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​Due to the lack of political salience that financial stability policy enjoys in tranquil economic times, this policy field lends itself particularly well to capture – the more so the more important the role of banks is in the financial system. Gundbert Scherf’s research focuses on this nexus between integrated banking, supranational monetary policy and national banking regulation. He finds that national level differences in financial systems and related institutions explain and drive variation in regulatory financial stability policy across countries.



Prelude The financial crisis as a crisis of regulated capitalism

The debate about the key causes of financial and economic crisis is as old as the study of political economy. As the quotes show, this debate already in the aftermath of the Great Depression has been led between those pointing out the inherent instability of an excessively de-regulated economy and those pointing to the excessive intervention of government and badly designed regulation in the economy.
Gundbert Scherf

1. Introduction

The introductory quotes in combination with the below figure illustrate the relevance of financial stability policy in economic policy making in the 21st century very pointedly: Financial instability in the form of crisis is a very rare ‘black swan’-type of event, but when it occurs it has a devastating effect on financial systems and economies at large. Because of this very rare and usually delayed occurrence of crises, financial stability policy also is subject to a very own political economy dynamic.
Gundbert Scherf

2. Trading off financial stability: A political economy perspective on European banking regulation

The previous chapter outlined the main theoretical underpinnings that will inform this approach to the political economy of banking regulation. This chapter wants to complement this with a first look at the formation of regulatory preferences for financial stability policy. The infamous insight of economics that “there is no such thing as a free lunch” also applies to financial stability policy, as I argue.
Gundbert Scherf

3. What drives the banking regulator? Varieties of financial systems and regulatory preferences

The previous chapter has shown that regulatory preferences are central to determining which two of the three regulatory objectives a country’s regulator is – ceteris paribus – going to favor at the expense of the third. This chapter develops a theoretical and empirical derivation of such sources of regulatory preferences in a cross-sectional fashion. I argue that institutional features of the financial systems shape the particular set of objectives and preferences along the trilemma that the regulator is likely to hold.
Gundbert Scherf

4. International cooperation or race to the bottom? Banking regulation in an integrating financial market

The prior discussion has advanced the argument that banking regulators have to make economic policy trade-offs based on their regulatory preferences, which derive form the nature of the financial system. As was shown, national banking regulators do not operate in a vacuum, but instead are faced with the interaction of domestic private interest influences that in many cases conflict with the original financial stability mandate assigned to them. Similar things can be said for the role of the national regulator in its international context.
Gundbert Scherf

5. Committing to hawkishness? Time consistency problems in the interaction of banking supervision and monetary policy

In this chapter I want to expand the perspective of banking regulation in its dynamic context, looking at the interaction of monetary policy and banking supervision. Also, in this respect, as I have shown, the Euro Zone is truly ‘sui generis’. It has a common currency and national banking regulation without very strong rules for the coordination of the two policy instruments. What this regulatory architecture of the Euro Zone fails to appreciate is the political time consistency problem, which the uncoordinated conduct of monetary policy and national banking regulation imposes on national supervisors.
Gundbert Scherf

6. Conclusion

Crises bring about changes not only in the institutional architecture of economic policy-making but also in the prevalent paradigms and ideas that drive policy-making to a substantial degree. For the Euro Zone countries the financial crisis of 2007/8 has obviated not only technical shortcomings in banking regulation, such as the neglect of the macro-prudential dimension of banking, but also the flaws of certain ideas behind the monetary union’s financial stability architecture at large.
Gundbert Scherf


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