Financial regulation has played an unfavorable role in the financial crisis. Many reform proposals conclude from its failure that there is a need for more and tougher rules (Group G30 2009).Consolidating existing regulatory bodies and a centralization of authorities seem to be the ubiquitous answer of many politicians. In the European Union (EU), a reform proposal has gained support by the European parliament (EP) and the European Commission (EC), which would mean additional competences and staff for European bureaucracies. Because it would centralize large parts of regulation and supervision, political arguments focus on the allocation of competences and power. However, it is not sure if the proposed changes would have any effect in preventing future crises.
The structure of this paper follows a systematic approach to demonstrate problems with this proposal. At first, I show in chapter 2 that the role of regulation and governments in the financial crisis is ambiguous. What is viewed as market failure was sometimes only a rational response to
incentives set by regulation. It is often stated that markets did not work efficiently, and the obvious solution is to rely on governments and regulators to fix the problems. I check if international comparison provides support for consolidating regulatory bodies. In Chapter 3, I assess in detail the
proposed EU reform that focuses on establishing new bureaucracies and implementing more rules. I will use a structured Public Choice approach to evaluate the reform proposal and assess special interests of involved political parties. Chapter 4 examines the role of the EU Council and voter
preferences. Considerable power in the EU decision-making process rests with parties that support centralization and more regulation. With various approaches, it is tried to shed light on the position of the Council as the representation of member states. While European institutions might embrace
additional power and competences, rational voters in the member states should oppose harmful, excessive regulation and centralization. However, a detailed analysis of government and voter preferences reveals that both are likely to have biased preferences in favor of too much regulation.
Table of Contents
1. Introduction
2. Financial Regulation
2. 1. Kinds of regulation
2. 2. Regulatory competition
2. 3. The dilemma of regulation
2. 4. The role of regulation in the recent financial crisis
2.4.1. Regulation, incentives and amplifying effects
2. 5. Consolidation
2.5.1. Regulatory approaches
2.5.2. International comparison
3. Centralizing regulation and supervision in Europe
3. 1. EU institutions and positions
3.1.1. Subsidiarity in the EU treaties
3.1.2. Interests for centralization
3.1.3. Reform Proposals for the EU
3. 2. Public Choice Analysis
3.2.1. Policy uniformity
3.2.2. Leviathan
3.2.3. Lobbying
3.2.4. Policy learning
3.2.5. Complementarities
3.2.6. Decision making
3. 3. The role of the EC and the ECB
4. The Council, Voters opinion and the risk of over-regulation
4. 1. The Council and the political decision-making process
4.1.1. Decision making on EU level
4.1.2. Description of data
4.1.3. Application to EU Council decision-making
4. 2. Voter Irrationality and the risk of over-regulation
5. Conclusion
Objectives and Research Themes
The primary objective of this paper is to evaluate the trend towards centralizing financial regulation in the European Union through a Public Choice perspective, questioning whether increased centralization effectively mitigates the risk of financial crises or merely exacerbates existing regulatory failures.
- The ambiguity of regulatory responses and government intervention during financial crises.
- The institutional motives of EU bodies (Commission, Parliament, Council) in the drive for centralization.
- The impact of voter irrationality and systematic biases on the demand for excessive regulation.
- The practical effectiveness of international regulatory consolidation versus decentralized competition.
Excerpt from the Book
2. 3. The dilemma of regulation
It is very easy for an economist to identify a problem, describe its causes and conclude that regulation should fix it. However, in the real life it seems like this is not the full story. Politicians and interest groups can try to misuse regulation to extract rents (Brennan and Buchanan 1984). This can lead to excessive and harmful regulation. There are other caveats of more and centralized regulation. As with all government failure, the problem is not primarily that regulators are either incompetent or lack knowledge. However, they have to work in an area of contradictory and conflicting interests. Stigler implied that "...as a rule, regulation is acquired by the industry and is designed and operated primarily for its benefits" (Stigler 1971, p.3). Yandle concluded that regulation is often required "...as protection from competition, from technological change, and from losses that threaten profits and jobs" (Yandle 1983, p.13). Political representatives often push for exceptions for certain branches or companies that are situated in their constituency. This does not imply that regulation is always a bad thing, but it does add additional complexity.
