The innovation of this article is estimating the model using unfiltered data allowing for non-stationary shocks in order to replicate how the model predicts the crisis. We find that ‘traditional shocks’ account for most of the fluctuations in macroeconomic variables; the non-stationarity of the productivity shock plays a key role. Crises occur when there is a ‘run’ of bad shocks; based on this sample they occur on average once every 64 years and when they occur around 10% are accompanied by financial crisis. Financial shocks on their own, even when extreme, do not cause crises – provided the government acts swiftly to counteract such a shock as happened in this sample.     

A firm-level chronicle of financial crises in the Southern Cone

This paper chronicles the recent emergence of financial crises in the ‘Southern Cone’ countries of South America. Relying on firm-level panel data, major changes in the macro and regulatory environments are linked to changes in firms' earnings streams and financial structures. For each country, a ‘boom’ phase, a ‘squeeze’ phase, and a ‘bust’ phase are identified. It is argued that the proximate cause of this pattern was wild fluctuation in the expected real return on financial assets. Though no formal model is developed, it is suggested that these swings were due to the system of incentives created by rapid banking sector deregulation cum exchange-rate-based stabilization policies.     

The 2014–15 Financial Crisis in Russia and the Foundations of Weak Monetary Power Autonomy in the International Political Economy

ABSTRACT

This article contributes to international political economy debates about the monetary power autonomy (MPA) of emerging market and developing countries (EMDs). The 2014–15 Russian financial crisis is used as a case study to explore why an accumulation of large international reserves does not provide protection against currency crises and macroeconomic adjustments in EMDs. The analysis centres on the interplay between two dimensions of MPA: the Power to Delay and the Power to Deflect adjustment costs. Two structural factors condition Russia’s low MPA. First, the country’s subordinated integration in global financial markets increases its financial vulnerability. The composition of external assets and liabilities, combined with cross-border capital flows, restrict the use of international reserves to delay currency crises. Second, the choice of a particular macroeconomic policy regime embraced the financialisation of the – mainly state-owned – Russian banking sector, thus making it difficult to transform liquidity inflows into credits for enterprises. Russia’s main comparative advantage, hydrocarbon export revenues, is not exploited. The type of economy created due to the post-Communist transition means that provided ‘excessive’ liquidity remains in the financial system and is channelled into currency arbitrage. This factor increases exchange rate vulnerability and undermines Russia’s MPA.     

Learning from Japan: The European Central Bank and the European Sovereign Debt Crisis

What shapes central banks’ learning from the policy experiments of their peers? Both economic ideas and organizational interests play important roles. Thus, New Keynesian ideas led central banks to interpret Japan's experience with quantitative easing (2001–2006) through the impact on risk spreads, although the Japanese central bank never intended such effects. In turn, scholars and policy-makers alike ignored one critical lesson: successful policy innovations depend on banks’ funding models. It is argued here that this was a crucial omission because the shift to market-based funding impairs the effectiveness of the traditional crisis toolkit. Central banks must intervene directly in asset markets of systemic importance for funding conditions, as the Bank of Japan did by buying government bonds. Hence, market-based finance engenders a trade-off between financial stability and institutional stability defined through central bank independence. During critical periods, central banks cannot preserve both. The ECB illustrates this trade-off well. Early in the crisis, it outsourced financial stability to a (largely) market-dependent banking system to protect its independence. With the introduction of Outright Monetary Transactions in September 2012, the Bank recognized that the market-based nature of European banking required outright purchases of sovereign bonds. This new instrument gave the ECB additional powers to shape national fiscal decisions in the name of an independence that no longer has theoretical justifications.     

