Policy takers or policy makers?

The lobbying of
global banking regulators
Kevin Young
Department of Political Science, University of Massachusetts Amherst, Thompson Hall, 200 Hicks Way,
Amherst, MA 01003, U.S.A.
1. Financial regulation, private power,
and public purpose
Do businesses act as passive policy takers, or do they
shape the policies to which they are subject? This
is a crucial question when it comes to nancial
regulation because the operation of nancial ows
is so absolutely fundamental to our everyday
existence. As most readers of this special issue will
no doubt be well aware, the shape of nancial
regulation can have wide-reaching consequences.
Financial regulationwhen it is effectivecan help
prevent nancial crises and ensure that private
sector innovation and ingenuity are channeled into
a thriving system of credit creation and a healthier
economy. When it is insufcient, nancial regulation
can have any variety of adverse consequences, from
distorting markets in inequitable ways to making
nancial booms and busts more severe.
The nancial industry is concerned with the man-
agement of what might be called one of the great
infrastructural resources of our civilization:
credit. Other than perhaps electricity and petro-
leum, there is little else that shapes and binds
Business Horizons (2013) 56, 691701
Available online at www.sciencedirect.com
www.elsevier.com/locate/bushor
KEYWORDS
Bank lobbying;
Financial regulatory
policymaking;
Post-crisis nancial
reform;
Regulatory capture
Abstract Do nancial sector groups act as passive policy takers, or do they shape
the policies to which they are subject? This article responds to this question with three
arguments pertaining to the policy shaping power of the nancial industry when it
comes to international nancial standards. First, industry groups confront a number of
additional challenges when it comes to lobbying international regulatory bodies,
which tend to be more opaque in their decision making and more difcult to hold
accountable when they make unpopular decisions. Second, while these groups are
sometimes able to shape nancial regulatory policy, the extent of this inuence is
more partial and contingent than most depictions suggest. The third argument
advanced is that since the global nancial crisis, business groups have had many
of their traditional lobbying tools adversely affected, making lobbying a more uphill
battle than before. Financial industry groups are able to inuence the governance of
their own activities and act as policy shapers some of the time, but are less strongly
positioned in this role than many existing depictions seem to suggest.
# 2013 Kelley School of Business, Indiana University. Published by Elsevier Inc. All
rights reserved.
E-mail address: kevinlyoung@polsci.umass.edu
0007-6813/$ see front matter # 2013 Kelley School of Business, Indiana University. Published by Elsevier Inc. All rights reserved.
http://dx.doi.org/10.1016/j.bushor.2013.07.010
together the organization of our contemporary
economy more than nancial ows. Both the hedge
fund manager in his Park Avenue apartment and the
single mother of four in her soon-to-be foreclosed-
on home depend (albeit in varying degrees and in
different ways) on the shape of the nancial system.
If nance and nancial regulation are so fundamen-
tally important to everyday life, then the question
of how nancial regulation is controlled is deeply
important. Regulationespecially nancial regula-
tioncan be highly complex. However, the basic
spirit of regulation is usually the same in principle.
The spirit of regulation is to modify the behavior of
business from what it would otherwise be: regula-
tion fundamentally governs or shapes the market.
However, if the very businesses that regulation is
meant to shape are themselves shaping the regu-
lations to which they are subject, a host of problems
may result. Private inuence over public regulation
may result in the undermining of the intended public
purpose of the regulation, orand these are not
mutually exclusiveprivate rms can use their in-
uence over the content of regulation to shape the
market in their interests, for example by affecting
the playing eld of market competition in a way
that favors their interests and disfavors their com-
petitors. Either way, either the general spirit or the
specic intent of regulation is undermined.
