Stefano Pagliano: "A Global Financial Governance?"

Editor's Notes

• #3: We have gone through the most extensive redesign of regulatory policies since the 1930s. We have expanded the perimeter of regulation to incorporate markets and institutiosn that were left outside. We have revised existing standards. Created new regulatory institutions.HOWEVER, not much discussion of what could be done to improve the regulatory process.Finanical regulation fails for a number of reasons:CasualiityIncompetence on the part of regulatorsDynamism of financial marketsPrivate interestsIn my presentation I’m taking the challenge to address one of the questions that was posed in the panel description: “Is it possible at all to create an international regime that prevents regulatory capture?” Origin of the concept:Concept is used frequently but in many different forms - to explain too much regulation, lack of regulation, or the wrong kind of regulation - different phases of the regulatory process (rule-making, supervision, enforcement and implementation)Little consensus regarding the extent of the problem and its causesHow do we prove the presence of capture? Where does the public interest resides in the presence of competing objectives (e.g. stability vs. growth)?When is a policy shift the result of the action of special interests?More groups or actors are capable to exercise an influence that knocks the regulator off its original balance (e.g. large consumers; electorally-driven politicians)Regulatory and supervisory process based on close and continuous interaction between regulators and regulated firms required to” to stay abreast of rapidly changing financial markets, to monitor the build-up of risks, to understand the impact of their regulatory policies. Proximity opens the regulatory process to the risk of unduly favoring narrow industry interests at the expense of the publicIncentivesInformationIdeas (socialization)PROBLEM OF EMPIRICAL EVIDENCEProblem of Empirical Evidence: “analysts have often inferred capture from episodes in which regulators partially relyupon firms, from patterns of regulatory advantage granted to certain groups, or simply ‘on the basis of observations of undesired regulatory outcomes, even though those outcomes might be caused by a number of things besides capture such as ‘regulators’ incompetence, inefficiency, or randomness’ (Carpenter and Moss)
• #7: Money: More relevant in the US than in Europe; More relevant vis-à-vis politicians than regulatorsInformationlimited engagement of deposit holders, investors, consumers of financial services
• #8: (endency to aggregate figures regarding the participation of different financial interest groups and the money spent by these groups to lobby policymakers often masks the fact that the interests and demands of different financial groups frequently diverge)debates surrounding financial regulatory policies do not always present the sort of frontal and asymmetrical clash between competing producers’ and consumers’ interests described by some regulatory capture theorists
• #9: (endency to aggregate figures regarding the participation of different financial interest groups and the money spent by these groups to lobby policymakers often masks the fact that the interests and demands of different financial groups frequently diverge)debates surrounding financial regulatory policies do not always present the sort of frontal and asymmetrical clash between competing producers’ and consumers’ interests described by some regulatory capture theorists
• #10: While the delegation of regulatory functions to independent agencies has been an attempt to protect the regulatory process from short-term pressures of politically influential stakeholders, the institutional design of independent regulatory agencies may still tilt the playing field in favour of certain stakeholders.
• #11: While the delegation of regulatory functions to independent agencies has been an attempt to protect the regulatory process from short-term pressures of politically influential stakeholders, the institutional design of independent regulatory agencies may still tilt the playing field in favour of certain stakeholders. FUNDINGForinstance, while from 1939–2009 the number of SEC employees haslittle more than doubled, the number of shares trading hands each day in the US has increased more than twenty times.126 Also, therecent investigation in the UK into the failure of the Royal Bank of Scotland has raised concerns regarding the inadequacy of thefunding of regulatory agencies, as the task of supervising a bank with a presence in over 50 countries and employing 226,400 peoplewas fulfilled at the beginning of the crisis by a team comprising onlyfour-and-a-half membersINTELLECTUAL CAPTURE:Lord Turner talksed about Capture through the intellectural zeitgeistAccording to Kwak, thepotential for this sort of capture increases with the complexity of theproblem: ‘faced with uncertainty deciding between competingtheories of the world and the public interest, people are more likely to fall back on the signals communicated by identity, status, orrelationships’.
