Post on 23-Jan-2015
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Towards a More Sustainable Regulatory
Process Regulatory Capture and
Mitigating Strategies
Dr. Stefano Pagliari Stefano.Pagliari.1@City.ac.uk
Seminar ‘Towards a Sustainable Financial System’Stockholm, 12-13 September 2013
“Is it possible at all to create an international regime that prevents regulatory capture?” George Stigler (1971) & the motor trucking
industry “as a rule, regulation is acquired by the industry
and is designed and operated primarily for its benefit”
Dr. Stefano Pagliari
Towards a Sustainable Financial System Stockholm, 12/09/2013
Stakeholders
• Banks• Other financial firms• Non-financial
business groups• Consumers, NGOs,
…
Regulatory policies
• Information• Incentives• Ideas
Regulators
• Rule-making• Enforcement• Supervision
When is the regulatory process more likely to fail us?
3 Factors
Demand: Balance of Stakeholders
Pro regulatio
n
Against regulatio
n
AFME
EACT
AIMA
Finance Watch
Allianz
Dr. Stefano Pagliari
Towards a Sustainable Financial System Stockholm, 12/09/2013
3 Factors
Demand: Balance of Stakeholders
Supply: Institutional Design of Regulatory Agencies
Pro regulatio
n
Against regulatio
n
AFME
EACT
AIMA
Finance Watch
Allianz
Dr. Stefano Pagliari
Towards a Sustainable Financial System Stockholm, 12/09/2013
When is the regulatory process more likely to fail us?
3 Factors
Demand: Balance of Stakeholders
Supply: Institutional Design of Regulatory Agencies
The Broader Political-Economic context
Pro regulatio
n
Against regulatio
n
AFME
EACT
AIMA
Finance Watch
Allianz
Dr. Stefano Pagliari
Towards a Sustainable Financial System Stockholm, 12/09/2013
When is the regulatory process more likely to fail us?
Pro regulatio
n
Against regulatio
n
AFME
EACT
AIMA
Finance Watch
Allianz
Asymmetry among stakeholders competing for regulatory influence
Financial Resources $1.4 million spent daily by
financial industry to lobby Congress during crisis
Technical Expertise and Information Asymmetries
Collective action problem (deposit holders, investors, and retail consumers)
Demand Side: Balance of Stakeholders
Dr. Stefano Pagliari
Towards a Sustainable Financial System Stockholm, 12/09/2013
• 1999-2008:$ 2.7 billion in reported federal lobbying expenses by fin. Industry
• $1.4 million spent daily during financial crisis
Pro regulatio
n
Against regulatio
n
AFME
EACT
AIMA
Finance Watch
Allianz
Heavy bias towards business
Since the crisis: Greater diversity of
stakeholders Greater diversity within the
business community
Source: Pagliari and Young 2013
Pre-Crisis
Post-Crisis
% Difference
Finance 75.1% 60.3% -19.8%
Non-financial business groups
16.4% 24.2% +47.5%
NGOs / Cons. / Trade Unions / Research
8.4% 15.5% +83.8%
USA EU UK
Financial business groups
66.6% 70,6% 59.6%
Non-financial business groups
23.2% 18.9% 28.1%
NGOs / Cons. / Trade Unions / Research
10.2% 10.5% 12.2%
Capital Requirement Directive (CRD IV)(2010)
Banks 43.7%
Non-bank financial groups 33%
Non-financial business groups 19.6%
NGOs / Cons. / Trade Unions / Research 3.6%
Dr. Stefano Pagliari
Towards a Sustainable Financial System Stockholm, 12/09/2013
Demand Side: Balance of Stakeholders
Balance of stakeholders
Pro regulatio
n
Against regulatio
n
AFME
EACT
AIMA
Finance Watch
Allianz
Heavy bias towards business
Since the crisis: Greater diversity of
stakeholders Greater diversity within the
business community
Rule-making vs. implementation
Dr. Stefano Pagliari
Towards a Sustainable Financial System Stockholm, 12/09/2013
Supply Side: Institutional Design of Reg. Agencies
Pro regulatio
n
Against regulatio
n
AFME
EACT
AIMA
Finance Watch
Allianz
Independence of Regulators
Mandate UK FSA mandate included to “have
regard to” the competitiveness of the financial services industry.
Dr. Stefano Pagliari
Towards a Sustainable Financial System Stockholm, 12/09/2013
Supply Side: Institutional Design of Reg. Agencies
Pro regulatio
n
Against regulatio
n
AFME
EACT
AIMA
Finance Watch
Allianz SEC Staff
Shares traded in US
1939 1,700 260 mln
2001 2,900 2 bln.
2009 3,584 5.4 bln.
Dr. Stefano Pagliari
Towards a Sustainable Financial System Stockholm, 12/09/2013
Independence of Regulators
Mandate
Funding
226,400 employees - 4.5 UK FSA Staff
Supply Side: Institutional Design of Reg. Agencies
Pro regulatio
n
Against regulatio
n
AFME
EACT
AIMA
Finance Watch
Allianz
Independence of Regulators
Mandate
Funding
Staffing and Revolving Doors
Inter-temporal conflict of interests
Preferential Access & Inside Knowledge
Socialization, Psychological Biases, & Intellectual Capture “It takes a thief to catch a thief” (F.D.