However, are private businesses able to shape
nancial regulation, or are they simply passive tak-
ers of regulation that are forced to comply with and
are unable to shape the rules to which they are
subject? The popular media and indeed the majority
of academic literature on this subject would re-
spond, They are policy makers; just look at those
powerful bank lobbies! The business and trade
press, populated with the practical day-to-day con-
cerns of dealing with new nancial regulations,
would likely answer the opposite: Business is
clearly a policy taker. Just look at all these new
regulations businesses have to deal with! In this
article, I will argue that the truth of the matter is
much more complicated than either of these posi-
tions. The nancial industry is able to shape the
nancial regulation to which it is subject some of
the time and under some conditions, but it is still a
long way off from being the savvy policy shaping
force that many depictions suggest. Indeed, since
the crisis, nancial industry groups have come
against more challenging times when it comes to
successfully shaping the content of nancial regula-
tion to align with their preferences.
My analysis proceeds in two stages. I rst set
out the dominant way scholars have thought about
nancial industry inuence over international nan-
cial regulatory bodies and provide some insights and
oversights of existing work in this area. I argue that
when it comes to international nancial standards,
nancial industry groups confront a special set of
challenges because the policy making process they
are trying to inuence is both more opaque and more
difcult to hold accountable when controversial de-
cisions are made. Secondly, I advance an empirical
case for why we should think about nancial industry
inuence as highly contingent and unstable. In par-
ticular, I argue that since the global nancial crisis,
nancial industry groups have had many of their
traditional lobbying tools adversely affected, making
successful lobbying a more uphill battle than before.
While these groups have succeeded in shaping some
recent regulatory policies, they have become more
policy takers than policy shapers since the crisis.
2. The state of the art
There is wide-ranging scholarship on the political
economy of international nancial regulatory bod-
ies, such as the International Organization of Secu-
rities Commissions (IOSCO), the Basel Committee on
Banking Supervision (BCBS), the International Ac-
counting Standards Board (IASB), and many others
(Hale & Held, 2011). Academics have honed in on
how these institutions operate as innovative trans-
national governance bodies effectively operating
as a unique form of global governance, how they
generate the international nancial standards, and
howand whetherthese standards are enforced
among governments and rms around the world.
One thing that has haunted this scholarship from
its early beginnings is the following question: is the
(private) nancial industry able to inuence the
(public) international regulatory bodies that seek
to govern the nancial industry? With respect to
purely private international bodies like the IASB,
this question is completely trivial since this body is
wholly private in the rst place. However, for other
international nancial regulatory bodies, the ques-
tion looms. In this section, I elucidate how existing
scholarship has thought about this issue.
2.1. Diverse tools of inuence
Financial industry groups have a wide range of tools
at their disposal to try to inuence the regulatory
policies to which they are subject. As is emphasized
most frequently when we hear about the nance
lobby, nancial industry groups or individual rms
can offer campaign contributions to elected of-
cials. Financial industry groups can also offer valu-
able information to regulators. Furthermore, like in
any industry, they can engage in strategic issue
692 K. Young
framing either with regulators, elected ofcials, or
the public at large in an attempt to promote their
point of view on a particular issue. They can also use
the political process to arrange for legislative over-
sight over their regulators when these regulators
take actions with which they fundamentally dis-
agree, and they can utilize their personal ties with
public ofcials, as is implied by the oft-cited theory
of revolving doors in nance. Furthermore, the
nancial industry can benet from its structural
importance in the economy: the central position of
banks and other nancial institutions in the econo-
my means that when the industry speaks, policy
makers listen. Through the use of all these tools,
nancial industry groups can benet from the fact
that the particular content with which they deal
tends to be relatively obscure and technical, which
not only makes their specialist knowledge highly
valued but may also eliminate potential counter-
vailing groups from causing trouble. Lobbying al-
ways functions much smoother if you do not have
many opponents. In this vein, many argue that the
kind of civil society agitation associated with other
regulated areas of the economy (e.g., environmen-
tal policy or food regulation: both feature well-
organized non-governmental organizations [NGOs]
and research institutes taking positions much dif-
ferent from the regulated industry) is lacking in
nance because of its inherent complexity.
