| Abstract: |
Highlights
The financial crisis modified drastically and rapidly the European
financial systemâ??s political economy, with the emergence of two competing
narratives. First, government agencies are frequently described as being at
the mercy of the financial sector, routinely hijacking political, regulatory
and supervisory processes, a trend often referred to as â??captureâ??. But
alternatively, governments are portrayed as subverting markets and abusing the
financial system to their benefit, mainly to secure better financing
conditions and allocate credit to the economy on preferential terms, referred
to as â??financial repressionâ??.
We take a critical look at this debate in
the European context. First, we argue that the relationship between
governments and financial systems in Europe cannot be reduced to polar notions
of â??captureâ?? and â??repressionâ??, but that channels of pressure and
influence bet-ween governments and their financial systems have frequently run
both ways and fed from each other. Second, we put these issues into an
historical perspective and show that the current reconfiguration of Europeâ??s
national financial systems is influenced by history but is not a return to
past interventionist policies. We conclude by analysing the impact of the
reform of the European financial architecture and the design of a European
banking union on the configuration of national financial ecosystems.
1.
Introduction
In the long shadow of the euro-area crisis, the relationship
between governments and their banks has been brought to the the centre of the
policy debate in Europe by the implementation of regulatory reforms, the risks
associated with financial fragmentation, and the fight to sustain the flow of
credit to governments and corporates. The attempt to interpret the patterns of
pressure and influence running between governments and their financial system
has led commentators to rediscover and give new life to concepts originating
from academic debates of the 1970s such as â??regulatory captureâ?? and
â??financial repressionâ??. Government agencies have been frequently described
as being at the mercy of the financial sector, often allowing financial
interests to hijack political, regulatory and supervisory processes in order
to favouring their own private interests over the public good 1. An opposite
view has instead pointed the finger at governments, which have often been
portrayed as subverting markets and abusing the financial system to their
benefit, either in order to secure better financing conditions to overcome
their own financial difficulties, or with the objective of directing credit to
certain sectors of the economy, â??repressingâ?? the free functioning of
financial markets and potentially the private interests of some of its
participants 2.
But a closer look at the experience of European countries
suggests that both the notion of â??captureâ?? and â??repressionâ?? are too
narrow to describe the complex relationship between financial stakeholders and
their national governments. Instead, the history of European financial systems
reveals how governments, central banks, public sector banks and financial
institutions have historically been part of deeply interconnected European
financial ecosystems bound both by political and financial relations. Patterns
of pressures and influence within these financial ecosystems have always run
in both directions and have been mutually reinforcing.
As Andrew Shonfield
argued in 1965 in one of the first detailed analyses of the role of
governments and of the â??balance of public and private powerâ?? in western
capitalism after WWII, these different financial ecosystems in Europe varied
across countries because of different histories and institutions that framed
such relationships 3. These national differences have frequently been
presented as declining with time and in response to deeper financial
integration. The breakdown of the Bretton Woods system in the early 1970s, the
removal of restrictions to the circulation of capital within Europe following
the 1986 Single European Act, the creation of the single currency, and the
process initiated in 2001 by the European Commission with the Lamfalussy
Report to extend the single market to financial services have fostered a
greater integration of banking and financial activities across national
borders that have profoundly altered existing national ecosystems 4. The
response to the euro-area crisis seems to have further encouraged this trend,
and new institutional mechanisms, in particular the creation of a European
banking union, typically aims at Europeanising further banking supervision and
resolution thereby potentially reducing further the weight of national
historical and institutional idiosyncrasies.
However, claims suggesting the
end of national financial ecosystems in Europe are at best premature. This
paper discusses how national financial ecosystems in Europe continue in fact
to exercise a significant influence over financial policy-making and how the
transition towards a more integrated financial framework (ie banking union)
influences these relations. Our conjecture is that the rapid reversal of
financial integration and a re-domestication of financial flows and financial
risks triggered by the crisis 5 have built on practices, ties and institutions
that have deep historical roots. Meanwhile, the European policy response,
which intended to repair financial fragmentation and recreate a more
integrated financial sector has attempted to Europeanise the regulation,
supervision, resolution of the financial sector thereby trying to break
historical ties within national financial ecosystems. It is therefore
important to take a critical look at these opposite movements and they way
they affect not only the efficacy of capital allocation and credit
intermediation at the national level, but also the policy-making process at
the European level.
2. Banks and governments: Competing narratives across the
Atlantic
Attitudes towards the relationship between governments and national
financial institutions have historically varied significantly across the
United States and Europe. Suspicions over the involvement of politically
powerful banks in the political system have been an integral part of the US
political debate. These can be traced as far back as the controversy between
Alexander Hamilton and Thomas Jefferson about the establishment of the First
Bank of the United States in 1791 6. More recently, many commentators seeking
to explain the regulatory failures at the origin of the financial crisis have
repeatedly pointed the finger towards the political clout of financial
lobbies. The Report by the Financial Crisis Inquiry Commission established by
the US Congress to investigate the roots of the crisis found that: â??the
financial industry itself played a key role in weakening regulatory
constraints on institutions, markets, and productsâ??. The Commission
explained this influence by making reference to the $2.7 billion in federal
lobbying expenses and $1 billion in campaign contributions spent by the
financial sector between 1999 and 2008 7. Others have highlighted how the role
of the preferential access allowed by the â??revolving doorsâ?? between Wall
Street and US regulatory agencies 8.
