From Independence to Politics in Financial Regulation
Social Science Research Network
Independent agencies have long dominated the institutional structure of financial regulation. But after the 2007-08 crisis, this Article argues, the independent agency paradigm is under attack. To monitor financial institutions more thoroughly and address future failures more effectively, the United States and other industrialized nations redesigned the framework of financial regulation. Post-2008 laws allocate new powers not to independent bureaucrats, but to elected politicians and their
... t appointees. To document this global paradigm shift, the Article examines the laws of fifteen key jurisdictions for international banking: the United States, Mexico, and South Korea. This analysis points to a marked increase in the influence of elected politicians over banking. Politicians' new powers extend not only over emergencies, but also over financial institutions' regular operations. Politicians are now at the helm of innovative institutional arrangements, typically in the form of regulatory councils that encompass preexisting independent agencies. In these councils, supermajority requirements and veto rights designate politicians as the ultimate decision makers. The Article shows how this paradigm shift resulted from the interplay of factors unique to the 2007-08 crisis and long-run trends. The collapse of institutions in diverse areas of financial activity, including investment banks, insurance companies, and thrifts, created a sense that independent regulators as a class had failed. Concerns about regulatory capture, combined with disillusionment with the markets' potential to self-correct, further undermined confidence in past paradigms. Developments in financial markets attracted great interest from ordinary Americans, who over the last two decades have increasingly relied on the financial system for their pension savings, housing credit, and other investments. Politicians could not remain as distant from financial regulation as in the past.