As this extensive list suggests, academics have
theorized at considerable length about the various
means or tools that nancial industry groups
might use to inuence international nancial regu-
latory bodies. The only problem with this list of
tools is that these factors are seldom empirically
tested as predictors of inuence over regulatory
content. We actually know surprisingly little about
which of these factors helps the nancial industry
shape policy more effectively than others. A num-
ber of sophisticated national quantitative studies
exist but are limited to analyzing what can be most
easily measureable, such as campaign contributions
to elected ofcials in the United States (Mian, Su,
& Trebbi, 2009; Puente, 2012). Many qualitative
case studies have examined instances of nancial
industry lobbying over specic pieces of regulation,
but they suffer from their own methodological
shortcomings, principally that individual case
studies might obscure general patterns. When it
comes to analyzing international regulatory bodies
like the IOSCO or the Basel Committee, qualitative
case studybased evidence is usually used
(Pagliari, 2011; Tsingou, 2008; Young, 2012).
In the place of systematic analyses of the nancial
industrys policy shaping role, most predominant
ways of thinking about nancial industry inuence
reect an everything in the basket model of inu-
ence: there are a large number of factors suggesting
that nancial industry groups can exert inuence
over regulatory content. Put differently, the nancial
industry is assumed to get a great deal for what it
wantsor indeed most of what it wantsbecause of
the vast combination of tools it has at its disposal. So
extensive are these tools, the typical narrative goes,
that the nancial industry is not just able to inuence
regulatory policy or shape it in subtle ways; rather, it
can capture the entire process. Indeed, the majori-
ty of academic literature on the subject is oriented
around the analytical device of regulatory capture
(Johnson, 2009; Pagliari, 2012).
2.2. Stigler and regulatory captures
intellectual foundations
The notion of regulatory capture is a concept in-
formed by the work of George Stigler (1971) on the
political economy of regulation. Theorizing about the
role of business in regulation in the early 1970s,
Stiglers pioneering work in this area argued that
public ofcials usually design regulation to favor
groups that offer themthe highest degree of political
support. As such, the content of regulation reects
private interests, particularly of those groups that
could successfully inuence policy makers, rather
than the public interest at large. In this model of
thepolitical economy, Stigler sought to point out that
regulation can be captured by private sector groups
(typically concentrated producer groups) that orga-
nize to inuence regulators. In his words, as a rule,
regulation is acquired by the industry and is designed
and operated primarily for its benet (Stigler, 1971,
p. 3). Such a contention builds on two prominent
strands of thinking in U.S. political scienceone old
and one new at the time. The old idea was that the
more the state approached private business with the
objective of regulating it, the more the state unin-
tentionally drew the business community closer to
the state. Such a notion has long been latent in
American political thought and relates to the cau-
tious approach that many right-leaning thinkers have
approached regulatory politics, essentially with an
eye to the cronyism that it could generate. The new
idea was the central notion within Mancur Olsons
Logic of Collective Action, a classic political science
theory that argued forcefully for a general property
of political organization: namely, small groups are
able to mobilize more effectively than large groups
because of the free-riding challenges that come with
large groups.
Stiglers concept of regulatory capture is regu-
larly invoked within academic scholarship on nan-
cial regulation. However, despite its widespread
Policy takers or policy makers? The lobbying of global banking regulators 693
invocation, several aspects of the conceptand its
extensions to our current time and circumstances
are often elided. First, while the notion of capture
has provided an analytical device that contempo-
rary scholars utilize with ease and great rhetorical
effect, the public choice literature following Stigler
(1971) was much less certain of the extent to which
capture was likely. In particular, even other Chica-
go-school scholars skeptical of state regulation,
such as Becker (1983) and Peltzman (1976, 1989),
thought that regulatory capture is likely to be
limited by the fact that liberal democratic societies
are characterized by a plurality of different inter-
ests vowing for inuence over policy making. Put
simply, the fact that there are competing groups
vying for inuence means that any one group will
have a hard time capturing regulatory policy.
