Policy Takers Or Policy Makers e2e6x

Business Horizons (2013) 56, 691—701

Available online at www.sciencedirect.com

www.elsevier.com/locate/bushor

Policy takers or policy makers? The lobbying of global banking regulators Kevin Young Department of Political Science, University of Massachusetts Amherst, Thompson Hall, 200 Hicks Way, Amherst, MA 01003, U.S.A.

KEYWORDS Bank lobbying; Financial regulatory policymaking; Post-crisis financial reform; Regulatory capture

Abstract Do financial sector groups act as ive policy takers, or do they ‘shape’ the policies to which they are subject? This article responds to this question with three arguments pertaining to the policy shaping power of the financial industry when it comes to international financial standards. First, industry groups confront a number of additional challenges when it comes to lobbying international regulatory bodies, which tend to be more opaque in their decision making and more difficult to hold able when they make unpopular decisions. Second, while these groups are sometimes able to shape financial regulatory policy, the extent of this influence is more partial and contingent than most depictions suggest. The third argument advanced is that since the global financial crisis, business groups have had many of their traditional lobbying tools adversely affected, making lobbying a more uphill battle than before. Financial industry groups are able to influence the governance of their own activities and act as ‘policy shapers’ some of the time, but are less strongly positioned in this role than many existing depictions seem to suggest. # 2013 Kelley School of Business, Indiana University. Published by Elsevier Inc. All rights reserved.

1. Financial regulation, private power, and public purpose Do businesses act as ive policy takers, or do they ‘shape’ the policies to which they are subject? This is a crucial question when it comes to financial regulation because the operation of financial flows is so absolutely fundamental to our everyday existence. As most readers of this special issue will no doubt be well aware, the shape of financial

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regulation can have wide-reaching consequences. Financial regulation–—when it is effective–—can help prevent financial crises and ensure that private sector innovation and ingenuity are channeled into a thriving system of credit creation and a healthier economy. When it is insufficient, financial regulation can have any variety of adverse consequences, from distorting markets in inequitable ways to making financial booms and busts more severe. The financial industry is concerned with the management of what might be called one of the great ‘infrastructural resources’ of our civilization: credit. Other than perhaps electricity and petroleum, there is little else that shapes and binds

0007-6813/$ — see front matter # 2013 Kelley School of Business, Indiana University. Published by Elsevier Inc. All rights reserved. http://dx.doi.org/10.1016/j.bushor.2013.07.010

692 together the organization of our contemporary economy more than financial flows. Both the hedge fund manager in his Park Avenue apartment and the single mother of four in her soon-to-be foreclosedon home depend (albeit in varying degrees and in different ways) on the shape of the financial system. If finance and financial regulation are so fundamentally important to everyday life, then the question of how financial regulation is controlled is deeply important. Regulation–—especially financial regulation–—can be highly complex. However, the basic spirit of regulation is usually the same in principle. The spirit of regulation is to modify the behavior of business from what it would otherwise be: regulation fundamentally governs or ‘shapes’ the market. However, if the very businesses that regulation is meant to shape are themselves shaping the regulations to which they are subject, a host of problems may result. Private influence over public regulation may result in the undermining of the intended public purpose of the regulation, or–—and these are not mutually exclusive–—private firms can use their influence over the content of regulation to shape the market in their interests, for example by affecting the ‘playing field’ of market competition in a way that favors their interests and disfavors their competitors. Either way, either the general spirit or the specific intent of regulation is undermined. However, are private businesses able to shape financial regulation, or are they simply ive ‘takers’ of regulation that are forced to comply with and are unable to shape the rules to which they are subject? The popular media and indeed the majority of academic literature on this subject would respond, ‘‘They are policy makers; just look at those powerful bank lobbies!’’ The business and trade press, populated with the practical day-to-day concerns of dealing with new financial regulations, would likely answer the opposite: ‘‘Business is clearly a policy ‘taker.’ Just look at all these new regulations businesses have to deal with!’’ In this article, I will argue that the truth of the matter is much more complicated than either of these positions. The financial industry is able to shape the financial regulation to which it is subject some of the time and under some conditions, but it is still a long way off from being the savvy ‘policy shaping’ force that many depictions suggest. Indeed, since the crisis, financial industry groups have come against more challenging times when it comes to successfully shaping the content of financial regulation to align with their preferences. My analysis proceeds in two stages. I first set out the dominant way scholars have thought about financial industry influence over international financial regulatory bodies and provide some insights and

K. Young oversights of existing work in this area. I argue that when it comes to international financial standards, financial industry groups confront a special set of challenges because the policy making process they are trying to influence is both more opaque and more difficult to hold able when controversial decisions are made. Secondly, I advance an empirical case for why we should think about financial industry influence as highly contingent and unstable. In particular, I argue that since the global financial crisis, financial industry groups have had many of their traditional lobbying tools adversely affected, making successful lobbying a more uphill battle than before. While these groups have succeeded in shaping some recent regulatory policies, they have become more ‘policy takers’ than ‘policy shapers’ since the crisis.