The perception of financial industry
groups capable to often act as rule-makers has brought a number of
commentators to analyse the relationship between US financial firms and the
political system through the lenses of â??regulatory captureâ??. The origins
of the term are usually attributed to the work of George Stigler in the early
1970s but this concept has been brought to the fore by Simon Johnson, former
IMF chief economist, and other commentators during the recent financial crisis
9.
This description of the financial industry as systematically
â??capturingâ?? the design and implementation financial regulatory reforms has
however resonated more broadly in the US than across the Atlantic. This is in
part the result of the fact that the focus of most US-centric analyses on
financial resources, campaign contributions and revolving doors as means
through which the financial industry is capable to routinely â??buyâ??
regulatory policies does not sit comfortably with the experience of most
European countries, where political party financing and electoral rules limit
the importance of financial resources in buying political support, while
bureaucrats in financial regulatory agencies and central banks are more likely
to spend most of their career in the public sector.
Campaign contributions
and revolving doors are not the only channels through which the interest
groups are capable to capture the policy-making process. On the contrary,
while theories of regulatory capture developed from the US experience have
focused on the resources that different financial groups are capable of
deploying in the lobbying of the US Congress or federal regulatory
authorities, the European experience is illustrative of the wider and often
less visible channels through financial which banks often influence the design
of financial policies. A number of structural characteristics of different
financial ecosystems in Europe have bolstered the influence of European banks
over the design of financial policies. These include for instance the formal
and informal links between the political system and the banking system. For
instance, German public saving banks (Sparkassen and Landesbanken) that held
some 33 percent of the assets of the German Banking sector in 2009 remain
owned and controlled by regional governments 10, which naturally create a
peculiar relationship. In Italy, state-owned banks have been privatised over
the last few decades, but many of these institutions remain still today under
the influence or control of foundations (â??fondazioni bancarieâ??) that
maintain close ties with the political system and in some cases are directly
appointed by political parties 11. In Spain, small and medium size Cajas
remained partly owned by the public and largely under the influence and
control of regional officials and religious leaders, thus weakening the hand
of the central government in supervising and regulating them and favouring
undue forbearance by the central authorities. These formal ties are frequently
reinforced by informal ties, such as the social networks embedded in the
French Grandes écoles where future civil servants, politicians and bankers are
trained together and come to form networks of influence organises around the
Grands Corps 12. These formal and informal ties between the political system
and the banking system make banks particularly receptive to political guidance
at the local, state and federal level but also allow these institutions to
exercise a significant influence over the regulatory process through their
political connections.
Another characteristics of the European financial
systems that is often ignored by US-centric analysis of regulatory capture is
the greater reliance of European countries on bank credit for financing the
real economy as well as sovereign debt. This structural feature of European
financial systems, gives to banks rather than other financial intermediaries a
particular importance and creates channels through which national financial
institutions are likely to gain leverage over policy makers. As Cornelia Woll
argues, â??decision-makers will act in favour of the industry because they
need finance for funding the so-called real economy, for funding the
government and as a motor for growthâ?? 13. These kinds of relations also
explain why even without strong pressures by the financial industry,
governments feel compelled to consider that the interest of the financial
sector are aligned with those of the economy and the country as a whole. For
example, Sir Howard Davies, the first Chair of the UK Financial Services
Authority explained how during the pre crisis period â??on the whole, banks
[in the UK] did not have to lobby politicians, largely because politicians
argued the case for them without obvious inducementâ?? 14.
Indeed, some of
the same dynamics have been fully in display during the response to the global
financial crisis when concerns about the potential impact of regulation on
banks balance sheets and possible consequences on the extension of credit to
the economy have brought politicians in a number of European countries to
support the demands from their financial industry to water down these
regulatory measures. The greater success of European banking lobbies in having
their demands met during the implementation of Basel III at the European level
has clearly been influenced by the link with the real economy that the
financial industry was able to establish 15. Indeed, financial industry
lobbies seem to have achieved concessions conditional on their capacity to
highlight the impact of different pieces of regulation over their capacity to
provide credit to the broader economy 16. At the same time, the watering down
of key regulatory requirements has been accompanied by repeated calls from
European politicians towards banks which were asked to commit to increase
credit to the domestic economy.
Overall, the experience of recent banking
regulatory reforms in Europe are indicative not only of the fact that the
significant political influence of banks is not uniquely a US phenomena. On
the contrary, the influence of European banks over the design of financial
policies frequently arises from a number of structural characteristics of the
different financial ecosystems in which they find themselves operating. But
shifting the focus from the direct lobbying of financial institutions towards
the characteristics of different financial ecosystems in Europe also reveals a
further corrective to notion of â??captureâ?? that has frequently been used to
interpret the relationship between banks and government agencies. While many
US-centric have focused on the influence of financial actors and other
interest groups over the state, channels of pressure and influence between
European governments and their banking system within distinct European
financial ecosystems have frequently been presented as running both ways and
feeding from each other. These reciprocal channels of influence between
European governments and their banking systems will be explored in the next
section by looking at modern European history.