The second reason why Stiglers notion of regula-
tory capture might be questioned in the context of
modern nancial regulation is because of the scope
of analysis. It is based on regulation designed by
elected ofcials. This is signicant because as more
recent scholarship has observed, one of the most
pronounced changes in public policy making in the
last two decades has been the planned institutional
delegation to independent regulatory agencies,
which are by their very nature several steps re-
moved from the machinations of electoral politics
(Gilardi, 2007; McNamara, 2002). Such a trend has
been especially marked in the realm of nance,
whereby central banks and regulatory agencies have
both been given much more agency independence
than they enjoyed in the past. This raises questions
about the mechanisms of regulatory capture in
nance since it is not immediately clear what pri-
vate sector actors could trade for distortions to
the regulatory framework.
Third, Stiglers notion of regulatory capture sug-
gests that private actors work to increase regulatory
costs rather than to decrease them. This stands in
strong contrast to what most scholars understand in
terms of the goals private actors face with new
stringent regulation, particularly in nance, where
a consistent assumption is that the aim of lobbying is
weakening regulation. Those who invoke the phrase
today forget that in Stiglers eyes, increasing regu-
latory stringency is detrimental to social welfare in
the sense that it increases the costs of goods and
services to consumers. Since regulation changes the
character of market relationships, it naturally has
some effect on the competitive playing eld be-
tween rms. Thus, a concern with business lobbying
always decreasing regulatory stringency and making
nancial regulation weak and imsy might be mis-
placed. In this regard, a rm may simply say to
itself, A costly regulation imposed on me and my
competitors might be painful for me in the short run,
but if it will wipe out my competitors, it may even be
useful for me.
From this discussion, we can derive that the
Stiglerian notion of regulatory capture may be less
applicable to modern nancial regulation than one
might rst think. On the above grounds, we might
question the explanatory power of this analytic
device beyond, of course, the useful rhetorical
device that it serves; for example, as a kind of
conceptual antidote to the notion that regulation
is always designed in a disinterested fashion and in
the general public interest.
2.3. How the international dimension
complicates matters
How does the international dimension of nancial
regulatory policy making play into these dynamics?
Much existing scholarship has suggested that the
construction of nancial regulatory standards at
the international level simply amplies the extent
to which nancial industry groups are able to
capture the regulatory policy making process. In
other words, the fact that much nancial regulation
is now being designed by international regulatory
commissions and organizations means that nancial
industry groups are able to shape regulatory policy
content more than at the national level. There are
three key ways in which international regulatory
forums are different from national regulatory agen-
cies: accountability, opacity, andremoteness. Each of
these factors plays into how we might usefully think
about the question of nancial industry inuence.
International regulatory bodies are different from
national nancial regulatory agencies because there
are fewer mechanisms of formal accountability
for them. This is not a value judgment but an empiri-
cal one. Even literature that has celebrated transna-
tional regulatory policy making as an innovative
new mode of governance (e.g., Hale & Held, 2011;
Slaughter, 2004) has remarked that there is a striking
lack of formal accountability mechanisms for these
bodies. As Underhill and Zhang (2008, p. 29) asserted
about the Basel Committee on Banking Supervision,
this international body has been characterized by
virtual separation from any accountable political
process. Furthermore, the decisions of these kinds
of transnational regulatory bodies are not subject
to the approval of any external body. Since the
nancial crisis, there has emerged a new public
ritual of the BIS Board of Governors (a collection
of central bank governors) signing off on newpolicy
decisions by the BCBS, but this pales in comparison
to the formal legal procedures that have to take
place when national nancial regulation is being
694 K. Young
developed. The same could be true for other inter-
national regulatory bodies: whatever one thinks of
the IOSCO or the IAIS, these bodies are not account-
able to a public that can vote themout or dispose of
themif they make costly decisions. Normal mecha-
nisms of democratic accountability built up over
many years at the national level simply do not exist
at the international level. Whether we think this is a
good thing or not, it should certainly play into how
we consider nancial industry inuence.
A related aspect to this is that the policy making
process at the international level is highly opaque:
decisions are made not through standardized bu-
reaucratic procedures but through closed-door ses-
sions that are often highly informal in character.