Credit Risk Determinants for the Bulgarian Banking System

Using an autoregressive distributed lag model, this paper examines the factors that influence the credit risk of the Bulgarian banking system over the decade 2001–2010, as measured by non-performing loans. Recent papers aim to identify the determinants of non-performing loans using a cross-country modelling framework. As the South East European region (SEE) is non-homogeneous, our analysis is country-specific and captures the timeline between the bank privatisation era up to the global financial crisis and the ensuing Greek crisis. The contribution of our paper is twofold: it uses the ARDL modelling framework that is scarcely employed in related studies but also investigates spillover effects from the Greek crisis in view of the material presence of Greek banks in Bulgaria. In accordance with previous studies, the findings suggest that the credit risk determinants of Bulgarian banks should be sought endogenously in macroeconomic variables and industry-specific factors but also in exogenous factors. We evidence a pronounced role of the global financial crisis and the country’s bank regulatory framework. The Greek debt crisis appears to play an immaterial role indicating that Greek banks have not been a Trojan horse in the Bulgarian banking system.     

The ‘Twin Peaks’ model of post-crisis banking supervision

This article examines the effectiveness of the ‘Twin Peaks’ supervision model, in which consumer protection and prudential regulation are carried out by two separate regulatory agencies. We use a dataset from 143 countries for the period of 2004–2011 to find that the Twin Peaks model is associated with a higher quality of banking supervision in terms of the efficiency and stability of financial institutions.     

Desperately seeking cash: Evidence from bank output measurement

We examine the impact of a “near-zero” interest rate policy on bank output. Specifically, we document the existence of negative banking output on deposits for French banks from 2009. We show a structural break in banks' long run interest rate pass-through that explains this change in their business model during the 2003–2012 period. Since the crisis, banks are desperately seeking cash, and deposits have become a cost center. This is due to the new monetary policy and reveals banks' adaptation to the new banking regulation on liquidity. This new environment raises questions about banks' increasing exposure to interest rate risk and shows the necessity of coordinating monetary and regulatory policies.     

Who’s Afraid of the Big Bad Wolf? Rethinking the Core and Periphery in the Eurozone Crisis

Recent literature on the eurozone crisis has begun to rethink those explanations of its origins that rely on narratives stressing the ‘immaturity’ of political and economic governance in the countries of the European periphery. These narratives are typically challenged by frameworks which understand the eurozone as a region characterised by a ‘beggar-thy-neighbour’ hierarchy between the economic growth of Germany, which leads to precarious, ‘financialised’ growth in the periphery. Yet, this article shows that core–periphery scholarship is unable to adequately challenge the immaturity thesis due to its preoccupation with German ‘victimisation’ of the European periphery. By exploring country-specific direction of trade and capital lending statistics, I shows that there is little basis for the argument that Germany is to blame for the origins of the eurozone crisis in the individual countries of the European Periphery. This article shows that by bringing core–periphery analysis into dialogue with Comparative Political Economy, a critical approach to the Eurozone crisis can be developed which leaves behind the myth of the German ‘big bad wolf’. Instead, I show that imbalances between the core and periphery are a product of a flawed construction of the Single Market and Economic and Monetary Union.     

The Efficiency of China's Banking Industry and the Determinants

The recent global financial crisis highlights the importance of a sound financial sector for economic development. This paper evaluates the economic efficiency of China's banking industry and investigates the determinants of this efficiency. Our analysis shows that the average economic efficiency of joint-stock commercial banks is highest, followed by the ‘Big Four’ state-owned commercial banks and city commercial banks. The economic inefficiency of these banks during the past 15 years was mainly caused by technical inefficiency, and this technical inefficiency was mainly caused by scale inefficiency. Using the scores of efficiency as dependent variables, the paper also comprehensively studies the impact of (1) the characteristics of individual banks, (2) the characteristics of the whole banking industry and (3) macroeconomic factors on banking efficiency. The results suggest a number of factors that banks can work on to improve efficiency and lend support to deepening reforms in the Chinese banking industry, including regulatory reforms that require capital adequacy in a more strict way, reforms that introduce more competition and, more broadly, reforms that aim at establishing institutions that can truly commercialize Chinese banks. Last but not least, the efficiency of banking depends on healthy growth of the overall economy.     

