The New Political Economy of the Macroprudential Ideational Shift

Abstract

From late 2008 onwards, in the space of six months, international financial regulatory networks centred around the Swiss city of Basel presided over a startlingly rapid ideational shift, the significance and importance of which remains to be deciphered. From being relatively unpopular and very much on the sidelines, the idea of macroprudential regulation (MPR) moved to the centre of the policy agenda and came to represent a new Basel consensus, as the principal interpretative frame, for financial technocrats and regulators seeking to diagnose and understand the financial crisis and to advance institutional blueprints for regulatory reform. This article sets out to explain how and why that ideational shift occurred. It identifies four scoping conditions of presence, position, promotion, and plausibility, that account for the successful rise to prominence of macroprudential ideas through an insiders' coup d'état. The final section of the article argues that this macroprudential shift is an example of a ‘gestalt flip’ or third order change in Peter Hall's terms, but it is not yet a paradigm shift, because the development of first order policy settings and second order policy instruments is still ongoing, giving the macroprudential ideational shift a highly contested and contingent character.

Keywords:

• economic ideas
• constructivism
• macroprudential
• transformation
• crisis
• financial regulation
• norm entrepreneurs
• Bank of International Settlements
• Basel Convention

Notes

Earlier versions of this article were presented at the University of Birmingham UK in May 2010, Brown University USA in June 2010 (funded by the AGORA network), ECPR Research Sessions EUI Florence in May 2011, and at the Department of Business and Politics, Copenhagen Business School in September 2011. The author would like to record his gratitude to Ole Jacob Sending, Wes Widmaier, Mark Blyth, Len Seabrooke, Abe Newman, Eleni Tsingou, Eric Helleiner, Steve Nelson, Ove Pedersen, John Campbell, Andre Broome, Kevin Young, Manuella Moschella, Duncan Wigan, Robert Boyer and James Perry, for some very helpful discussions and comments on earlier drafts of this article, as well as the useful guidance and comments of three anonymous NPE reviewers. Remaining shortcomings are my responsibility alone.

For example Helleiner's account of Bretton Woods identifies four phases beginning in the early 1930s moving through to a consolidation phase in the 1950s. Likewise Blyth's account of the rise of embedded liberalism in the US begins with the election of Roosevalt in 1932 and carries through to the enactment of key legislation in 1947.

Macroprudential issues did get discussed in BIS documents in the 1990s BIS (1995, 1997). The IMF also attempted to develop some macroprudential indicators after the Asian financial crisis as part of revamping of surveillance (IMF 2000, 2001; Moschella 2011).

Note that microprudential is not an antonym of macroprudential. A microprudential approach can be a constitutent part of a macroprudential approach.

Former Citigroup CEO Chuck Prince captured the essence of this in an interview in the Financial Times in July 2007, when he said, ‘when the music is playing you have to get up and dance’. The down part of the cycle is captured by Warren Buffet's phrase that it is only when the tide goes out that you see who has been swimming naked.

Countercyclical capital buffers are often confused with the so-called capital adequacy regime, or the regulatory capital institutions are required to hold to operate in the market. That capital is a charge not a buffer, because it cannot used by an institution to tide it over in bad times (Eatwell 2009 ) Capital adequacy standards, in other words, are not countercyclical. The Spanish system of dynamic provisioning is frequently cited by macroprudential advocates as an example of how such a system of countercyclicality might operate.

William White formerly of the BIS has made the claim regarding Austrian school influences, but these intellectual influences are much less clearly identifiable than Minskyian ones. Essentially the Austrian school label refers to White's belief that public authorities often preside over and contribute to credit bubbles through an overly easy monetary policy stance.

The macroprudential policy programme is still evolving through a process of trial, error and experimentation as will be discussed in the final section of the paper. Microprudential approaches are not discontinued as a consequence of the macroprudential ideational shift, rather it is their adequacy that is disputed by the macroprudential case and so macroprudential approaches overlay, rather than replace microprudential approaches altogether.

Of course this is one of the many instances where the distinction between ideas and interests becomes blurred. National regulators for example might have recognised that MPR provided a route to equip them with more powers to police the market, opportunistically taking advantage of the fact market actors were on the back foot. While market actors may have calculated that macroprudential proposals constituted a least worst scenario, as populist anti-bank sentiment surged and that such proposals even offered the opportunity to protect the industry from its own excesses. Further research is required to verify either of these hypotheses.

Information revealed to author in private conversations.

Meeting Chatham House, March 2009. Author in attendance.

Meeting attended by author March 2009. Chatham House rules apply.

This point emerges from many of my conversations with the individuals directly involved.

The author is grateful to Mark Blyth for suggesting this insightful phrase.

For an exception see Keohane, 2010.

See endnote 8.