3. Historical perspectives on
financial ecosystems
Examples of this symbiotic relationship between European
governments and their financial system abound throughout modern European
history. European governments have indeed frequently used banks to expand and
broaden their reach over the economy either domestically or internationally.
The creation of Deutsche Bank in 1870 in the context of the formation of the
German Empire and the need to challenge the leadership of British banks in the
global markets, as well as the creation of public credit institutions in Italy
and France to support national financial development or postwar
reconstructions are only some of the many examples throughout modern European
history of the way through which financial nationalism and The promotion of
â??national banking championsâ?? was also often intended to allow competition
with European neighbours and the projection of power internationally to
accompany the internationalisation of domestic firms 17.
The involvement of
the State in financial developments in the nineteenth century went beyond the
promotion of international champions. During this period, financial
liberalisation went hand in hand with the promotion of national credit and
state intervention. Governments were indeed keen on rescuing banks in order to
save bankers interests as well as the financing of the economy, and personal
connections between politicians and bankers were crucial to this process 18.
Central banks â?? which were still at the time institutions with private
shareholders granted with a monopoly on the right to issue â?? were perfect
examples of these connections between governments and financial capitalism
that developed throughout the nineteenth century. European governments or
monarchs also exerted controls on some large credit institutions that were
crucial for the financing needs and debt repayments of local authorities, as
the Caisse des Dépôts and Crédit Foncier in France and the Cassa Depositi e
Prestiti in Italy.
For a long period, the collusion between State and banks
went hand in hand with significant government interference in the activities
of financial firms in order to channel and allocate credit in a
non-competitive way. But the controls of the State over financial systems
strongly increased after the Great Crash throughout the 1930s in democratic
and dictatorships alike, and were reinforced after the second world war with
bank nationalisations and the increasing role given to public credit
institutions.
Also in the years following the end of the second world war,
western European governments continued to strategically directs their domestic
banking system towards the achievement of specific public policy objectives.
The term â??financial repressionâ?? â?? coined in the early 1970s to describe
developing economies in Asia and Latin America 19 â?? has been used
retrospectively to indicate a wide range of targeted prudential controls and
requirements such as capital controls, reserve requirements, capital
requirements, and various taxes and levies to favour â?? directly or
indirectly â?? the holding of government debt. In addition, over the same
period, interventionist credit policies were developed to influence the
allocation of credit through price or quantity rules so as to offer a
competitive advantage to certain economic sectors. A key feature of these
interactions during this period was to force financial institutions to extend
credit that would otherwise have to be funded by government deficits
expenditures 20. This alternative financing of state intervention contained
public debt while introducing political pressures and "distortions" of
competition in the financial sector. Banks were sometimes requested to hold a
certain amount of government bonds and of claims on certain sectors as a
percentage of their total asset. The same outcomes could also be pursued
indirectly by central banks in their design of monetary policy operations
(reserve requirements, credit ceilings, liquidity ratios) and through
collateral policy facilitating banks access to the discount window for certain
categories of claims. The intervention of governments in the working of their
respective domestic markets also frequently occurred through the development
of public credit institutions as substitutes to banks and through the direct
investment of Western European governments in some specific sectors (housing,
agriculture, industry etc) and support industrial policies or resort to the
development of state-owned credit institutions or public banks as substitutes
to banks.
All in all, these policies were used â?? at different degrees
across countriesâ?? to control risk in the banking sector, to support
industrial policy, facilitate government-financing needs and control
inflationary risks 21.
These tools also shared a strong national bias; most
savings, investments, government financing came from domestic sources and
financial regulation aimed to mitigate risks and influence the allocation of
credit at the national level. As a consequence, the political economy of these
systems relied on connections and coordination 22 at the national level
between government agencies, public and private lending institutions and
industries. Employees circulated easily and frequently between public
administrations and nationalised firms or banks. In the name of the public
interest, industries negotiated with governments in order to receive
subsidies, to be given priority, and sometimes to be rescued 23.
It is only
in the late 1970s and 1980s, that these symbiotic relations between Western
European governments and their national banking systems approach were
challenged by profound intellectual changes about the merits of financial
liberalisation and independent central banking and that the negative effects
of governments interventions (unproductive rents, crowding out, over-saving by
state owned institutions) became more central to economic thinking and
policymaking. As a result, the recourse to these interventions and instruments
gradually but rapidly vanished. Countries â?? prominently Franceâ??
experienced a radical liberalisation in the mid 1980s and all converged
towards and open financial system with a mature money market in the early
1990s.
As a result of this new settlement, financial ecosystems were
organically but deeply redesigned, and as a result, financial and political
relationships were recomposed. The expansion and deepening of cross border
capital flows supported further financial market openness, independence of
central banks and disengagement from the public sector 24.
In sum, while
distinct financial ecosystems characterised by symbiotic relationship and
reciprocal patterns of influence between governments and their banking
industry have exercised a significant influence in the past, these differences
have frequently been presented as in decline at the turn of the century. The
question remains whether the current crisis has interrupted this decline and
reinvigorated past behaviours and historical relationships?