2. The state of the art There is wide-ranging scholarship on the political economy of international financial regulatory bodies, such as the International Organization of Securities Commissions (IOSCO), the Basel Committee on Banking Supervision (BCBS), the International ing Standards Board (IASB), and many others (Hale & Held, 2011). Academics have honed in on how these institutions operate as innovative ‘transnational’ governance bodies effectively operating as a unique form of global governance, how they generate the international financial standards, and how–—and whether–—these standards are enforced among governments and firms around the world. One thing that has haunted this scholarship from its early beginnings is the following question: is the (private) financial industry able to influence the (public) international regulatory bodies that seek to govern the financial industry? With respect to purely private international bodies like the IASB, this question is completely trivial since this body is wholly private in the first place. However, for other international financial regulatory bodies, the question looms. In this section, I elucidate how existing scholarship has thought about this issue.

2.1. Diverse tools of influence Financial industry groups have a wide range of tools at their disposal to try to influence the regulatory policies to which they are subject. As is emphasized most frequently when we hear about ‘the finance lobby,’ financial industry groups or individual firms can offer campaign contributions to elected officials. Financial industry groups can also offer valuable information to regulators. Furthermore, like in any industry, they can engage in strategic ‘issue

Policy takers or policy makers? The lobbying of global banking regulators framing’ either with regulators, elected officials, or the public at large in an attempt to promote their point of view on a particular issue. They can also use the political process to arrange for legislative oversight over their regulators when these regulators take actions with which they fundamentally disagree, and they can utilize their personal ties with public officials, as is implied by the oft-cited theory of ‘revolving doors’ in finance. Furthermore, the financial industry can benefit from its ‘structural importance’ in the economy: the central position of banks and other financial institutions in the economy means that when the industry speaks, policy makers listen. Through the use of all these tools, financial industry groups can benefit from the fact that the particular content with which they deal tends to be relatively obscure and technical, which not only makes their specialist knowledge highly valued but may also eliminate potential ‘countervailing groups’ from causing trouble. Lobbying always functions much smoother if you do not have many opponents. In this vein, many argue that the kind of civil society agitation associated with other regulated areas of the economy (e.g., environmental policy or food regulation: both feature wellorganized non-governmental organizations [NGOs] and research institutes taking positions much different from the regulated industry) is lacking in finance because of its inherent complexity. As this extensive list suggests, academics have theorized at considerable length about the various ‘means’ or ‘tools’ that financial industry groups might use to influence international financial regulatory bodies. The only problem with this list of tools is that these factors are seldom empirically tested as predictors of influence over regulatory content. We actually know surprisingly little about which of these factors helps the financial industry ‘shape’ policy more effectively than others. A number of sophisticated national quantitative studies exist but are limited to analyzing what can be most easily measureable, such as campaign contributions to elected officials in the United States (Mian, Sufi, & Trebbi, 2009; Puente, 2012). Many qualitative case studies have examined instances of financial industry lobbying over specific pieces of regulation, but they suffer from their own methodological shortcomings, principally that individual case studies might obscure general patterns. When it comes to analyzing international regulatory bodies like the IOSCO or the Basel Committee, qualitative case study—based evidence is usually used (Pagliari, 2011; Tsingou, 2008; Young, 2012). In the place of systematic analyses of the financial industry’s policy shaping role, most predominant ways of thinking about financial industry influence

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reflect an ‘everything in the basket’ model of influence: there are a large number of factors suggesting that financial industry groups can exert influence over regulatory content. Put differently, the financial industry is assumed to get a great deal for what it wants–—or indeed most of what it wants–—because of the vast combination of tools it has at its disposal. So extensive are these tools, the typical narrative goes, that the financial industry is not just able to influence regulatory policy or shape it in subtle ways; rather, it can ‘capture’ the entire process. Indeed, the majority of academic literature on the subject is oriented around the analytical device of ‘regulatory capture’ (Johnson, 2009; Pagliari, 2012).