The Importance of Monitoring and Mitigating the Safety-Net Consequences of Regulation-Induced Innovation

To be effective, programs of regulatory reform must address the incentive conflicts that intensify financial risk-taking and undermine government insolvency detection and crisis management. Subsidies to risk-taking that large institutions extract from the financial safety-net encourage managers to make their firms riskier, harder to supervise, and politically and administratively more difficult to fail and unwind. Except in the very short run, repealing the Gramm-Leach-Bliley Act or breaking up so-called too-big-to-fail institutions will do little to arrest subsidy-induced activities. Rebuilding Glass-Steagall barriers between banking, securities, and insurance firms would instead make implicit taxpayer support of large institutions less transparent and serve foreign interests by encouraging conglomerate firms to operate affected businesses through foreign subsidiaries. To discourage financial institutions from abusing safety-net support, government supervisors must be made specifically accountable for delivering and pricing safety-net benefits fairly and efficiently. If it wants to make the system more stable, Congress should focus on: rewriting top officials' oaths of office; changing the ways top officials are recruited, trained, and compensated; reworking the ways they measure and report regulatory performance; and changing the kinds of securities that large institutions have to issue.     

Neoliberal Entrenchment of North Atlantic Capital. From Corporate Self-Regulation to State Capture

After the financial crisis of 2007–8, neoliberal capitalism by all appearances has entrenched instead of being displaced. Its political–economic programme or ‘comprehensive concept of control’ continues to hold society in thrall. This was different in the crisis of 1974–5 when the corporate liberalism of the postwar years and its industry-centred class compromise were beginning to be replaced by finance-led neoliberalism and a compromise with asset-owning middle classes. Under corporate liberalism, real capital accumulation was protected from the ‘rentier’/‘money-dealing’ fraction of capital associated with speculative investment; neoliberalism has allowed its resurgence. Large corporations in the first phase of the transition (‘systemic neoliberalism’) embarked on a strategy of transnational restructuring no longer dependent on 1960s-style state support. In the process, financial group formation, here measured by dense director interlocks (≥2) amongst the largest corporations in the North Atlantic economy (where this type of corporate governance obtains), was intensified. The resurgence of money-dealing capital and rentier incomes in the 1990s led to a decline in real accumulation (‘predatory neoliberalism’), and after the crisis of 2007–8, to a demise of the financial group structure of Atlantic capital as the network of dense interlocks radically thins out and capital comes to rely on states again, this time to protect it from a democratic correction of the neoliberal regime and with state autonomy greatly reduced by public debt.     

China's Post-Listian Rise: Beyond Radical Globalisation Theory and the Political Economy of Neoliberal Hegemony

While China's rise has been much discussed, its meaning continues to be contested. This is true in radical international political economy, where, for example, it was the subject of (often polarised) debates between Giovanni Arrighi and David Harvey prior to Arrighi's death in 2009. This reflected a broader debate in IPE between development theory and radical globalisation analysis. The key point of contention is whether China's rise represents a challenge to or further consolidation of neoliberal hegemony on a global scale. This article critically scrutinises some of the key assumptions of the radical globalisation approach, specifically, that China represents another form of the ‘competition state’ whose development aspirations have been radically constrained by global ‘new constitutionalism’ and American monetary power so as to conform to neoliberalism. Deploying a structurationist approach to global governance and an eclectic/regulatory analysis of the Chinese state, I argue that China has challenged neoliberalism by projecting its growing power through constitutionalised global governance. In the face of (declining) American power, global constitutionalism has provided an opportunity structure that may help China consolidate its long-term strategy of consensual development. Far from anchoring ‘neoliberal hegemony’, global economic governance is increasingly central to its unravelling.     

Delegation and the regulation of U.S. financial markets

We analyze the institutional determinants of U.S. financial market regulation with a general model of the policy-making process in which legislators delegate authority to regulate financial risk at both the firm and systemic levels. The model explains changes in U.S. financial regulation leading up to the financial crisis. We test the predictions of the general model with a novel, comprehensive data set of financial regulatory laws enacted specifically between 1950 and 2009. The theoretical and empirical analysis finds that economic and political factors impact Congress’ decision to delegate regulatory authority to executive agencies, which in turn impacts the stringency of financial market regulation, and our estimation results indicate that political factors may have been stronger and resulted in inefficiencies.