Regulatory Capture and Mitigating Strategies (Stockholm)

Towards a More Sustainable Regulatory

Process Regulatory Capture and

Mitigating Strategies

Dr. Stefano Pagliari [email protected]

Seminar ‘Towards a Sustainable Financial System’Stockholm, 12-13 September 2013

mailto:[email protected]

“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



3 Factors


Supply: Institutional Design of Regulatory Agencies

Pro regulatio

n

Against regulatio

n

AFME

EACT

AIMA

Finance Watch

Allianz




3 Factors


Supply: Institutional Design of Regulatory Agencies

The Broader Political-Economic context

Pro regulatio

n

Against regulatio

n

AFME

EACT

AIMA

Finance Watch

Allianz




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



• 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%



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



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.




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.




Mandate

Funding

226,400 employees - 4.5 UK FSA Staff


Pro regulatio

n

Against regulatio

n

AFME

EACT

AIMA

Finance Watch

Allianz


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



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”



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




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




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



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



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



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



Limits of existing checks Board of Directors Parliament Media

3. External Checks & Balances Pro

regulation

Against regulatio

n

AFME

EACT

AIMA

Finance Watch

Allianz



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



Towards a More Sustainable Regulatory

Process Regulatory Capture and Mitigating

Strategies

Thank you for your attention

Dr. Stefano Pagliari [email protected]

mailto:[email protected]

Economy & Finance

Regulatory Capture and Mitigating Strategies (Stockholm)