The Political Economy of Financial Regulation

62 Pages Posted: 20 Oct 2022 Last revised: 21 Feb 2023

See all articles by Rainer F. H. Haselmann

Rainer F. H. Haselmann

Goethe University Frankfurt - Faculty of Economics and Business Administration; Leibniz Institute for Financial Research SAFE

Arkodipta Sarkar

National University of Singapore

Shikhar Singla

London Business School - Department of Finance; Goethe University Frankfurt - Center for Advanced Studies - Foundations of Law & Finance (LawFin)

Vikrant Vig

London Business School

Date Written: May 25, 2022

Abstract

Using the negotiation process of the Basel Committee on Banking Supervision (BCBS), this paper studies the way regulators form their positions on regulatory issues in the process of international standard-setting and the consequences on the resultant harmonized framework. Leveraging on leaked voting records and corroborating them using machine learning techniques on publicly available speeches, we construct a unique dataset containing the positions of banks and national regulators on the regulatory initiatives of Basel II and III. We document that the probability of a regulator opposing a specific initiative increases by 30% if their domestic national champion opposes the new rule, particularly when the proposed rule disproportionately affects them. We find the effect is driven by regulators who had prior experience of working in large banks – lending support to the private-interest theories of regulation. Meanwhile smaller banks, even when they collectively have a higher share in the domestic market, do not have any impact on regulators’ stand – providing little support to public-interest theories of regulation. Finally, we show this decision-making process manifests into significant watering down of proposed rules, thereby limiting the potential gains from harmonization of international financial regulation.

Keywords: Political Economy, Financial Regulation, Textual Analysis

JEL Classification: P43, G28, G21

Suggested Citation

Haselmann, Rainer F. H. and Sarkar, Arkodipta and Singla, Shikhar and Vig, Vikrant, The Political Economy of Financial Regulation (May 25, 2022). LawFin Working Paper No. 45, Available at SSRN: https://ssrn.com/abstract=4250919 or http://dx.doi.org/10.2139/ssrn.4250919

Rainer F. H. Haselmann

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )

Mertonstrasse 17-25
Frankfurt am Main, D-60325
Germany

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Arkodipta Sarkar

National University of Singapore ( email )

Kent Ridge
119077
Singapore

Shikhar Singla (Contact Author)

London Business School - Department of Finance ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

Goethe University Frankfurt - Center for Advanced Studies - Foundations of Law & Finance (LawFin) ( email )

Theodor-W.-Adorno-Platz 3
60629 Frankfurt am Main
Germany

Vikrant Vig

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

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