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

Andrew.walter@unimelb.edu.au

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.

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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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