Most international nancial regulatory bodies do
produce reports, conduct quantitative impact stud-
ies, and engage in a post-and-comment procedure,
which in some ways mimic national-level practices,
but there are nevertheless important differences. In
the United States, for example, nancial regulatory
agencies are subject to legislation that controls
how the policy making process must proceed. The
Administrative Procedures Act, for example, speci-
es timelines for review and comment periods and
ensures a formal process is followed when regulatory
changes are undertaken. Furthermore, most national
jurisdictionsat least in democratic countries
allow for access-to-information requests to these
agencies when they contest regulatory opacity.
The other way in which international nancial
regulatory bodies are different is the most obvious
one. These bodies are more remote than national
regulatory agencies. Because they operate on a
highly informal basis (most bodies have very small
secretariats, and meetings are highly information
based and informal), it is a challenge for those
contesting their operations from the outside to
critique decisions as they are being formulated or
agreed upon. This remoteness factor relates to
opacity: the timing and location of their meetings
are often unknown and reach public attention later.
These remoteness factors have important effects on
the diversity of interest groups that can mobilize
over the content of new nancial regulations as they
are being developed. Put simply, it is harder to
mobilize for or against a policy being designed far
away than it is to mobilize for or against a policy that
is being designed close to home. This might not be
true for all international bodies, but in nance in
particular the workings of international regulatory
bodies are likely to be much less obscure and un-
known, however important their decisions might be.
Most existing scholarship suggests that these spe-
cial conditions amplify nancial industry inuence
and facilitate transnational regulatory capture.
Lack of accountability mechanisms, opaqueness,
and remoteness all contribute to nancial industry
inuence in a systematic way. Some have pointed to
the fact that international-level regulatory policy
making by groups like the BCBS or the IOSCO are
associated with a context that makes it easy for
some groups to act as specialized interlocutors with
these bodies, essentially feeding them (biased) in-
formation as to the correct design of particular
nancial regulatory rules. International associa-
tions, such as the Institute of International Finance
(IIF) and the International Swaps and Derivatives
Association (ISDA), are often seen in this light since
they often meet with bodies like the BCBS in high-
level forums to exchange views and information.
The fact that international-level policy making oc-
curs at a level that is highly opaque and relatively
unknown to most of the public means that these and
other international associations can act to inuence
policy content at early stages of the policy making
process, and they can do so systematically given the
lack of alternative voices at the table. A range of
work has illustrated, for example, the ways in which
international nancial sector associations work with
the BCBS to promote the use of particular nancial
models (Tsingou, 2008; Underhill & Zhang, 2008).
There is something useful about these insights.
However, as I have illustrated in empirical detail
elsewhere, nancial industry groups inuence over
the policy making process has been much more
inconsistent than many depictions suggest (Young,
2012). Even when nancial industry groups organize
large-scale international lobbying campaigns to get
international regulators to change a policy proposal
in their preferred direction, they can lose. This
reects some truisms observed in the broader aca-
demic literature on interest groups. First, lobbying
resources are not the same thing as lobbying suc-
cess. Second, access (to international regulatory
bodies) is not the same as inuence (over the policy
process or eventual policy content).
3. Lobbying success is a variable, not a
constant
A more nuanced and empirically skeptical look at
the international regulatory policy making process
suggests that nancial industry groups have a harder
time getting what they want out of international
regulators than one might rst think. It does not
deny that nancial industry groups cannot or do not
act as policy shapers some of the time, but it regards
the issue as an empirical one and weighs the differ-
ent kinds of power resources private sector groups
have at their disposal relative to the degree of
Policy takers or policy makers? The lobbying of global banking regulators 695
discretion possessed by international regulatory
bodies. I argue that what is absolutely crucial in
understanding power relationships between differ-
ent parties is not what happens when both parties
already agree on something but what happens when
they disagree. In this regard, to understand nancial
industry groups policy shaping role, one needs to
think about the power resources they possess rela-
tive to international regulators. Let me advance two
propositions that are relevant here:
Proposition 1: When regulators and the nancial
industry are already in agreement, nancial in-
dustry groups can have an important impact as
policy shapers.
Proposition 2: When regulators and the nancial
industry are in disagreement, the nancial indus-
trys ability to act as successful policy shapers is
weak relative to the situation at the national
level.