2.2. Stigler and regulatory capture’s intellectual foundations The notion of regulatory capture is a concept informed by the work of George Stigler (1971) on the political economy of regulation. Theorizing about the role of business in regulation in the early 1970s, Stigler’s pioneering work in this area argued that public officials usually design regulation to favor groups that offer them the highest degree of political . As such, the content of regulation reflects private interests, particularly of those groups that could successfully influence policy makers, rather than the public interest at large. In this model of the political economy, Stigler sought to point out that regulation can be ‘captured’ by private sector groups (typically concentrated producer groups) that organize to influence regulators. In his words, ‘‘as a rule, regulation is acquired by the industry and is designed and operated primarily for its benefit’’ (Stigler, 1971, p. 3). Such a contention builds on two prominent strands of thinking in U.S. political science–—one old and one new at the time. The old idea was that the more the state approached private business with the objective of regulating it, the more the state unintentionally drew the business community closer to the state. Such a notion has long been latent in American political thought and relates to the cautious approach that many right-leaning thinkers have approached regulatory politics, essentially with an eye to the cronyism that it could generate. The new idea was the central notion within Mancur Olson’s Logic of Collective Action, a classic political science theory that argued forcefully for a general property of political organization: namely, small groups are able to mobilize more effectively than large groups because of the free-riding challenges that come with large groups. Stigler’s concept of regulatory capture is regularly invoked within academic scholarship on financial regulation. However, despite its widespread

694 invocation, several aspects of the concept–—and its extensions to our current time and circumstances–— are often elided. First, while the notion of capture has provided an analytical device that contemporary scholars utilize with ease and great rhetorical effect, the public choice literature following Stigler (1971) was much less certain of the extent to which capture was likely. In particular, even other Chicago-school scholars skeptical of state regulation, such as Becker (1983) and Peltzman (1976, 1989), thought that regulatory capture is likely to be limited by the fact that liberal democratic societies are characterized by a plurality of different interests vowing for influence over policy making. Put simply, the fact that there are competing groups vying for influence means that any one group will have a hard time capturing regulatory policy. The second reason why Stigler’s notion of regulatory capture might be questioned in the context of modern financial regulation is because of the scope of analysis. It is based on regulation designed by elected officials. This is significant because as more recent scholarship has observed, one of the most pronounced changes in public policy making in the last two decades has been the planned institutional delegation to ‘independent’ regulatory agencies, which are by their very nature several steps removed from the machinations of electoral politics (Gilardi, 2007; McNamara, 2002). Such a trend has been especially marked in the realm of finance, whereby central banks and regulatory agencies have both been given much more agency independence than they enjoyed in the past. This raises questions about the mechanisms of regulatory capture in finance since it is not immediately clear what private sector actors could ‘trade’ for distortions to the regulatory framework. Third, Stigler’s notion of regulatory capture suggests that private actors work to increase regulatory costs rather than to decrease them. This stands in strong contrast to what most scholars understand in of the goals private actors face with new stringent regulation, particularly in finance, where a consistent assumption is that the aim of lobbying is weakening regulation. Those who invoke the phrase today forget that in Stigler’s eyes, increasing regulatory stringency is detrimental to social welfare in the sense that it increases the costs of goods and services to consumers. Since regulation changes the character of market relationships, it naturally has some effect on the competitive playing field between firms. Thus, a concern with business lobbying always decreasing regulatory stringency and making financial regulation weak and flimsy might be misplaced. In this regard, a firm may simply say to itself, ‘‘A costly regulation imposed on me and my

K. Young competitors might be painful for me in the short run, but if it will wipe out my competitors, it may even be useful for me.’’ From this discussion, we can derive that the Stiglerian notion of regulatory capture may be less applicable to modern financial regulation than one might first think. On the above grounds, we might question the explanatory power of this analytic device beyond, of course, the useful rhetorical device that it serves; for example, as a kind of conceptual antidote to the notion that regulation is always designed in a disinterested fashion and in the general public interest.

2.3. How the international dimension complicates matters How does the international dimension of financial regulatory policy making play into these dynamics? Much existing scholarship has suggested that the construction of financial regulatory standards at the international level simply amplifies the extent to which financial industry groups are able to capture the regulatory policy making process. In other words, the fact that much financial regulation is now being designed by international regulatory commissions and organizations means that financial industry groups are able to shape regulatory policy content more than at the national level. There are three key ways in which international regulatory forums are different from national regulatory agencies: ability, opacity, and remoteness. Each of these factors plays into how we might usefully think about the question of financial industry influence. International regulatory bodies are different from national financial regulatory agencies because there are fewer mechanisms of formal ability for them. This is not a value judgment but an empirical one. Even literature that has celebrated transnational regulatory policy making as an innovative new mode of governance (e.g., Hale & Held, 2011; Slaughter, 2004) has remarked that there is a striking lack of formal ability mechanisms for these bodies. As Underhill and Zhang (2008, p. 29) asserted about the Basel Committee on Banking Supervision, this international body has been characterized ‘‘by virtual separation from any able political process.’’ Furthermore, the decisions of these kinds of transnational regulatory bodies are not subject to the approval of any external body. Since the financial crisis, there has emerged a new public ritual of the BIS Board of Governors (a collection of central bank governors) g off on new policy decisions by the BCBS, but this pales in comparison to the formal legal procedures that have to take place when national financial regulation is being