Problems with this regulatory capture have been classified in three categories: Interest group theories, Tollbooth theories and Principal-Agent Theories (Boehm 2007). Interest group theories focus on the influence of lobby groups on regulators and the costs of rent seeking activities, with a passive role of public agents. Tollbooth theories point to the possibility of companies actively extracting rents from regulated industries through bribes and campaign contributions. Asymmetric information is the core of Principal-Agent theories. The fact that "firms have private information that is hard for citizens or their representatives to obtain" (Bó 2006) is indeed an issue that is hard to overcome.
Summary of Chapters
1. Introduction: Outlines the research scope, highlighting the tendency toward centralizing financial regulation in the EU and questioning its actual efficacy in preventing crises.
2. Financial Regulation: Examines the different types of regulation, the debate on regulatory competition, and how market dynamics can lead to regulatory capture and the failure of centralized rules.
3. Centralizing regulation and supervision in Europe: Analyzes the institutional push for centralization within the EU, utilizing a Public Choice framework to evaluate incentives, lobbying, and the influence of EU bodies like the EC and ECB.
4. The Council, Voters opinion and the risk of over-regulation: Investigates the decision-making processes within the Council and analyzes survey data to show how voter preferences and systemic biases contribute to the risk of over-regulation.
5. Conclusion: Summarizes the findings, arguing that excessive complexity in regulations can be counterproductive and suggesting that transparency and simple rules may be superior to consolidation.
Keywords
Public Choice, Financial Regulation, Centralization, Regulatory Capture, European Union, Financial Crisis, Lobbying, Voter Irrationality, Subsidiarity, Supervisory Agencies, Economic Freedom, Principal-Agent Theory, Market Failure, Institutional Economics, Political Economy
Frequently Asked Questions
What is the core focus of this research paper?
This paper examines the trend toward centralizing financial regulatory and supervisory authorities in the European Union following the recent financial crisis.
What are the central themes discussed in the work?
The central themes include regulatory capture, the institutional incentives of EU policy-makers, the role of public choice in shaping financial policy, and the influence of voter preferences on regulatory demand.
What is the primary research question?
The primary research question asks whether centralizing financial regulation in the EU actually improves regulatory outcomes or if it risks introducing new failures due to political and bureaucratic incentives.
Which scientific methodology is employed?
The paper utilizes a systematic Public Choice approach, combining theoretical analysis of political incentives with empirical observation and data from Eurobarometer surveys to model council decisions.
What topics are covered in the main section?
The main sections cover the dilemmas of financial regulation, international comparisons of regulatory approaches, the specific institutional structure of the EU, and the analysis of voter irrationality in the context of financial policy.
How would you characterize this paper with keywords?
Key terms include Public Choice, regulatory capture, financial crisis, European Union institutional reform, and political economy of regulation.
How does the paper view the relationship between voters and financial regulation?
The author argues that voters often display systemic biases and irrationality, which politicians exploit to push for more regulation, potentially leading to over-regulation rather than optimal market stability.
What role does the 'Council' play in the presented analysis?
The Council is analyzed as the key representative body for member states, whose legislative decision-making process is evaluated regarding its susceptibility to centralizing pressures and national political interests.
What conclusion does the author reach regarding regulatory consolidation?
The author suggests that consolidation is not a panacea and warns that overly complex, centralized rules can be easily circumvented by market actors, recommending instead a focus on simplicity, transparency, and the enforcement of existing responsibilities.
- Quote paper
- Kai Gehring (Author), 2010, Centralization of financial regulation , Munich, GRIN Verlag, https://www.hausarbeiten.de/document/165291