4. The European
crisis and the recomposition of national ecosystems
The abrupt interruption
in cross border capital movement has triggered a clear renationalisation of
finance over the last three years and has profoundly modified relations
between national financial systems and governments in Europe 25. The vast and
ubiquitous use of government expenditures and guarantees to support the
financial system 26 has been followed by widespread calls for tighter
regulation and supervision of the financial sector as a whole and of the
banking sector in particular. In addition, in many instances, the crisis has
unsettled governments' access to financial markets and increased their
borrowing cost. The economic downturn has in turn woken up a certain desire
and a need to address credit shortages and intervene more forcefully in the
financial system to improve and augment the extension of credit and facilitate
the recovery. However, if governments in Europe have not resorted completely
and openly to the policies and instruments that had characterised the Bretton
Woods era, a number of developments could indicate a redefinition of the
relations between the public and the financial sector along the lines of
pre-existing historical relations and behaviours.
The most common and clearly
identified aspect of these changing landscapes is the extent to which holdings
of public debt have been on balance re-nationalised. Debt sustainability
concerns, uncertainty about the integrity of the European monetary union and
the reluctance of the central bank to address risks of multiple equilibria in
sovereign debt markets in the euro area 27 have all contributed to put
sovereign debt markets under strain and forced governments to rely on national
savings and national financial institutions to finance their expenditures.
Despite these developments, the current re-domestication of government debt
holding does not appear to be an unseen phenomenon, nor a direct return to the
pre-EMU situation. Among countries of the euro area, only Spain has today a
level of sovereign debt held by residents (including central banks and
financial corporations) higher than before it joined the euro.
The huge
exposure of government towards their banking system is therefore not a
phenomenon that was born during the crisis but is a well-established feature
of European economies since the 1980s. Nevertheless, what is true on average
is not necessarily true on an individual basis. Ireland and Portugal for
instance, have experienced a dramatic increase in this ratio from 2006 to 2011
while in Germany, Belgium and France, on the contrary, the financial crisis
has not stopped a downward trend in the domestic holding of government debt.
These trends are characterised by a strong path dependency, which supports the
argument that historical trends are still important for the structure of bank
holdings.
A second aspect of these changing landscapes is the evolution in
the centrality of central banks in the European national financial ecosystems.
This role had significantly been curtailed after the demise of Bretton
Woodswith the creation of the Eurosystem, the centralisation of key central
prerogatives within the ECB and the emergence of principle of central bank
independence. However, during the current crisis, with growing financial
fragmentation, impaired transmission mechanisms, the European Central Bank was
forced to take a more active role to repair transmission channels and it
contributed to increase the holding of government bonds held by central banks
of the Eurosystem. This modification of its collateral framework also allowed
National Central Banks to exert some discretion in the types of claims they
could accept as collateral which may have increased the national bias in the
refinancing of credit claims 28.
These dynamics have provoked a vivid
reaction denouncing both financial repression and â??fiscal dominanceâ?? 29 of
central banks but these criticisms seem to ignore the fact that the most
striking feature of European national central banksâ?? balance sheet expansion
is not the result of greater accumulation of public debt but rather of an
historically unprecedented increase in central bank credit to the private
economy. Central bank balance sheet usually increased during wars and
recessions mostly to ease government financing. After 1945, some central banks
became more involved in directed credit and used their balance sheet to
finance long-term investment and influence the allocation of credit through
re-discount privileges and choices. However, even in the central banks that
used these techniques extensively such as France, the ratio of central
bankâ??s claim on the domestic banking sector never really exceeded 8-10
percent of GDP. In the euro area, it has now reached more than 30 percent of
GDP. This contrasts starkly with the UK and the US where the Bank of England
and the Fed assets purchase were largely government and quasi-government
liabilities 30.
Arguably, a large part of these claims, are in reality claims
on the financial sector caused by the extension of large amounts of liquidity
to the banking sector. Indeed, never in history did central banks support an
entire financial system to this extent. While the UK stands out here as having
provided relatively little liquidity support to its banking sector beyond
purchase of government bonds, the ECB, on the contrary, has accumulated claims
to the banking sector by a record amount. In 2011, central bank claims on the
banking sector in the euro area was 30 percent of GDP, ranging from 0.1
percent for the Bank of Finland to 68.7 percent for the Bank of Ireland.
Interestingly, those central banks that have the least government debt, tend
to have the most claims on the private sector thereby potentially revealing
important differences in the structures of national ecosystems.
The
intervention of central banks in the financial sector has further been
increased by the acknowledgement that macro-prudential regulation is a
necessary complement to modern central banking. The new macroprudential
mandate acquired granted during the crisis to central banks is in part a
return to the theory and practice of central banking 30 years ago in Europe
(even though the term â??macroprudentialâ?? was coined recently) when central
bankers thought their role extended well beyond the narrow remit of monetary
policy.
