In This Article The Political Economy of Financial Regulation in Advanced Industrial Democracies

  • Introduction
  • General Overviews
  • Journals
  • The Challenges of Financial Regulation
  • Corporate Governance and Financial Regulation

Political Science The Political Economy of Financial Regulation in Advanced Industrial Democracies
by
Richard Deeg
  • LAST REVIEWED: 04 May 2015
  • LAST MODIFIED: 25 June 2013
  • DOI: 10.1093/obo/9780199756223-0087

Introduction

The regulation of financial markets is central to the growth and development of every capitalist economy. Financial regulation determines which kinds of financial activities take place and which kinds of organizations may conduct these. Regulation shapes the overall character of the financial system, the relationship between borrowers and savers, the allocation of capital, and thus the macroeconomic performance of the economy. Financial market regulation is distinct from regulation of other sectors of the economy because of the essential infrastructural role of finance—all other sectors of advanced economies depend significantly on the financial system. Thus the successes and failures of the financial system have considerable effects on the entire economy. Despite the enormous importance of financial market regulation, financial regulation normally has low political salience. Except in times of crisis, most voters—and therefore politicians—have relatively little interest in the matter. This can be attributed in part to the complex and technical nature of financial markets and regulation, which relatively few people understand well. Low political salience facilitates a regulatory process that is very heavily shaped by regulators (technocrats) and the industry they regulate, with only minor direction from elected political leaders. In the long history of capitalism, bank and financial system crises have been regular occurrences. Regulation, or regulatory failure, is often seen as a cause of crises, but regulatory change is also the response. Thus any given financial regulatory regime is never settled for long. After the Great Depression all the advanced capitalist economies introduced highly restrictive financial regulatory regimes designed to minimize systemic risk from bank failures. Such regimes often included regulations that intentionally fragmented markets—for example, geographically or by financial product—or limited any individual financial institution to operating within one or a few market segments. In the postwar period, restrictive domestic financial regulatory regimes were combined with capital controls that limited international movements of capital. The postwar Bretton Woods international monetary regime stabilized fixed exchange rates through such controls and, when necessary, lending by the International Monetary Fund (IMF) to countries that could not pay for their external debts. Starting with the collapse of the Bretton Woods regime in the early 1970s, and especially since the 1980s, all the advanced capitalist economies started liberalizing financial market regulation and removing capital controls. This movement was a response to the widespread economic problems of the 1970s and, broadly speaking, part of a policy shift in the advanced economies toward a neo-liberal economic philosophy. These deregulatory measures brought about a dramatic transformation of domestic financial systems and the reemergence of a dynamic and rapidly growing international financial market. Despite the dramatic growth of the international market, financial regulation remains overwhelmingly a domestic affair.

General Overviews

There are several publications that summarize and analytically integrate significant portions of the literature on financial regulation. Deeg 2010 and Berger, et al. 2010 summarize shifts in domestic regulation and consequent changes in financial market structure. Cohen 1996 reviews much of the literature that analyzes the removal of capital controls and regulatory changes producing a reinvigorated global financial system. Helleiner and Pagliari 2011 reviews literature covering the initial international regulatory responses to the 2007–2009 financial crisis. Deeg and O’Sullivan 2009 reviews literature that explores linkages between domestic and international financial regulation.

  • Berger, Allen, Phillip Molyneux, and John O. S. Wilson, eds. Oxford Handbook of Banking. Oxford: Oxford University Press, 2010.

    E-mail Citation »

    Numerous chapters in this handbook address diverse issues of banking regulation at the domestic and international level.

  • Cohen, Benjamin J. “Phoenix Risen: The Resurrection of Global Finance.” World Politics 48.2 (1996): 268–296.

    DOI: 10.1353/wp.1996.0002E-mail Citation »

    Reviews the literature, addressing the resurgence of global financial markets beginning in the 1960s. It examines explanations given for the return of financial globalization, as well as their economic and political consequences. One of the primary concerns of this literature is the implication of global finance for state sovereignty in managing domestic affairs.

  • Deeg, Richard. “Institutional Change in National Financial Systems.” In Oxford Handbook of Comparative Institutional Analysis. Edited by Glenn Morgan, John L. Campbell, Colin Crouch, Ove Kaj Pedersen, and Richard Whitley, 309–334. Oxford: Oxford University Press, 2010.

    E-mail Citation »

    Reviews alternative conceptual frameworks for comparing national financial systems and their broader political-economic functions. Next it summarizes alternative approaches to explaining change in financial systems. The final section suggests how financial system typologies might be updated.

  • Deeg, Richard, and Mary A. O‘Sullivan “The Political Economy of Global Finance Capital.” World Politics 61.4 (2009): 731–763.

    DOI: 10.1017/S0043887109990116E-mail Citation »

    Discusses three prominent issues in the political economy of finance literature since the mid-1990s: the partial shift in governance of financial markets from states to transnational regimes involving public and private actors as rule makers; the shift in many causal explanations toward a blend of institutions, interests, and ideas as variables; and an increased focus on new sources of systemic risk in the global financial system and their repercussions for states.

  • Helleiner, Eric, and Stefano Pagliari. “The End of an Era in International Financial Regulation? A Postcrisis Research Agenda.” International Organization 65.1 (2011): 169–200.

    DOI: 10.1017/S0020818310000305E-mail Citation »

    Takes stock of international regulatory responses to the 2007–2009 financial crisis. It notes that scholars traditionally understand international financial regulation and coordination as occurring in three arenas: interstate, domestic, and transnational. The authors suggest that the outcome of the crisis may well not be strengthened international regulation, but less or weaker international regulation.

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