Towards a more effective regulatory r

Towards a More

Sustainable

Regulatory ProcessRegulatory 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



Financial System


3 Factors


Supply: Institutional

Design of Regulatory

Agencies



Financial System




3 Factors


Supply: Institutional

Design of Regulatory

Agencies

The Broader Political-Economic context



Financial System




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



Financial System


• 1999-2008:＄2.7 billion in reported federal lobbying expenses by fin. Industry

• $1.4 million spent daily during financial crisis

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%



Financial System


Demand Side:

Balance of Stakeholders

Balance of stakeholders

Heavy bias towards business

Since the crisis:

Greater diversity of

stakeholders

Greater diversity within the

business community

Rule-making vs.

implementation



Financial System


Supply Side: Institutional

Design of Reg. Agencies

Independence of Regulators

Mandate

UK FSA mandate included to “have

regard to” the competitiveness of the

financial services industry.



Financial System




SEC Staff Shares

traded in US

1939 1,700 260 mln

2001 2,900 2 bln.

2009 3,584 5.4 bln.



Financial System


Independence of Regulators

Mandate

Funding

226,400 employees - 4.5 UK FSA Staff



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

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



Financial System


Source: FT from ECB data

Cyclical Nature of Capture

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”



Financial System


the Bank of England as

“capital Taliban”

What can we do about it?

1. Promoting greater

balance and

diversity among

stakeholders



Financial System




balance and

diversity among

stakeholders

2. Reforming the

institutional design of

regulatory agencies



Financial System




balance and

diversity among

stakeholders

2. Reforming the

institutional design of

regulatory agencies

3. External checks and

balances



Financial System


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.



Financial System


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‟



Financial System


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



Financial System


Limits of existing checks

Board of Directors

Parliament

Media

3. External Checks & Balances



Financial System


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



Financial System


Towards a More Sustainable

Regulatory ProcessRegulatory Capture and Mitigating

Strategies

Thank you for your attention

Dr. Stefano Pagliari [email protected]

mailto:[email protected]

Towards a more effective regulatory r

Economy & Finance

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