Policy takers or policy makers? The lobbying of global banking regulators developed. The same could be true for other international regulatory bodies: whatever one thinks of the IOSCO or the IAIS, these bodies are not able to a public that can vote them out or dispose of them if they make costly decisions. Normal mechanisms of democratic ability built up over many years at the national level simply do not exist at the international level. Whether we think this is a good thing or not, it should certainly play into how we consider financial industry influence. A related aspect to this is that the policy making process at the international level is highly opaque: decisions are made not through standardized bureaucratic procedures but through closed-door sessions that are often highly informal in character. Most international financial regulatory bodies do produce reports, conduct quantitative impact studies, and engage in a post-and-comment procedure, which in some ways mimic national-level practices, but there are nevertheless important differences. In the United States, for example, financial regulatory agencies are subject to legislation that controls how the policy making process must proceed. The istrative Procedures Act, for example, specifies timelines for review and comment periods and ensures a formal process is followed when regulatory changes are undertaken. Furthermore, most national jurisdictions–—at least in democratic countries–— allow for access-to-information requests to these agencies when they contest regulatory opacity. The other way in which international financial regulatory bodies are different is the most obvious one. These bodies are more remote than national regulatory agencies. Because they operate on a highly informal basis (most bodies have very small secretariats, and meetings are highly information based and informal), it is a challenge for those contesting their operations from the outside to critique decisions as they are being formulated or agreed upon. This remoteness factor relates to opacity: the timing and location of their meetings are often unknown and reach public attention later. These remoteness factors have important effects on the diversity of interest groups that can mobilize over the content of new financial regulations as they are being developed. Put simply, it is harder to mobilize for or against a policy being designed far away than it is to mobilize for or against a policy that is being designed close to home. This might not be true for all international bodies, but in finance in particular the workings of international regulatory bodies are likely to be much less obscure and unknown, however important their decisions might be. Most existing scholarship suggests that these special conditions amplify financial industry influence and facilitate ‘transnational regulatory capture.’

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Lack of ability mechanisms, opaqueness, and remoteness all contribute to financial industry influence in a systematic way. Some have pointed to the fact that international-level regulatory policy making by groups like the BCBS or the IOSCO are associated with a context that makes it easy for some groups to act as specialized interlocutors with these bodies, essentially feeding them (biased) information as to the correct design of particular financial regulatory rules. International associations, such as the Institute of International Finance (IIF) and the International Swaps and Derivatives Association (ISDA), are often seen in this light since they often meet with bodies like the BCBS in highlevel forums to exchange views and information. The fact that international-level policy making occurs at a level that is highly opaque and relatively unknown to most of the public means that these and other international associations can act to influence policy content at early stages of the policy making process, and they can do so systematically given the lack of alternative voices at the table. A range of work has illustrated, for example, the ways in which international financial sector associations work with the BCBS to promote the use of particular financial models (Tsingou, 2008; Underhill & Zhang, 2008). There is something useful about these insights. However, as I have illustrated in empirical detail elsewhere, financial industry groups’ influence over the policy making process has been much more inconsistent than many depictions suggest (Young, 2012). Even when financial industry groups organize large-scale international lobbying campaigns to get international regulators to change a policy proposal in their preferred direction, they can lose. This reflects some truisms observed in the broader academic literature on interest groups. First, lobbying resources are not the same thing as lobbying success. Second, access (to international regulatory bodies) is not the same as influence (over the policy process or eventual policy content).

3. Lobbying success is a variable, not a constant A more nuanced and empirically skeptical look at the international regulatory policy making process suggests that financial industry groups have a harder time getting what they want out of international regulators than one might first think. It does not deny that financial industry groups cannot or do not act as policy shapers some of the time, but it regards the issue as an empirical one and weighs the different kinds of power resources private sector groups have at their disposal relative to the degree of

696 discretion possessed by international regulatory bodies. I argue that what is absolutely crucial in understanding power relationships between different parties is not what happens when both parties already agree on something but what happens when they disagree. In this regard, to understand financial industry groups’ policy shaping role, one needs to think about the power resources they possess relative to international regulators. Let me advance two propositions that are relevant here:

Proposition 1: When regulators and the financial industry are already in agreement, financial industry groups can have an important impact as policy shapers.