A third significant evolution in the relationship between governments
and the financial system that has in part turned the clock back can be found
in the return of â??public credit institutionsâ?? (also known as
â??development banksâ??). These state-owned lenders in France, Germany, Italy
and Spain, respectively the Caisse des dépôts et consignations (CDC), the
Kreditanstalt für Wiederaufbau (KfW), the Cassa depositi e prestiti (CDP) and
the Instituto de Crédito Oficial (ICO) have considerably increased their scope
as of recently. The CDC and CDP are old state owned institutions (created
respectively in 1816 and 1863) that played an important historical role in the
economic development of France and Italy. The KfW was created in 1948 to
support the reconstruction of the German economy while the Spanish ICO is more
recent (1971). Their role in the economy has increased greatly and rapidly
during the financial crisis.While total assets of the credit institutions of
the Euro Area increased by only 4 percent from 2008 to 2012, assets of public
credit institutions increased by at least 30 percent and even 128 percent for
the ICO. These institutions have also, together with the European Investment
Bank, which has also expanded its lending activities quite substantially by 56
percent over the same period (2008-2012), collectively created the
â??long-term investorsâ?? club to promote their role in the economy as a
provider of long term financing 31.
The detailed balance sheets of these
institutions show that they have performed various functions over time with
different emphasis in each country. The Cassa de Depositi e Prestiti for
example has expanded its credits to the public sector tremendously, extending
some â?¬85bn worth of loans to public (mainly local) entities and purchasing
some â?¬90bn in Italian government bonds and bills. In France, the CDC has
repositioned its portfolios away from European peripheral countriesâ?? debt
into French sovereign debt where the exposure almost doubled. The CNP
insurances company, which is the 6th European insurance company in assets size
and which is owned by the CDC, has also accomplished a similar portfolio
rebalancing towards domestic debt.
Meanwhile, in Germany, KfW played a quite
different role by first being largely used to provide capital, loans and
guarantees to the financial sector 32 during the first wave of the crisis in
particular in the case of IKB. It also expanded its financing to local SME and
infrastructure in Germany and abroad. Indeed, the KfW played an important role
in German financial aid to other European countries as in Greece with some
â?¬22bn of outstanding credits at the end of 2011, Italy with some â?¬1.7bn,
Ireland with â?¬1.4bn, Spain with â?¬3.2bn. These institutions are therefore
not only important to understand the political economy of national eco-systems
but also of new financial relationships between European nations during the
crisis. Indeed, in Spain for instance, KfW lends to Spanish SMEs through the
ICO. It is also interesting to observe that the countries that did not have an
important â??development bankâ?? (such as Portugal and Greece) are now in the
process of creating one 33.
In essence, the existence of these institutions
has allowed reactivating practices and mechanisms of intrusion in the
intermediation system that were an essential part of the financial ecosystem
over the last century. Their role is probably even reinforced in European
countries today by the fact that national central banks and governments cannot
provide direct public support or target specific sectors via subsidised loans
as they used to do in the immediate post war period. In many countries (but
not in all) national credit institutions never really disappeared, they just
blended in. The CDCâ??s total assets for instance represent 15 percent of GDP
in 2012 when it was equal to 17 percent of GDP in 1970. Governments for the
most part therefore never really disbanded the institutions they had built of
the last century and they proved relatively easy to awaken and mobilise as the
crisis hit.
Contrary to Carmen Reinhartâ??s argument, it is misleading to
these developments as a mere â??return of financial repressionâ?? 34. The
intervention of European states in their financial system have not intended to
become substitute for fiscal or industrial policy and thus differ drastically
from historical quantitative tools used by central banks thirty years ago.
Nonetheless, it is clear that the greater re-nationalisation in the holding of
public debt by domestic financial institution, the unprecedented increase in
central bank credit to the private economy, and the return of public credit
institutions are three developments since the financial crisis that have
reaffirmed the centrality of distinct European financial ecosystems after two
decades in which these ties had been eroded by financial liberalisation and
the process of European monetary integration.
5. European financial
ecosystems and the move towards a banking union
The previous section has
discussed how the changes in the patterns of financial intermediation and
sovereign debt holding emerged in response to the crisis, but the implications
of these trends extends well beyond economics and deep into the political
arena and the debate concerning the reform in the European financial
architecture.
The long and troubled history of the construction of an
integrated market for financial services in Europe has often been described as
a â??battle of the systemsâ?? across different European countries, in
particular between systems such as Britain where capital markets played a key
role as the main source of financing and the continent where banks dominated
the provision of credit 35. But on the continent itself, national practices
and structures also differ greatly and are somewhat embedded in the domestic
institutions and possibly in different varieties of capitalism 36.
The
realisation of an integrated financial market encouraged first by the Banking
Directive in 1977, the Single European act in 1986 and the Lamfalussy Report
in 2001 had partially redesigned the fault lines in European financial
policies. The traditional conflicts across different countries reflecting the
preferences of their national champions was complemented by the emergence of
coalitions of large pan-European groups with a strong interest in removing
obstacles to the emergence of an integrated financial market for financial
services in Europe, often pitted against firms with a more local or national
outlook threatened by this trend.
The dynamics triggered by the financial
crisis have reinforced the channels of pressure and influence between European
governments and their banking systems. The greater nationalisation of
financial intermediation as well as the wave of re-regulation revive strong
national preferences and tensions in the design of financial policies. Debates
surrounding the design and implementation of Basel III for example, have
instead witnessed the re-emergence of traditional national cleavages, with
different European regulatory authorities frequently running in support of
their banking industry at the negotiating table. The violent realisation that
the monetary union did imply lesser avenues for economic adjustment in
response to shocks has certainly strengthened the reluctance of national
governments to deprive themselves of policy levers to influence credit
intermediation. On the other hand, the financial sector seems to have been
able to use this dependency in order to extract concessions from national
regulatory authorities that would serve its own interests. The influence of
financial industry groups over the position of their respective governments
has not been confined to countries with large financial sectors, but it has
been pervasive also in countries where the financial industry occupies a
smaller position in the economy 37.