While nancial industry groups have a lot of tools
at their disposal to affect their desired changes in
nancial regulation, these tools might be weakened
when it comes to international nancial regulatory
bodies. Consider the lack of accountability mecha-
nisms previously outlined. While these are usually
considered to be assets for groups able to secure
good access to international regulatory bodies,
they can also have the opposite effect. In the
absence of formal accountability mechanisms,
what can nancial industry groups do if they dis-
agree with the international regulatory bodies
decision? Holding a legislative oversight hearing
in the global parliament is not a possibility since
a global government does not exist. What about
threatening the chances of their next election?
Since the individuals that construct international
nancial rules are not elected and are even more
removedfrom the democratic political process than
at the national level, this possibility is also exclud-
ed. In short, the lack of accountability mechanisms
means that nancial industry groups have fewer
means at their disposal to get the kind of regulatory
changes they would prefer when they disagree with
international regulators.
The opacity of international nancial regulatory
bodies also has consequences for the policy shaping
power of nancial industry groups when the two
disagree. Opacity means that both insiders and
outsiders have less information about how to adjust
their advocacy strategies in response to feedback.
For example, in most national jurisdictions, there
is a formalized process of regulatory rulemaking
in which nancial industry representatives are able
to track a formal process of rulemaking, question-
and-comment period, and regulatory changes, all
with regulatory ofcials with whomthey have long-
standing relationships. Legislative hearings on
nancial regulatory rule changes (when they do
occur) provide yet further information. Financial
industry groups have access to relatively regular
feedback on what is being changed and often why.
Among international nancial regulatory bodies,
however, the policy making process does not pro-
vide this feedback. There is more uncertainty about
when and why nancial regulatory changes are
made.
The third factor is remoteness. This too may neg-
atively affect nancial industry groups chances to
shape policies when they disagree with international
regulators. As stated above, remoteness means that
it is harder, in relative terms, for interest groups
and the public at large to access the institutions
making decisions. This may mean that particularly
well-resourced groups reach international nancial
regulatory bodies to a disproportionate extent, but
it may also have other consequences. Remoteness
can mean that regulators are less constrained by
the dictates of their national political systems and
entrenched interests there, and global-level organi-
zation and resources can help regulators survey con-
ditions across the entire globe. This is consequential
because it means that international nancial regula-
tory bodies can see whether or not there is disagree-
ment among the business community for a policy they
are designing. Consequentially, the chances that
business groups compete is amplied rather than
theinuence of any one particular groupdominating,
nancial or otherwise.
3.1. Three empirical arguments
So far, I have argued that we have several reasons
to doubt that the nancial industry is able to engage
in regulatory capture of todays international
nancial regulatory bodies. Some of the factors
that make international regulatory policy making
unique and different are also factors that might
inhibit nancial industry inuence at least when
regulators and nancial industry groups are in
disagreement.
An alert reader will no doubt offer the reply that
this is more of an empirical question than a theoreti-
cal one. Sure, there may be some holes in the theo-
retical apparatus we use to think about nancial
industry inuence, but surely, there is evidence for
policy shaping out there. Furthermore, one might
challenge the possibility that nancial industry
groups and international regulatory bodies disagree
at allor at least thefrequencyof that disagreement.
696 K. Young
In the remainder of this article, I want to focus on
these two issues. Political scientists have produced a
vast literature just to think through the question of
how the policy shaping power of business might be
measured empirically, yet since this is not the appro-
priate venue to discuss the various typologies of
power and precise estimation techniques for inu-
ence, the remainder of this article is devoted to three
simple empirical arguments. First, while there is
evidence that nancial industry groups are able to
shapepolicies at least some of the time, this inuence
appears to be highly inconsistent. Second, nancial
industry groups andinternational nancial regulatory
bodies disagree quite regularly. Finally, I will argue
that both of these empirical patterns have become
more pronounced in recent years since the global
nancial crisis: in other words, nancial industry
groups have lost policy shaping power rather than
gained it.