Proposition 2: When regulators and the financial industry are in disagreement, the financial industry’s ability to act as successful policy shapers is weak relative to the situation at the national level. While financial industry groups have a lot of tools at their disposal to affect their desired changes in financial regulation, these tools might be weakened when it comes to international financial regulatory bodies. Consider the lack of ability mechanisms previously outlined. While these are usually considered to be assets for groups able to secure good access to international regulatory bodies, they can also have the opposite effect. In the absence of formal ability mechanisms, what can financial industry groups do if they disagree with the international regulatory bodies’ decision? Holding a legislative oversight hearing in the global parliament is not a possibility since a global government does not exist. What about threatening the chances of their next election? Since the individuals that construct international financial rules are not elected and are even more removed from the democratic political process than at the national level, this possibility is also excluded. In short, the lack of ability mechanisms means that financial industry groups have fewer means at their disposal to get the kind of regulatory changes they would prefer when they disagree with international regulators. The opacity of international financial regulatory bodies also has consequences for the policy shaping power of financial industry groups when the two disagree. Opacity means that both insiders and outsiders have less information about how to adjust their advocacy strategies in response to . For example, in most national jurisdictions, there is a formalized process of regulatory rulemaking in which financial industry representatives are able

K. Young to track a formal process of rulemaking, questionand-comment period, and regulatory changes, all with regulatory officials with whom they have longstanding relationships. Legislative hearings on financial regulatory rule changes (when they do occur) provide yet further information. Financial industry groups have access to relatively regular on what is being changed and often why. Among international financial regulatory bodies, however, the policy making process does not provide this . There is more uncertainty about when and why financial regulatory changes are made. The third factor is remoteness. This too may negatively affect financial industry groups’ chances to shape policies when they disagree with international regulators. As stated above, remoteness means that it is harder, in relative , for interest groups and the public at large to access the institutions making decisions. This may mean that particularly well-resourced groups reach international financial regulatory bodies to a disproportionate extent, but it may also have other consequences. Remoteness can mean that regulators are less constrained by the dictates of their national political systems and entrenched interests there, and global-level organization and resources can help regulators survey conditions across the entire globe. This is consequential because it means that international financial regulatory bodies can see whether or not there is disagreement among the business community for a policy they are deg. Consequentially, the chances that business groups compete is amplified rather than the influence of any one particular group dominating, financial or otherwise.

3.1. Three empirical arguments So far, I have argued that we have several reasons to doubt that the financial industry is able to engage in regulatory capture of today’s international financial regulatory bodies. Some of the factors that make international regulatory policy making unique and different are also factors that might inhibit financial industry influence at least when regulators and financial industry groups are in disagreement. An alert reader will no doubt offer the reply that this is more of an empirical question than a theoretical one. Sure, there may be some holes in the theoretical apparatus we use to think about financial industry influence, but surely, there is evidence for policy shaping out there. Furthermore, one might challenge the possibility that financial industry groups and international regulatory bodies disagree at all–—or at least the frequency of that disagreement.

Policy takers or policy makers? The lobbying of global banking regulators In the remainder of this article, I want to focus on these two issues. Political scientists have produced a vast literature just to think through the question of how the policy shaping power of business might be measured empirically, yet since this is not the appropriate venue to discuss the various ‘typologies of power’ and precise estimation techniques for influence, the remainder of this article is devoted to three simple empirical arguments. First, while there is evidence that financial industry groups are able to shape policies at least some of the time, this influence appears to be highly inconsistent. Second, financial industry groups and international financial regulatory bodies disagree quite regularly. Finally, I will argue that both of these empirical patterns have become more pronounced in recent years since the global financial crisis: in other words, financial industry groups have lost policy shaping power rather than gained it.

3.2. Influence over policies occurs, but is highly inconsistent With respect to Empirical Proposition 1, there is a wide range of evidence here. I have already mentioned the literature suggesting that financial industry groups have played an important role in shaping aspects of the Basel II Accord. They played an important role in securing value-at-risk (VAR) models into the market risk amendment. However, this influence has not been consistent, especially where international regulators and financial industry groups disagreed. Financial industry groups like the IIF and the ISDA have been able to the use of an internal ratings-based (IRB) approach to capital adequacy regulation in the Basel II Accord–—one of the cornerstones of the pre-crisis international regulatory framework–— which is both important and consequential. However, this evidence alone elides the fact that these same groups actually pushed for much more substantial changes to international regulatory standards, such as the use of full internal models. Despite concerted international attempts and excellent access to the BCBS, these battles were lost in a big way. Another example is the regulatory policy proposed by the BCBS designed to get banks to hold capital against unexpected management and infrastructural failures–—the so-called ‘operational risk’ policy. Many financial industry groups lobbied heavily for this policy to be either gutted or scrapped, and they lobbied hard at both the international level and at the national level, trying to influence individual regulatory agencies that sat on the BCBS. They failed to change the policy in the desired direction, although a