The path towards a banking union â?? a
single supervisory mechanism applying a single rulebook and eventually a
single resolution mechanism â?? is therefore particularly important in this
respect. If successful, it should precipitate a profound redefinition of
national financial ecosystems in Europe and have broader consequences on the
underlying structure of financial intermediation in Europe. This may not be
completely compatible with sustaining national preferences as far as the
organisation of the financial system is concerned. But it could also reduce
the ability of member states to use their financial system to play a
cushioning role in the event of economic downturns. This could imply a further
reduction in the ability of member state to stabilise their economies and
entail much more radical changes in the structures of national capitalisms.
The tensions existing between these changes and the historical ties between
different governments and their banking systems explain the opposition of
domestic financial interests and some national governments have been source of
resistance on the way for the establishment of a banking union. The resilience
of history within national financial ecosystems and the symbiotic
relationships remaining between western European governments and their
national banking systems are a key factor shaping the path towards the
Europeanisation in the regulation, supervision, resolution of the financial
sector that the banking union entails. Will the union break national ties,
create a new balance of public and private power at the European level or, on
the contrary reinforce domestic specificities and relationships such that a
dual system might emerge with two separate levels of activities and political
economies (national and European)? There is a wide research agenda ahead as
very little has been written up to now on the potential consequences of the
banking union for the political economy of national financial ecosystems. The
debate has not even fully started and insights from economics, history and
political sciences are more than needed at this stage.
6. Conclusion
Despite
their renewed popularity among economists and policymakers since 2008, neither
the notions of â??captureâ?? nor â??financial repressionâ?? appear sufficient
to fully understand todayâ??s European dynamic and complex patterns that
characterise the relationship between governments and their financial
industries at the national and increasingly at the European level.
These seem
to be evolving profoundly in two directions. First an apparent rapid reduction
of banksâ?? balance sheets that will probably increase the role of non-banks
in the provision of credit and thereby certainly affect profoundly the ties
between banks and government insofar as they influence the extension and
allocation and credit to the economy. Second, and maybe more importantly, the
ongoing process of Europeanisation of financial policy is likely to have
profound ramifications for both financial ecosystems themselves and for the
relationships that governments and financial institutions develop. In
particular, it could be expected that relationships that were so far developed
within the confines of national borders would be gradually transferred over
the to the European level via the process of the banking union, thereby
side-lining or at least minimising the importance of national governments.
However, developments in the last few years very much question this notion as
it appears clearly that the financial crisis has actually awakened
institutions, practices and relations that have strengthened the ties between
governments and their respective financial ecosystems. Starting from the
breadth and scope of financial support 38, to the reactivation of certain
supervisory and even monetary practices, the ties between national governments
and the banking system has been in many ways reactivated in a way that tends
to blur the rigid categories of capture and repression. As a result, a more
nuanced prism is needed, focusing on agency that national specificities will
be able to develop within European contexts as well as on the non-trivial
equilibria between public and private interests. The political science
literature, which has highlighted the existence and persistence of
â??varieties of capitalismâ?? in Europe and the resilience of national
ecosystems, will be particularly helpful in this respect. This strand of work
should also help us to introduce the perspective brought by the political
economy literature in the debates about the European monetary union over and
above the importance of the need for a banking union as a necessary
stabilising feature of the single currency.
***
1 Baxter has defined capture
as occurring â??whenever a particular sector of the industry, subject to the
regulatory regime, has acquired persistent influence disproportionate to the
balance of interests envisaged when the regulatory system was establishedâ??.
Lawrence G. Baxter (2011) 'Capture in Financial Regulation: Can We Redirect It
Toward the Common Good?' Cornell Journal of Law & Public Policy 175-200. The
origins of the concept: see George J. Stigler (1971) 'The Theory of Economic
Regulation', The Bell Journal of Economics and Management Science, Vol. 2, No.
1. See also Dal Bó, Ernesto (2006) 'Regulatory Capture: A Review', Oxford
Review of Economic Policy, 22(2), 203â??225. For a recent discussion of the
problem of capture in the context of the financial crisis see Carpenter,
Daniel and David A. Moss (eds) (2013) Preventing Regulatory Capture: Special
Interest Influence and How to Limit it, Cambridge University Press; Johnson,
Simon (2009) 'The Quiet Coup', Atlantic Monthly, May; and Daron Acemoglu and
Simon Johnson (2012) â??Captured Europeâ??, Project Syndicate, May.
2
Reinhart, Carmen. M. (2012) 'The return of financial repression', Financial
Stability Review, 16, 37-48; Kirkegaard, Jacob F. and Carmen M Reinhart (2012)
'Financial repression, then and now', VoxEU.org, May; Allianz Global Investors
(2013) Financial Repression. It Is Happening Already.
