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2014 | OriginalPaper | Buchkapitel

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

verfasst von : Gundbert Scherf

Erschienen in: Financial Stability Policy in the Euro Zone

Verlag: Springer Fachmedien Wiesbaden

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Zusammenfassung

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.

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Vorheriges Kapitel Trading off financial stability: A political economy perspective on European banking regulation

Nächstes Kapitel International cooperation or race to the bottom? Banking regulation in an integrating financial market

For a more extensive economic discussion of the subject see the classical piece by Bernanke and Gertler (2000). For a political economy discussion of the relationship between the regulatory agency and the central bank see for instance (Ioannidou, 2005) (Schoenmaker & Goodhart, 1992)

The argument that accountability and independence are really complementary features and condition regulatory policy in the same way is advanced extensively in Masciandaro, Quintyn, and Taylor (2008) and is discussed later on.

Such a functional account is best described by one of the main functionalist proponents Robert Merton (Merton & Bodie, 2005; p.26): “When studying the dynamics of financial systems, it is best to adopt an analytical framework that treats functions rather than institutions as the conceptual anchors.”

From a VoC-perspective one might add to these three subsystems the fourth subsystem of corporate strategy, which in the firm-centered VoC-perspective is shaped by the institutional complementarities. In fact in an earlier print of their concept, this broader view of the subsets is defined, comprising the financial sector, different financing patterns (saving and investment), different corporate governance arrangements, and systemic variations in corporate strategy (R. H. Schmidt, 1999). Thus, these four different subsystems and their respective polar choices within the subsystems open up different combinations along which systems can differ.

The most comprehensive approach to defining a framework for comparative analysis has come from a small branch of the economics discipline itself. With a focus on the German financial system as well as the convergence of systems in Europe Reinhard Schmidt has authored a series of papers and books, which provided a systemic perspective on what constitutes a financial system and how they can be analyzed in comparative perspective (Krahnen & Schmidt, 2004; R. H. Schmidt, 1999; R. H. Schmidt & Tyrell, 2001, 2003).

The oil shock of the 1970s is given by Allen and Gale as such an example of a correlated change in stock prices, which was felt much less in household spending in the bank-based systems of Germany, France, and Japan than in the market-based systems of the U.K. and the U.S.. As competition in banking is more intense in countries like the U.K. and the U.S., therefore banks have to compete with financial markets for returns and will be less able to smoothen. Given the trends towards the market-based system, a subject of analysis in a later chapter, such competitive pressures tend to increase as well in the EU and the Euro Zone.

This is consistent with those approaches that have derived financial system choices as the ‘Anglo-Saxon’ and the ‘German-style’ financial system as equilibria choices, based on the presence of moral hazard and variation in the respective bargaining power of lenders and borrowers and corresponding demand for monitored or un-monitored loans (Baliga & Polak, 2004).

This year is chosen to have a departure point far enough in the past to derive developments since but near enough to allow inference about the implications of recent financial integration.

As such, this operationalization does not assume something like a cultural aspect that would justify higher risk-taking in some countries over others, which for instance Charles Kindleberger seems to suggest, who found (Kindleberger & Aliber, 2005; p.54): “The speculative temperament may differ among countries.”

In fact, the European Central Bank, at the time of writing, was still in the process of filling this gap to provide household-level data across its Member Countries through a Household Finance and Consumption Network (HFCN). Data results could then be used to validate the risk-measures used here.

See Bacher, Pöge, & Wenzig for an extensive discussion of this methodology (2010).

The Pearson correlation figures confirm that (see Table 7.8 in Appendix) and would even justify dropping two of the variables employed. I choose to include them here to reflect certain existing differences between the variables.

In fact Greece also seems like a hybrid system based on the clustering analysis. However, Greece is still by far the least developed financial system analyzed here and hence has a much lower developed banking system as well, which requires different interpretation of the data.

This typology wants to emphasize parsimony over completeness and capture a great deal of the variation in regulatory styles, which to the best of the author’s knowledge, to this day has not been reflected in a real categorization, reflecting both intent and likely stringency in the use of instruments by the regulator.

Interview with a former senior regulator of the FSA and a banker from the City.

This latter strategy of using profits as a stability buffer in essence reflects elements of the regulatory approach described by Hellmann, Murdock, and Stiglitz (1997), who advocate a policy of financial restraint for low-depth financial systems at the expense of competition and efficiency in the financial sector to reduce moral hazard and create micro-prudential stability.

Greece would count in as well but is excluded due to the relative under-development of its banking system.

For a discussion of the rise of the new markets in these economies see Posner (2009).

Particularly since I look at their status in the year 1999/2000, which precedes the implementation of important institution-converging European-level legislation such as the FSAP, the Conglomerates Directive, and the Capital Requirements Directive.

The transformation of the French economy from a ‘financial network economy’ to a ‘financial market economy’ was already discussed in the literature of the early 2000s and has since been debated. See Morin (2009) for an overview.

Titel: What drives the banking regulator? Varieties of financial systems and regulatory preferences
verfasst von: Gundbert Scherf
Verlag: Springer Fachmedien Wiesbaden
Buch: Financial Stability Policy in the Euro Zone
Print ISBN: 978-3-658-00982-3

Electronic ISBN: 978-3-658-00983-0

Copyright-Jahr: 2014
DOI: https://doi.org/10.1007/978-3-658-00983-0_4