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small minority of banks did manage to effect changes in the policy against the preferences of the majority of the financial industry (Young, 2012). Often, what appears to be influence at one point ends up shifting in favor of international regulators’ own initial position. Once again, the formation of the Basel II Accord provides a useful illustration. As the Basel II Accord was beginning to take shape in 2000, the BCBS proposed that the measurement of capital adequacy would have a particular definition of capital adequacy at its heart: banks should hold capital for both their unexpected losses and their expected losses. Banks and financial sector associations around the world challenged this ‘expected losses’ policy. In manifold forums ranging from comment letters and conference calls to published studies and in-person meetings with BCBS and the BCBS as a whole, financial industry groups critiqued this policy on the grounds that it constituted a form of ‘double counting’ and was all belt and suspenders. They advanced sophisticated arguments to the BCBS based not only on the latest capital theory at the time but also based on hard empirical data. Low and behold, in the autumn of 2003, the U.S. regulators practically halted an entire BCBS meeting to declare that this longstanding policy of ‘expected losses’ was to be changed. Financial industry groups applauded the decision. Then, in the spring of 2004, just as the BCBS negotiations were drawing to a close, the BCBS decided to increase regulatory capital through a ‘scalar’ for exactly the value expected losses were calculated. Thus, while the expected losses policy was ‘defeated’ in the spring of 2003, it then re-emerged in a different form in 2004. What could financial industry groups do to change this? Absolutely nothing–—at the international level at least.

3.3. ‘‘Thank you for offering this new regulation. Now, let us tell you 100 reasons why your policy is problematic.’’ With respect to Empirical Proposition 2, there is evidence that international financial regulators and financial industry groups disagree on a regular basis. On the one hand, evidence for this comes in the form of the hundreds of comment letters that international regulatory bodies have received from financial industry groups over the years. Comment letters have become a standardized part of the regulatory policy making process at the national, regional (European Union), and international levels. As anyone familiar with the content of these letters is well aware, they are full of contestation and discord. Financial industry groups usually begin with a standard line in their letters to international

698 regulators: ‘‘Thank you for offering this new regulation. We are pleased to comment in this important process. Now, let us tell you 100 reasons why your policy is problematic.’’ Very few of these concerns are even addressed by international financial regulatory bodies let alone make it onto their agenda in a way that has a consequence for eventual policy. It is a challenge to find instances when financial industry groups agree with the BCBS’ policies: there is a considerable level of disagreement between proposed policies and financial industry group preferences. If there were not, there would be little need for comment letters to be sent at all and little need for lobbying to take place. However, as most scholarship would agree, the extent of lobbying that takes place is considerable–—a fact not only evidenced by the volume and content of comment letters but also by the BCBS’ own quantitative impact studies (QISs), which showed both gains and losses for banks around the world. To be sure, some policy decisions are very expensive for banks to adjust to, while others offer banks cost savings. The important point here is that there is considerable variation: banks and regulators do not agree, and in many cases costs are considerable.

3.4. ‘‘Reg Rage’’ One can actually show the extent to which international regulatory rules are contested by looking at general industry views and tracing the balance of positive or negative sentiment expressed toward these rules. One way to assess the sentiment within a regulated industry is to look within specialist publications that are marketed toward and authored by of the financial industry. In this vein, the monthly magazine The Banker provides an especially systematic tracking of financial sector sentiment toward a variety of new regulatory rules as they are being developed at both the national and international levels. Specifically, since November 2005, the column ‘‘Reg Rage’’ has been reporting on various financial regulatory events. Authors of this monthly column have reported each regulatory event since that time on a continuum ranging, for example, from ‘‘Reg Zen’’ to ‘‘Irritation’’ to ‘‘Exasperation’’ and, finally, to ‘‘Reg Rage.’’ While the precise metric used has not been consistent since the column started, we can measure more crudely the positive, negative, and more neutral sentiment expressed in this column (the actual scale reported within The Banker varied over time, so I collapsed 5- and 6-point scales to 3-point scales oriented around the position of ‘acceptance/neutral,’ which did not change over time). Table 1 shows the balance of sentiment expressed toward national

K. Young Table 1. Financial industry attitudes to new national and international regulations National Regulations

International Regulations

Positive

14%

7%

Acceptance/ Neutral

28%

28%

Negative

58%

65%

and international regulatory rules produced from November 2005 to December 2012. These data suggest a picture of contention rather than a position of rosy agreement. By this metric, the financial industry is either neutral or willing to accept almost a third of all new regulations whether at the national or international level. However, there is also a significant degree of disagreement with regulatory output, and this seems to be more intense when it comes to international regulations. These data are hardly precise evidence that the financial industry and international regulators disagree with respect to the content of regulations, but these data and the hundreds of comment letters produced by financial industry groups in response to financial regulations are certainly suggestive evidence that international regulatory bodies and financial industry groups often do not see eye to eye.

