It is easy to see why financial market actors would want restrictions on their
activities removed, but why did regulators come to share this view? Pagliari (2012)
describes four reasons why financial regulators are particularly prone to capture.
First, financiers devote a huge amount of time and resources in the attempt to
influence policy: financial lobbyists in the US spent US$2.7 billion on lobbying
between 1999 and 2008 (ibid.). The complexity of financial regulation also gives
sector insiders an advantage compared to other actors when regulators are con -
sidering policy change: less than 10 per cent of the stakeholders who participate
in official consultations on regulation are from trade unions, consumer groups,
NGOs or independent research institutions (Pagliari and Young, 2012).
Second, outside official consultations, the financial industry retains preferential
access to regulators, mostly behind closed doors (Pagliari, 2012). In some cases,
the explanation is that regulatory agencies are not independent in the first place.
Part of the UK’s Financial Services Authority mandate, for example, was to
support the interests of the City of London. The powerful Office of the
Comptroller of the Currency is required to promote the interests of US banks
(Pagliari, 2012).
Third, and perhaps most importantly, even where regulators are formally
independent, the last 30 years saw an increasing convergence of mindset with those
they are charged with regulating. This ‘intellectual’ or ‘cultural capture’ went way
beyond regulation of finance to incorporate a distrust of the state and blind faith
in markets (Kwak, 2013).
A final element supporting capture is the ‘revolving door’ between policy-makers
and financial institutions. This has long been a feature of US regulation and politics.
A surprising number of Treasury Secretaries in recent years have worked for
Goldman Sachs, for example, but this is not confined to the US: the current Governor
of the Bank of England, Mark Carney, and President of the European Central Bank,
Mario Draghi, for example, also held senior positions at Goldman Sachs.
As well as ‘captured’ regulators, another source of influence is the politicians
who appoint them. Pagliari (2012, p12) summarizes the factors identified in the
literature:
[T]he financial industry [in the US] remains one of the major contributors
to politicians’ electoral campaigns across the political spectrum; consequently
it is able to exercise a significant influence over the voting behaviour of
Congress on certain regulatory issues. Second . . . politicians may interfere
in the actions of regulators in order to achieve key political objectives such
as economic growth, employment, social and economic stability . . . [or]
pressure regulators in order to achieve short-term political objectives by
pleasing powerful electoral constituencies or special interest groups . . .
during boom times regulatory agencies are likely to face pressures to be
accommodating in the implementation of financial rules, thus hindering their
capacity to ‘remove the punchbowl from the party’.
164 Stephen Spratt
activities removed, but why did regulators come to share this view? Pagliari (2012)
describes four reasons why financial regulators are particularly prone to capture.
First, financiers devote a huge amount of time and resources in the attempt to
influence policy: financial lobbyists in the US spent US$2.7 billion on lobbying
between 1999 and 2008 (ibid.). The complexity of financial regulation also gives
sector insiders an advantage compared to other actors when regulators are con -
sidering policy change: less than 10 per cent of the stakeholders who participate
in official consultations on regulation are from trade unions, consumer groups,
NGOs or independent research institutions (Pagliari and Young, 2012).
Second, outside official consultations, the financial industry retains preferential
access to regulators, mostly behind closed doors (Pagliari, 2012). In some cases,
the explanation is that regulatory agencies are not independent in the first place.
Part of the UK’s Financial Services Authority mandate, for example, was to
support the interests of the City of London. The powerful Office of the
Comptroller of the Currency is required to promote the interests of US banks
(Pagliari, 2012).
Third, and perhaps most importantly, even where regulators are formally
independent, the last 30 years saw an increasing convergence of mindset with those
they are charged with regulating. This ‘intellectual’ or ‘cultural capture’ went way
beyond regulation of finance to incorporate a distrust of the state and blind faith
in markets (Kwak, 2013).
A final element supporting capture is the ‘revolving door’ between policy-makers
and financial institutions. This has long been a feature of US regulation and politics.
A surprising number of Treasury Secretaries in recent years have worked for
Goldman Sachs, for example, but this is not confined to the US: the current Governor
of the Bank of England, Mark Carney, and President of the European Central Bank,
Mario Draghi, for example, also held senior positions at Goldman Sachs.
As well as ‘captured’ regulators, another source of influence is the politicians
who appoint them. Pagliari (2012, p12) summarizes the factors identified in the
literature:
[T]he financial industry [in the US] remains one of the major contributors
to politicians’ electoral campaigns across the political spectrum; consequently
it is able to exercise a significant influence over the voting behaviour of
Congress on certain regulatory issues. Second . . . politicians may interfere
in the actions of regulators in order to achieve key political objectives such
as economic growth, employment, social and economic stability . . . [or]
pressure regulators in order to achieve short-term political objectives by
pleasing powerful electoral constituencies or special interest groups . . .
during boom times regulatory agencies are likely to face pressures to be
accommodating in the implementation of financial rules, thus hindering their
capacity to ‘remove the punchbowl from the party’.
164 Stephen Spratt