![Sample our Politics & International Relations journals, sign in here to start your FREE access for 14 days]({"type":"image" , "src" : "/sda/5947/TOC-Subject-Sample-2021-Politics-International-Relations.jpg"})
ABSTRACT
This paper contributes to our understanding of post-crisis financial regulation by reasserting the centrality of domestic politics in defining government preferences and explaining regulatory outcomes. It draws on Robert Putnam's two-level game approach and Foreign Policy Analysis to develop a model of a three-level informal ratification game. This adds value to existing approaches by capturing the contested nature of government preferences and delineating the causal mechanisms through which domestic groups shape international negotiations. The model is used to explain the UK's pivotal role in the reform of bank capital requirements in the European Union (EU). It demonstrates that governments are able to take advantage of a narrowing domestic ‘win-set’ by marginalising the influence of industry and building political momentum for regulatory reform. In particular, the paper shows how UK negotiators were able to exploit the increased domestic costs of agreement and synergistic strategies between negotiations to successfully oppose the maximum harmonisation of capital rules across the EU.
Disclosure statement
No potential conflict of interest was reported by the author.
Notes on contributors
Dr Scott James is Senior Lecturer in Political Economy in the Department of Political Economy, King's College London. His research concerns the political economy of banking and financial regulation. From 2012–2014 Dr James was Principal Investigator on the ESRC ‘Voices in the City’ Project [S/K001019/1]. Prior to joining King's College in 2008, he completed his PhD at the University of Manchester.
Notes
1. This paper focuses on the deal reached on capital definitions and levels in the EU Council of Ministers in May 2012. The legislation was subsequently amended by Parliament to include curbs on remuneration, including a cap on bankers' bonuses of twice their salary, in the face of UK opposition. However because the bonus cap does not relate to capital requirements and was not part of the original Basel 3 accord it is beyond the scope of this paper.
2. The paper is based on 53 interviews conducted between 2012 and 2014 with representatives from the UK government and regulatory bodies, EU institutions, financial services trade associations and the main UK-based banks. The author acknowledges the financial support of the Economic and Social Research Council for this research (Ref ES/K001019/1).
3. The opposition of UK banks to even higher capital requirements was confirmed by interviews with UK regulators, trade associations and the European Commission (November 2011, December 2011, April 2013 and May 2013).
4. Similarly, Dyson (Citation2002) reverses Putnam's model by conceptualising EU economic governance as a ‘semi-sovereignty game’ and reasserting the importance of the state as the prime unit of analysis.
5. Interview with UK lobbyist, May 2013.
6. Interview with senior UK regulators, April 2013 and June 2013.
7. Interview with UK regulator, April 2013.
8. Interview with UK lobbyist, May 2013.
9. Interviews with trade association, March 2013 and June 2013.
10. Interview with senior UK regulators, April 2013 and June 2013.
11. Interview with senior UK regulator, April 2013 and UK lobbyist, May 2013. Deputy Governor of the Bank of England, Paul Tucker, chaired the Basel Committee on Payment and Settlement Systems and the Financial Stability Board (FSB) Resolution Steering Group; while the Chairman of the FSA, Lord Adair Turner, chaired the FSB Standing Committee on Supervisory and Regulatory Cooperation.
12. Interview with UK regulator, April 2013.
13. The Basel 3 accord raised the Core Equity Tier 1 ratio to 4.5 per cent of risk-weighted assets, introduced a new capital conservation buffer of 2.5 per cent, and agreed to trial a new non-risk based leverage ratio of 3 per cent.
14. Interview with UK regulator, April 2013.
15. Interview with trade association, July 2013.
16. On top of the Basel 3 rules, the ICB recommended that the largest retail banks should hold an additional core equity ‘ring fence buffer’ of 3 per cent (creating total CET1 equal to 10 per cent of risk-weighted assets); a leverage ratio of 4 per cent; and stipulated that both parts of the bank must hold additional loss absorbing capital of 7–10 per cent (ICB Citation2011).
17. Interview with UK lobbyist, May 2013. See also Financial Times (Citation2013c).
18. Interview with UK regulator, June 2013.
19. Interview with trade association, May 2013.
20. Interview with UK official, November 2011.
21. Interviews with UK officials, June/July/August 2013; and UK bank, October 2013.
22. Interview with UK regulator, November 2011.
23. Interview with UK regulator, June 2013.
24. Narrow banking refers to a full split of retail and investment banking, with ‘narrow’ retail banks forced to hold full capital reserves.
25. Interview with trade association, March 2013.
26. Interviews with UK regulators and trade association, November 2011, April 2013 and May 2013.
27. Interview with UK lobbyist, May 2013.
28. Treasury officials were quoted as being critical of ‘jihadist’ elements in the Bank of England for forcing banks to comply with the 3 per cent leverage ratio earlier than required (Financial Times Citation2013b).
29. Mervyn King publicly complained about the industry's aggressive lobbying (Financial Times Citation2013a) while Jenkins (Citation2011) called industry arguments ‘intellectually dishonest'.
30. Interviews with UK regulator and lobbyist, May and June 2013.
31. For illustrative purposes we assume that the preferences of the Commission and other national governments on CRD IV are the same.
32. Interviews with trade associations, September 2011 and June 2013.
33. Interview with UK official, November 2011 and July 2014.
34. Interview with UK official, November 2011.
35. Interview with UK regulator, April 2013. See also Financial Times (Citation2011a).
36. Interview with UK lobbyist, May 2013.
37. Interview with industry representative, December 2013.
38. Interview with FSB official, January 2014.
39. Opposition to maximum harmonisation was led by the UK, Sweden, the Netherlands, Hungary, Czech Republic and Bulgaria (supported by the European Central Bank and IMF), while those in favour included France, Germany, Italy and Finland (supported by the Commission) (see also Howarth and Quaglia forthcoming).
40. Interview with UK regulator, July 2014.
41. The UK inserted two articles into the text of CRD IV which permit derogations from maximum harmonisation: a ‘systemic risk buffer’ allows national regulators to raise capital levels by 3 per cent above the Basel agreement on global assets, and a further 5 per cent on national assets, without EU approval (Article 133 CRD); and the ability of national regulators to vary requirements on capital, liquidity, leverage and risk weights on macro-prudential grounds, and which can only be blocked by a majority in Council (Article 458 CRR).
42. Interview with UK regulator, July 2014.