3.5. Challenges since the crisis One might reasonably object to my narrative thus far that what is important is not a general snapshot of financial industry influence or contention but rather how things are changing. This issue allows me to assess the third empirical proposition advanced above. In the next section, I argue that the inconsistency of industry influence has increased since the recent global financial crisis and the extent to which financial industry groups and international regulatory bodies disagree has increased. This, I argue, points to a picture suggesting that financial industry groups have declined in power and importance since the crisis as they have faced a number of unique challenges due to the context of the crisis and its aftermath. Since the global financial crisis, business groups have had many of their traditional lobbying tools adversely affected, making lobbying a more uphill battle than before. The context in which the financial industry has had to engage in advocacy has changed in two important ways since the crisis. First, financial regulation has become a salient issue: people discuss financial regulation on a more regular basis than before. Financial regulation has

Policy takers or policy makers? The lobbying of global banking regulators traditionally been characterized by what Culpepper (2011) calls a situation of ‘quiet politics’–—a situation whereby business groups are able to exercise influence because they are the only ones mobilized for the issue (this has recently begun to be explored in the case of finance in Baker, 2010; Pagliari & Young, 2013). What this has meant is that a relatively narrow collection of specialists within regulatory agencies and financial industry groups were the principle actors discussing, debating, and contesting financial regulatory content. That changed in a big way since the crisis. Financial regulation moved from the business section to the current affairs section of newspapers, and films like Inside Job (2010) and Too Big to Fail (2011) and many bestselling books helped to popularize a national discussion about financial regulation that stands in sharp contrast to the pre-crisis years. Now, most Americans have some view of financial regulation, and policy makers face big incentives to listen or at least be attentive to these new conditions. Why does this matter? It matters because when a regulatory area ceases to be associated with ‘quiet politics,’ it is believed to constrain the policy shaping power of the particular business groups being regulated. When a regulated industry becomes salient, it invites more scrutiny on their activities as well as encourages a greater diversity of groups to be involved in regulatory discussions. Specialized NGOs (e.g., Finance Watch in Europe, which received a s1 million subsidy from the European Parliament, or Americans for Financial Reform in the United States) represent coalitional efforts among diverse NGOs and labor unions to muster their own lobbying efforts to act as a countervailing force to the private financial industry. Pagliari and Young’s (2012) study of lobbying letters directed at financial regulatory agencies since the crisis shows a significant increase in mobilization of groups that have traditionally shied away from financial regulatory issues, such as labor unions and NGOs. A greater diversity of groups are making with regulatory bodies in finance: the Financial Stability Board has met with international trade union organizations, the Basel Committee on Banking Supervision has conducted high-level meetings with the International Chamber of Commerce, and the U.S. Securities and Exchange Commission has even engaged with representatives from the ‘Occupy Wall Street’ movement. To be sure, access is not the same as influence. However, if anything, the greater plurality of groups engaging in financial regulation speaks to the more contested terrain the financial industry now faces. There is evidence that relationships between financial industry advocacy groups and financial

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regulators became strained after the crisis. Following the collapse of Lehman Brothers and the ensuing market reactions in the fall of 2008, according to many participants, there was a significant drop in communication between financial industry associations and regulatory bodies at both the national and transnational levels. This might not be terribly surprising as regulators had extremely pressing items on the agenda to say the least. However, when financial sector groups tried to bring themselves back into dialogue with policy makers, they faced significant challenges. As the dust of the crisis began to settle, private sector groups found it challenging to re-establish the kind of regulatory dialogue they had previously enjoyed. This was not, however, a seamless process, as considerable work had to be done to try to secure meetings with regulatory bodies, and in some instances, groups had to ‘muscle into’ meetings according to many industry representatives. Dialogue between regulators and financial industry groups not only became more formal and more restricted but financial industry groups also learned of new regulatory policy changes at a much later stage than they had in the past. Instead of a casual exchange of information with regulators, financial industry participants were invited to present short formal presentations and to answer specific questions fielded to them by regulators. In some instances, going ‘off script’ and raising issues not already on the agenda has led to participants being shot down aggressively by regulators. Regulators often have stronger mandates from their politicians back home than in the past, insisting they send strong signals that progress on financial reform is indeed taking place, which has had real consequences for how regulators react to private sector critiques. For example, in private meetings between the incoming Financial Stability Board Chairman and then Bank of Canada Governor (now Bank of England Governor), Mark Carney, the CEO of JPMorgan Chase, Jamie Dimon, spoke out aggressively against the new liquidity rules of Basel III. This had two consequences: the first was that Carney reportedly left the room in haste; the second was that other bankers present at the meeting were horrified at the social opprobrium, later issuing apologies to regulators (Masters & Goff, 2011; Younglai & Halstrick, 2011). These changes in the relationships between regulators and the financial industry have taken place in an environment in which financial regulation is more stringent and costly than before and the financial industry sees new regulations more critically than in the past. Using the date from The Banker magazine mentioned above, Table 2 reports the extent to which financial industry sentiment has changed since the

