Multi‐level Governance of Banking Regulation in the EU: Evidence from Developing Bank Supervision in Bulgaria and Hungary

Abstract

Recent bank collapses as a result of the global financial crisis have highlighted the need to keep international bank supervision practices up to date with technological and product innovations in the sector. In the 1980s, coordination in international financial regulation resulted from multilateral negotiations in which states played a central role. Since then, international banking regulation has undergone significant transformation. This article probes the explanatory power of multi‐level governance in the case of European bank regulation. According to the first proposition examined here, experts play an essential role in policy formulation. The second proposition stipulates that public, private and international actors participate in decision‐making and shape the regulatory outcomes together with national regulators. The third proposition states that independent regulatory agencies, rather than government ministries, implement regulations and monitor compliance. The analysis is based on evidence from two new EU member states, Bulgaria and Hungary, that are representative of the two most common types of bank supervision organizational structure in the EU.

Key Words:

• Bank supervision
• regulatory politics
• multi‐level governance
• international finance
• experts
• independent regulatory agencies

Acknowledgement

I would like to thank the interviewed banking supervision professionals and academics for their time and sharing valuable insights into the regulatory process. I am grateful to the participants in the ECPR Joint Sessions 2009 Workshop 9 and three anonymous JEI referees for their constructive comments on earlier versions of the paper.

Notes

1. This article treats international banking regulation as a subset of policies within the broader framework of international financial regulation which also encompasses insurance and securities.

2. It is beyond the scope of the article to discuss the debate between the rationalist and the constructivist schools. Two excellent pieces that provide an overview of what is at stake in this debate are Finnemore and Sikkink’s (2001) article on constructivism in international relations and comparative politics and Jupille et al.’s (2003) survey article on integrating rationalism and constructivism in the study of the European Union. As an example of convincing synthesis of rationalism and constructivism, Thomas Conzelmann (1998, 9) has employed effectively both rationalist and constructivist arguments in his multi‐level governance analysis of Germany’s regional policy.

3. Appendix I provides a diagram of the Lamfalussy process. At the time of writing, the European Commission announced further streamlining of the European financial regulatory framework following the recommendations of the de Larosière report (see European Commission 2009).

4. The ‘Group of Ten’ is comprised of eleven industrialized states that consult and cooperate on economic, monetary, and financial matters. Those states are Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom, and the United States. Luxembourg and Spain are also members of the Basel Committee.

5. Kremers et al. (2003) present a lucid and comprehensive analysis of the pros and cons of a single supervision entity for the entire financial sector versus multiple supervision organizations focusing on specific fields such as banking, insurance, and securities.

6. Since 1998, the European Commission has published annual reports on the progress of each candidate country toward membership in the EU. The acquis communautaire is organized in 31 negotiation chapters, based on which the Commission specifies pieces of legislation that need to be adopted or amended to achieve full compliance.