3 Andrew Schonfield
(1965) Modern capitalism: The changing balance of public and private power,
Oxford University Press. A subsequent literature in political sciences has
coined the term i>â??varieties of capitalismâ?? to study these differences and
their institutional roots: Colin Crouch and Wolfgang Streeck (eds) (1997) The
Political Economy of Modern Capitalism: Mapping Convergence and Diversity,
London: Sage; Peter A. Hall, David Soskice (eds) (2001) Varieties of
Capitalism. The Institutional Foundations of Comparative Advantage, Oxford
University Press.
4 ;De Larosière Jacques (2009) Report on financial
supervision to the European Commission; Mügge, Daniel (2006) 'Reordering the
Marketplace: Competition Politics in European Finance', Journal of Common
Market Studies, 44(5), 991â?? 1022.
5 For the literature on financial
retrenchment globally see for example Lund, Susan et al (2013) Financial
globalization: retreat or reset'McKinsey, available at Milesi-Ferretti, Gian
Maria and Cedric Tille (2011) 'The Great Retrenchment: International Capital
Flows during the Global Financial Crisis', Economic Policy vol. 26(4), pp.
285-342. Re-nationalisation of financial intermediation and financial policy
has emerged as a response to the contradiction between international market
integration and spatially limited political mandates, as highlighted in the
political science literature: Pontusson, J. and Raess, D. (2012) 'How (and
Why) Is This Time Different? The Politics of Economic Crisis in Western Europe
and the United States', Annual Review of Political Science, 15, 13-33; Clift,
B. and Woll, C. (2012) 'Economic patriotism: reinventing control over open
markets', Journal of European Public Policy, 19(3), 307-323; Schmidt, V. A.
and Thatcher, M. (eds) (2013) Resilient liberalism in Europe's political
economy, Cambridge University Press.
6 Goldstein, Morris and Veron, Nicolas
(2011) 'Too Big to Fail: The Transatlantic Debate', Working Paper No. 11-2,
Peterson Institute for International Economics; Johnson, Simon and Kwak, James
(2011) 13 bankers: the Wall Street takeover and the next financial meltdown,
Vintage.
7 FCIC (2011) The Financial Crisis Inquiry Report. Final Report of
the National Commission on the Causes of the Financial and Economic Crisis in
the United States. Washington, DC: The Financial Crisis Inquiry Commission.
See also Johnson, Simon (2009) 'The Quiet Coup', Atlantic Monthly, May.
8 US
GAO (2011) 'Securities and Exchange Commission. Existing Post-Employment
Controls Could be Further Strengthened', Government Accountability Office,
GAO-11-654 Report, Washington DC.
9 Stigler (1971). See footnote 1.
10 The
Landesbanken are themselves partly owned by regional confederations of
Sparkassen (saving banks) and respective federal states. See also Grossman
Emiliano (2006) 'Europeanisation as an interactive process: German public
banks meet EU competition policy', Journal of Common Market Studies, vol. 44,
n°2, p. 325-347.
11 Giani, Leonardo (2008) â??Ownership and Control of
Italian Banks: A Short Inquiry into the Roots of the Current Context',
Corporate Ownership & Control, Vol. 6, No. 1, pp. 87-98.
12 On the role of
these networks for banking reforms, see Butzbach Olivier, Grossman Emiliano
(2004) 'La réforme de la politique bancaire en France et en Italie : le rôle
ambigu de lâ??instrumentation de lâ??action publique', in Lâ??instrumentation
de lâ??action publique (sous la dir. de Pierre Lascoumes et Patrick Le Galès),
Presses de Sciences Po, Paris, pp. 301-330. More general references are
Swartz, David (1985) 'French Interlocking Directorships: Financial and
Industrial Groups', in Stokman, Ziegler and Scott (eds) Networks of Corporate
Powers: A Comparative Analysis of Ten Countries; Kadushin, Charles (1995)
'Friendship Among the French Financial Elite', American Sociological Review,
Vol 60, N_2, pp 202-221. For a quantitative approach highlighting the role of
networks of former high ranking civil servants in shaping board composition of
banks and other corporations, see Kramarz, Francis and Thesmar, David (2013)
'Social networks in the boardroom', Journal of the European Economic
Association, 11:780â??807.
13 Woll, Cornelia (2013) 'The power of banks',
Speri, University of Sheffield, July.
14 Davies, Howard (2010) 'Comments on
Ross Levineâ??s paper â??The governance of financial regulation: reform
lessons from the recent crisisâ??', Bank for International Settlements; see
also The Warwick Commission on International Financial Reform (2009) In Praise
of Unlevel Playing Fields, University of Warwick.
15 Howarth, David and
Quaglia, Lucia (2013) 'Banking on Stability: The Political Economy of New
Capital Requirements in the European Union', Journal of European Integration
(May), 37â??41.
16 Pagliari, Stefano and Young, Kevin L. (2014) 'Leveraged
interests: Financial industry power and the role of private sector
coalitions', Review of International Political Economy, 21(3), 575â??610.
17
Morris and Veron (2011), see footnote 6. Gerschenkron, A. (1962) Economic
backwardness in historical perspective. Economic backwardness in historical
perspective, Harvard University Press.
18 Hautcoeur, Pierre Cyrille, Riva
Angelo, and White Eugene N. (2013) 'Can Moral Hazard Be Avoided? The Banque de
France and the Crisis of 1889', paper presented at the 82nd Meeting of the
Carnegie-Rochester-NYU Conference on Public Policy; Caroline Fohlin (2012)
Mobilizing Money: How the Worldâ??s Richest Nations Financed Industrial
Growth, New York: Cambridge University Press.