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Table 2. Financial industry attitudes to new regulations before and after the financial crisis Pre-Crisis Nov. 2005— Sept. 2008

Post-Crisis Oct. 2008— Dec. 2012

Positive

19%

6%

Acceptance/ Neutral

36%

22%

Negative

44%

73%

crisis. What these figures show is that positive sentiment toward new financial regulatory output has declined, while negative sentiment has increased significantly since October 2008. Financial industry groups have not been ive participants in this process. They have adapted, for example, by taking on a broader range of advocacy partners, such as non-financial firms (Pagliari & Young, 2012), and by focusing more on policy implementation than on policy development (Young, in press). Nevertheless, there does seem to be evidence for the proposition that disagreement between international regulators and financial industry groups has increased since the crisis. One key shift that seems evident in the post-crisis period is that financial industry groups emphasize the costs of new financial regulations on the economy as a whole rather than on the financial industry per se. In reflection of this move, industry associations like the Institute for International Finance and others have worked hard to produce empirical studies on the negative effect of Basel III and other regulatory changes to the global economy. However, at nearly every turn, regulators at both the international level and in key jurisdictions in the United Kingdom have challenged the empirical basis for these claims quite publically (Pagliari, 2011). Is financial industry influence less consistent than in the past? This important question cannot be empirically resolved here, but one relevant comparison can be made between the lobbying and contention over Basel II, which was negotiated before the crisis, and the Basel III Accord, which was negotiated after. Basel III (BCBS, 2010) has been subject to deep criticism, but there are fewer instances of good evidence of financial industry influence. Industry groups and regulators have disagreed on a great many policies within the new accord, but little seems to be changed at the formers’ behest. The BCBS, particularly the American, British, and Swiss regulators, had an appetite to increase the level of Tier 1 regulatory capital and the international leverage ratio. Financial industry groups opposed both but were not successful in bringing about their

desired changes. The BCBS introduced new (and fairly strict) regulatory policies for the regulation of bank liquidity, such as the net stable funding ratio and the liquidity coverage ratio (LCR) policies, which represented significant learning lessons following the Northern Rock and Lehman Brothers events, respectively. Many individual banks, banking associations, and others rallied against the stringency of these new policies, in particular arguing that the LCR should allow a wider class of assets to be included in the denominator. A number of changes were introduced to the LCR in January 2013, but none of these appear to be aligned with what financial industry groups were lobbying. One change has occurred to the LCR, which was a key demand of financial industry groups, and that is with respect to the timing of the regulation. Like many aspects of Basel III, the LCR will now be phased out in successive periods. The recent changes mean that only 60% of the LCR minimum is required beginning as originally scheduled in 2015, with a 10% rise each year until it reaches 100% in 2019 (see BCBS, 2013, p. 2). Other key demands–—such as the inclusion in the LCR of new securitization products that the financial industry worked hard to generate since the crisis and the inclusion of key financial instruments (e.g., covered bonds, which are key financial instruments for some countries, such as Denmark and )–—were not heeded.

4. Conclusion This special issue has usefully explored various questions of the governance of finance. My contribution to this discussion has been to explore one aspect of this terrain that often surfaces in discussions of the governance of international finance: the question of private sector influence. Specifically, I have explored the question of whether we should think of financial industry groups as policy ‘takers’ or policy ‘shapers.’ I have argued that when it comes to international financial standards, financial industry groups confront a special set of challenges because the policy making process they are trying to influence is both more opaque and more difficult to hold able when controversial decisions are made. This does not mean that financial industry groups are not able to effect desired changes to international regulatory rules: they can, and they do. However, when we consider their role, we should take into consideration the fact that this policy shaping power is often highly variable. In particular, when international regulatory bodies and financial industry groups disagree on a policy, financial industry groups’ influence over the content of regulation is significantly

Policy takers or policy makers? The lobbying of global banking regulators restrained, particularly compared to the national level of governance. Moreover, the global financial crisis has made financial sector lobbying a more uphill battle than before. While these groups have succeeded in shaping some recent regulatory policies, they have become more policy takers than policy shapers since the crisis.

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