Roosevelt)
The Broader Economic and Political Context
Pro regulatio
n
Against regulatio
n
AFME
EACT
AIMA
Finance Watch
Allianz
Capture through the political process
Electoral weight of financial industry
Banks and the financing of the real economy
Banks as buyers of sovereign-debt
Impact of the Eurozone crisis
Dr. Stefano Pagliari
Towards a Sustainable Financial System Stockholm, 12/09/2013
Source: FT from ECB data
Cyclical Nature of Capture
Pro regulatio
n
Against regulatio
n
AFME
EACT
AIMA
Finance Watch
Allianz
SlumpSlump
Crisis Crisis
Boom
Boom
Pressures on regulators not to ‘remove the
punchbowl from the party’
Electoral pressures to re-regulate
Pressures on regulators not to
forestall economic recovery
“on the whole, banks [in the UK] did not have to lobby politicians, largely because politicians argued the case for them without obvious inducement”
Dr. Stefano Pagliari
Towards a Sustainable Financial System Stockholm, 12/09/2013
the Bank of England as “capital Taliban”
What can we do about it?
1. Promoting greater balance and diversity among stakeholders
Pro regulatio
n
Against regulatio
n
AFME
EACT
AIMA
Finance Watch
Allianz
Dr. Stefano Pagliari
Towards a Sustainable Financial System Stockholm, 12/09/2013
What can we do about it?
Pro regulatio
n
Against regulatio
n
AFME
EACT
AIMA
Finance Watch
Allianz
1. Promoting greater balance and diversity among stakeholders
2. Reforming the institutional design of regulatory agencies
Dr. Stefano Pagliari
Towards a Sustainable Financial System Stockholm, 12/09/2013
What can we do about it?
Pro regulatio
n
Against regulatio
n
AFME
EACT
AIMA
Finance Watch
Allianz1. Promoting greater balance and diversity among stakeholders
2. Reforming the institutional design of regulatory agencies
3. External checks and balances
Dr. Stefano Pagliari
Towards a Sustainable Financial System Stockholm, 12/09/2013
1. Promoting Greater Balance & Diversity of Stakeholders
Breaking up large banks (S. Johnson)
Participatory Mechanisms
Tripartitism & Proxy advocates E.g. Consumer Panels; Finance Watch
Promoting long-termism and diversity in fin. industry lobbying
Compensation rules, fiduciary duties of boards, ownership.
Pro regulatio
n
Against regulatio
n
AFME
EACT
AIMA
Finance Watch
Allianz
Dr. Stefano Pagliari
Towards a Sustainable Financial System Stockholm, 12/09/2013
2. Reforming the Institutional Design of Reg. Agencies
Mandate: danger of conflicting/ambiguous mandates
Internal decision-making IMF’s IEO: ‘strengthen the
incentives to “speak truth to power”’ and ‘create internal advisory boards ‘to challenge and think the unthinkable’
Pro regulatio
n
Against regulatio
n
AFME
EACT
AIMA
Finance Watch
Allianz
Dr. Stefano Pagliari
Towards a Sustainable Financial System Stockholm, 12/09/2013
2. Reforming the Institutional Design of Reg. Agencies Mandate: danger of
conflicting/ambiguous mandates
Internal decision-making
Staffing & Revolving doors Mitigating strategies: e.g. disclosure,
cooling off periods, complement “revolvers” and career supervisors
Promote diversity of experiences and training (e.g. IMF)
Funding Level Source
Pro regulatio
n
Against regulatio
n
AFME
EACT
AIMA
Finance Watch
Allianz
Dr. Stefano Pagliari
Towards a Sustainable Financial System Stockholm, 12/09/2013
Limits of existing checks Board of Directors Parliament Media
3. External Checks & Balances Pro
regulation
Against regulatio
n
AFME
EACT
AIMA
Finance Watch
Allianz
Dr. Stefano Pagliari
Towards a Sustainable Financial System Stockholm, 12/09/2013
Public Interest Review Bodies “The Sentinel” (Barth Caprio and
Levine 2012)
Reciprocal oversight from other domestic regulators
Macroprudential regulators Consumer protection bodies
Reciprocal oversight from foreign regulators
Financial Stability Board’s Peer Review Colleges of Supervisors, IMF’s surveillance (FSAP and ROSC)
3. External Checks & Balances Pro
regulation
Against regulatio
n
AFME
EACT
AIMA
Finance Watch
Allianz
Dr. Stefano Pagliari
Towards a Sustainable Financial System Stockholm, 12/09/2013
Towards a More Sustainable Regulatory
Process Regulatory Capture and Mitigating
Strategies
Thank you for your attention
Dr. Stefano Pagliari Stefano.Pagliari.1@city.ac.ukwww.stefanopagliari.net