• #12: Finally, while the different faces of capture described above pertain to the interaction between regulators and the regulated firms, different commentators have broadened this analysis to account for the role of the politicians, governments and legislative bodies who define the responsibilities that independent regulatory agencies need to follow and grant them the resources and powers to perform these tasks. n particular, in those circumstances where an apparent trade-off exists between the mandate of regulatory agencies to bolster financial stability and the goal of promoting economic growth (such as in defining appropriate capital requirements for banking institutions), then political incumbents as well as a number of societal stakeholders are more likely to support financial industry groups in demanding a watering down of the regulatory measures introduced in the middle of the crisis.68
• #13: Carpenter and Moss: ‘all too often, observers of regulation are quicker to yelp about capture than to think hard about how it might be prevented or mitigated. Analyses stop at diagnosis without venturing to the matter of cure.’
• #14: Important to reduce the risks that regulators find themselves exposed to one-sided evidence from the regulated financial industry. Limit the risk of groupthink and intellectual capture Competition among groups is beneficialLower risk of intellectual capture and groupthinParticipatory mechanismspublic consultationsby themselves are unlikely to be sufficient to ensure that a plurality ofstakeholders will be capable of having their share of the input into theregulatory processa highlytechnical area such as financial regulation, the financial industrygroups with the greatest technical expertise continue to be bestpositioned to take advantage of these mechanismsTripartitisme.g. regulatory agencies granting access to the information available to them (e.g. internal data and analysis) in order to compensate the information advantage of industry insiders‘form of affirmative action’ on the part of regulators to strengthen thevoice of those real economy interests whose representation is morefragmentedTripartitism & Proxy AdvocatesGranting less-funded groups full access to the data and analyses of regulators and privileged position at the negotiating tableSubsiding the creation of “public interest” voices (e.g. creation of Finance Watch by the European Parliament)Creating directroutes for designated consumer groups to present complaints towhich regulators need to respond within a defined timeframeProxy Advocatescapacity of these bodies to truly represent consumerperspectives in the regulatory process is constrained by differentfactors such a limit to the resources allocated to such bodies, as wellas their location within the organizationPROBLEM OF THESE STRATEGIESWhile the strategies described above seek to mitigate capture byincreasing the capacity of consumers of financial services and othernon-financial parties to act as counterweights to the producers’interests, this strategy is less applicable to the case of those marketswhere the counterparties are not retail consumers but rather otherfinancial groups, such as in the case of wholesale markets.
• #15: Important to reduce the risks that regulators find themselves exposed to one-sided evidence from the regulated financial industry. Limit the risk of groupthink and intellectual capture Independence is a pre-requisite but not enoughMANDATEit is likely that ‘industry pressure anda focus on short-term economic concerns that are easily monitoredwill trump the long-term effects on the public that are harder toassess’.95Hiring Practices - Two competing views
• #16: Important to reduce the risks that regulators find themselves exposed to one-sided evidence from the regulated financial industry. Limit the risk of groupthink and intellectual capture Independence is a pre-requisite but not enoughMANDATEit is likely that ‘industry pressure anda focus on short-term economic concerns that are easily monitoredwill trump the long-term effects on the public that are harder toassess’.95Hiring Practices - Two competing views
• #17: Important to reduce the risks that regulators find themselves exposed to one-sided evidence from the regulated financial industry. Limit the risk of groupthink and intellectual captureSENTINEL-, Barth, Caprio, and Levine have called for the creation ofan independent institution called the “Sentinel” whose unique powerwould be to acquire information required to assess financialregulation and to provide an expert and independent assessment offinancial policies, thus allowing an informed debate Problems:Where do we finance these bodies?To Whatextent the highly political task of actually defining “public interest” ona given regulatory issue can be ‘entrusted to a group of disinterested“wise men”’.
• #18: Important to reduce the risks that regulators find themselves exposed to one-sided evidence from the regulated financial industry. Limit the risk of groupthink and intellectual captureSENTINEL-, Barth, Caprio, and Levine have called for the creation ofan independent institution called the “Sentinel” whose unique powerwould be to acquire information required to assess financialregulation and to provide an expert and independent assessment offinancial policies, thus allowing an informed debate Problems:Where do we finance these bodies?To Whatextent the highly political task of actually defining “public interest” ona given regulatory issue can be ‘entrusted to a group of disinterested“wise men”’.
• #19: Carpenter and Moss: ‘all too often, observers of regulation are quicker to yelp about capture than to think hard about how it might be prevented or mitigated. Analyses stop at diagnosis without venturing to the matter of cure.’