19 McKinnon, Ronald (1973)
Money and capital in economic development, Brookings Institution Press.
20
Hodgman Battilossi, Stefano (2005) 'The Second Reversal: The ebb and flow of
financial repression in Western Europe, 1960-91', Open Access publications
from Universidad Carlos III de Madrid; Monnet, Eric (2014) 'The diversity in
national monetary and credit policies in Western Europe under Bretton Woods',
in Central banks and the nation states, O.Feiertag and M.Margairaz (eds),
Paris, Sciences Po, forthcoming; Monnet, Eric (2013) 'Financing a planned
economy, institutions and credit allocation in the French golden age of growth
(1954-1974)', BEHL Working Paper n°2, University of Berkeley; Hodgman, Donald
(1973) 'Credit controls in Western Europe: An evaluative review', Credit
Allocation Techniques and Monetary Policy, The Federal Reserve Bank of
Boston.21 Monnet Eric (2012) 'Monetary policy without interest rates. Evidence
from Franceâ??s Golden Age (1948-1973) using a narrative approach', Working
Papers 0032, European Historical Economics Society (EHES).
22 Eichengreen,
Barry (2008) The European economy since 1945: coordinated capitalism and
beyond, Princeton University Press.
23 Pontusson & Raess (2012) 'How (and
Why) Is This Time Different? The Politics of Economic Crisis in Western Europe
and the United States', Annual Review of Political Science, vol. 15, pp.
13-33; Zysman, John (1983) Governments, markets, and growth: financial systems
and the politics of industrial change, Cornell University Press. The academic
literature that builds on the â??varieties of capitalismâ?? has studied
extensively how these national characteristics and â??institutional
complementaritiesâ?? were shaped and reinforced by the role of the state, then
shaping these various forms of â??capitalismâ??. Schonfield, A. (1965) Modern
Capitalism: The Changing Balance of Public and Private Power, Oxford
University Press. Peter Katzenstein (1985) Small States in World Markets,
Ithaca, Cornell University Press; Peter Hall, David Soskice (eds) (2001)
Varieties of Capitalism, Oxford University Press.
24 Mügge, Daniel (2006)
'Reordering the Marketplace: Competition Politics in European Finance',
Journal of Common Market Studies, 44(5), 991â??1022.
25 Carmen Reinhart
(2012) 'The return of financial repression', CEPR, DP8947; Sapir, André, and
Wolff, Guntram (2013) 'The neglected side of banking union: reshaping
Europeâ??s financial system', Policy Contribution, Bruegel; Goodhart, Charles
(2013) 'Lessons for monetary policy from the Euro-area crisis', Journal of
Macroeconomics.
26 Stolz, S. M., and Wedow, M. (2010) 'Extraordinary measures
in extraordinary times: Public measures in support of the financial sector in
the EU and the United States', Occasional Paper 117, European Central Bank.
27 De Grauwe, Paul (2011) 'The European Central Bank: Lender of last resort in
the government bond markets?' CESifo working paper: Monetary Policy and
International Finance (No. 3569). De Grauwe, Paul, and Ji, Yuemei (2012)
'Mispricing of sovereign risk and multiple equilibria in the Eurozone', Centre
for European Policy Working Paper 361.
28 Merler, Silvia, and Pisani-Ferry,
Jean (2011) 'Hazardous tango: sovereign-bank interdependence and financial
stability in the euro area', Financial Stability Review, (16), 201-210.
29 In
a 25 November 2013 speech, J. Weidmann said that â??Monetary policy runs the
risk of becoming subject to financial and fiscal dominanceâ??.
30 For
example, speech by David Miles from the BoE: 'Government debt and
unconventional monetary policy', at the 28th NABE Economic Policy Conference,
Virginia, 26 March 2012.
31 The long-term investors club: See also green
paper by the European Commission on long-term finance.
32 Between the end of
2007 and February 2008, IKB had to go through several rounds of financial
support in which banks and the KfW agreed to two more bailout packages, which
ended up increasing KfWâ??s participation in IKB from 38 percent to 90.8
percent. For more details see Cornelia Woll (2014) The Power of Collective
Inaction: Bank Bailouts in Comparison, Ithaca, Cornell University Press.
33
'Germany to help Spain with cheap loans', EUObserver, 28 May 2013,
http://euobserver.com/economic/120278.
34 Reinhart, C. M. (2012) 'The return
of financial repression', Financial Stability Review, 16, 37-48.
35 Story,
Jonathan, and Walter, Ingo (1997) Political Economy of Financial Integration
in Europe: The Battle of the Systems, MIT Press.
36 Hall, Peter and Soskice,
David (2001) Varieties Of Capitalism: The Institutional Foundations of
Comparative Advantage, Oxford University Press.
37 Howarth, David, and
Quaglia, Lucia (2013) 'Banking on Stability:â?¯ The Political Economy of New
Capital Requirements in the European Union', Journal of European Integration
(May), 37â??41; Bruegel blogpost by Nicolas Veron.
38 Woll (2014). See
footnote 32. |