Bank of America Lawsuit
Bank of America Lawsuit News- 2/1/2012: On the one hand, regulatory policy produces few costs—compared to distributive policy and state-spending programmes—as the production of laws and rules is generally not very expensive. Similarly, monitoring compliance with these rules also requires little financial commitment, especially since these costs can often be imposed onto the regulated sector of the economy. As a result, regulatory policy will be largely unaffected by budgetary problems of a state, and if the latter vary across a group of states that are under investigation, the analysis will consequently not be distorted by this variation.
Distributive policies are also more easily affected by inertia and path dependence, resulting in changes of course only having an effect in the medium term (Beisheim and Walter 1997). Regulatory policy is comparatively more “flexible”, which should result in quicker reaction to changes in the environment. Pressure for policy convergence should therefore more quickly result in policy changes here than in other policy areas. The concrete policy area of choice for this study is the field of banking regulation. In her path-breaking book about the comparative evolution of vocational training in four countries, Kathleen Thelen (2004: xi) apologizes that some of her readers might not find this “the most scintillating of topics”, but hopes to convince them that the subject holds many valuable insights for political economy and comparative politics generally. The same, I would hope, applies to the field of banking regulation. While it may not seem to promise the most riveting of reads, it is, as I argue in the following section, very well suited to the analysis of the question at hand.
In great detail the intricate manoeuvres that take place when trying to substantially alter the regulatory balance in a policy area that is of great (not least material) importance to big financial interests and consumers alike. As readers of this book will come to appreciate after reading Chapter 3, it is probably no coincidence that it was the case of the United States that inspired the analyses of both books. Comparative analyses of the field include the studies by Pauly (1988) on “Banking Politics on the Pacific Rim” (tracing the domestic politics of opening banking markets across four countries) and the book by Coleman (1996) that analyses the impact of domestic politics on financial market regulation in North America and the European Union. Both studies are thus close to the concerns of this book in that they link domestic banking policy to developments in international banking markets, but predate it in fieldwork and analysis by ten to fifteen years.
During that time, financial markets have made further progress towards integration and globalization. Today one can argue that hardly anywhere else is reality so close to the idea of a 24/7-integrated global market. Banks play a central role in this market, and it is the nature of the goods they trade that exposes them, in particular, to globalization, for they trade intangible assets like risk, time, and promises to pay (Baecker 1991) which have been very strongly affected by technological developments in computerization and telecommunications in the last decades. The emergence of new, “derivative” financial instruments21 that have been facilitated by these technological developments has influenced discussions about changed risk structures on financial markets, especially since the trading volume of derivatives exploded in the span of only a few years.The question of how these new risks could best be hedged in and handled put the issue of regulation very much on the agenda.
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The regulation of the banking sector is therefore an important political topic in practically all countries, while that is much less the case in other financial sectors where important markets exist in only a few countries. But above all, banking systems have historically developed very differently in different countries (Pohl 1994). It has been argued that different trajectories of industrialization are the main determining factor for this (Gerschenkron 1966), and that industrial policy found greatly differing opportunities for intervention as a consequence (Zysman 1983). The same diagnosis is true for the sphere of state banking regulation: here as well, following from nationally specific experiences, very different solutions to the supervision of the banking sector were developed, not least in institutional terms (Pecchioli 1987). Banking regulation as a policy area is thus characterized by a combination of high pressure for globalization and greatly differing national starting positions in both banking systems and state regulatory mechanisms. It is thus an excellent test case for theories of convergence through globalization.
For research into causal mechanisms in political science, different approaches exist. One focuses primarily on maximizing the number of observations, most often by collecting data on as many countries as possible— a strategy suggested by Lijphart to escape the “many variables, small N” dilemma (Lijphart 1971: 686). Such a strategy will investigate correlations between macro-level statistical data and thus have to forgo causal investigations for individual cases. Since the interest in this book is above all one in the precise country-level processes, this is not a strategy suitable for the research question followed here. In addition, the dominance of said research approach has been mentioned critically in the past as a cause for the shortcomings in globalization-related research (cf. Beisheim and Walter 1997: 176; Bernauer 2000: 66).
In addition to these political system-level variations, the countries covered also differ with respect to economic system-level variables. In this area, the past decade and a half has seen a number of contributions aimed at classifying different market economy systems (e.g. Porter 1990, Albert 1993, Soskice 1999, Hall and Soskice 2001^, Amable 20 03). The differences that this research has identified in the area of financial systems is of particular interest to the present study. While “liberal market economies” (LMEs) have been characterized as “capital market dominated”, “coordinated market economies” (CMEs) are “credit oriented”. The former are less risk-averse, but more short-term in outlook, resulting in looser relations between capital owners and firms (and a lower propensity to invest in intangible assets such as quality, R&D, and worker retraining); the latter take a more long-term view (with ensuing more stable relations between firms and capital owners), resulting in higher investments in intangible assests, but limiting firms’ flexibility and access to capital (especially for small and medium enterprises). These brief remarks should suffice to point out the interrelations between the various dimensions of economic systems
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The period of investigation of the present study is the time from 1974 to 1999. It covers thus twenty-five years—a time sufficiently long to analyse banking regulation policy in detail in the countries covered. But the period is, above all, chosen for the events that happened in it: its starting point is a fundamental change in the global exchange rate system, namely the switch from fixed exchange rates (under the Bretton Woods system) to floating exchange rates. This altered parameters on world financial markets substantially, increasing both opportunities and risks, and thus constituted a major challenge to state regulation. One consequence was the setting up of the Basle Committee which attempted to coordinate regulation on the international level. After many years of negotiations, 1988 eventually saw the agreement on the Basle Accord which contained regulations on banks’ own capital requirements. In 1999, consultations started to bring about a “Basle II” agreement which would reshape and re-focus regulations, mainly through introducing risk-weighted measures, constituting a “regime change” (Good- hart, Hofmann, and Segoviano 2004: 613).
Negotiations lasted until 2004 (with the Committee releasing a revised version of the new accord in November 2006), and implementation is still in the future in many countries. In addition, 1999 saw the start of the third stage of European currency union with the introduction of the common currency, the Euro, which (besides many other things) has prompted cross-border bank mergers in the Eurozone. Whether the higher level of banking market integration introduced by these mergers, and the existence of a common currency will eventually lead to more common and unified banking regulation and supervision (either in the form of a common regulator or in the form of a harmonization of national supervisory regimes) remains to be seen. Both the start of the Basle II process and the introduction of the Euro, however, point to the fact that 1999 marks a substantial change. The period after that is best left to some future study analysing the processes once they will have run their course. The period of investigation covered in the present study therefore ends in 1999.
After the context and scope of the book have been set out in this introductory chapter, Chapter 2 provides a brief introduction into the peculiarities of the banking sector and the principal tools states have at their disposal for regulating it. It also addresses the challenges states faced in the period after 1973 when liberalization of capital and currency markets, computerization, and a telecommunications revolution fundamentally altered world capital flows, thus creating new banking opportunities and risks.
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