3.2. Inuence over policies occurs, but is
highly inconsistent
With respect to Empirical Proposition 1, there is a
wide range of evidence here. I have already men-
tioned the literature suggesting that nancial indus-
try groups have played an important role in shaping
aspects of the Basel II Accord. They played an
important role in securing value-at-risk (VAR) mod-
els into the market risk amendment.
However, this inuence has not been consistent,
especially where international regulators and
nancial industry groups disagreed. Financial in-
dustry groups like the IIF and the ISDA have been
able to support the use of an internal ratings-based
(IRB) approach to capital adequacy regulation in
the Basel II Accordone of the cornerstones of the
pre-crisis international regulatory framework
which is both important and consequential. How-
ever, this evidence alone elides the fact that these
same groups actually pushed for much more sub-
stantial changes to international regulatory stand-
ards, such as the use of full internal models. Despite
concerted international attempts and excellent
access to the BCBS, these battles were lost in a
big way.
Another example is the regulatory policy proposed
by the BCBS designed to get banks to hold capital
against unexpected management and infrastructural
failuresthe so-calledoperational risk policy. Many
nancial industry groups lobbied heavily for this
policy to be either gutted or scrapped, and they
lobbied hard at both the international level and at
the national level, trying to inuence individual reg-
ulatory agencies that sat on the BCBS. They failed to
change the policy in the desired direction, although a
small minority of banks did manage to effect changes
in the policy against the preferences of the majority
of the nancial industry (Young, 2012).
Often, what appears to be inuence at one point
ends up shifting in favor of international regulators
own initial position. Once again, the formation of
the Basel II Accord provides a useful illustration. As
the Basel II Accord was beginning to take shape in
2000, the BCBS proposed that the measurement of
capital adequacy would have a particular denition
of capital adequacy at its heart: banks should hold
capital for both their unexpected losses and their
expected losses. Banks and nancial sector associ-
ations around the world challenged this expected
losses policy. In manifold forums ranging from com-
ment letters and conference calls to published stud-
ies and in-person meetings with BCBS members and
the BCBS as a whole, nancial industry groups cri-
tiqued this policy on the grounds that it constituted
a form of double counting and was all belt and
suspenders. They advanced sophisticated argu-
ments to the BCBS based not only on the latest
capital theory at the time but also based on hard
empirical data. Low and behold, in the autumn of
2003, the U.S. regulators practically halted an en-
tire BCBS meeting to declare that this longstanding
policy of expected losses was to be changed.
Financial industry groups applauded the decision.
Then, in the spring of 2004, just as the BCBS nego-
tiations were drawing to a close, the BCBS decided
to increase regulatory capital through a scalar for
exactly the value expected losses were calculated.
Thus, while the expected losses policy was de-
feated in the spring of 2003, it then re-emerged
in a different form in 2004. What could nancial
industry groups do to change this? Absolutely noth-
ingat the international level at least.
3.3. Thank you for offering this new
regulation. Now, let us tell you 100
reasons why your policy is problematic.
With respect to Empirical Proposition 2, there is
evidence that international nancial regulators
and nancial industry groups disagree on a regular
basis. On the one hand, evidence for this comes in
the form of the hundreds of comment letters that
international regulatory bodies have received from
nancial industry groups over the years. Comment
letters have become a standardized part of the
regulatory policy making process at the national,
regional (European Union), and international
levels. As anyone familiar with the content of these
letters is well aware, they are full of contestation
and discord. Financial industry groups usually begin
with a standard line in their letters to international
Policy takers or policy makers? The lobbying of global banking regulators 697
regulators: Thank you for offering this new regu-
lation. We are pleased to comment in this important
process. Now, let us tell you 100 reasons why your
policy is problematic. Very few of these concerns
are even addressed by international nancial regu-
latory bodies let alone make it onto their agenda in
a way that has a consequence for eventual policy. It
is a challenge to nd instances when nancial in-
dustry groups agree with the BCBS policies: there is
a considerable level of disagreement between pro-
posed policies and nancial industry group prefer-
ences. If there were not, there would be little need
for comment letters to be sent at all and little need
for lobbying to take place. However, as most schol-
arship would agree, the extent of lobbying that takes
place is considerablea fact not only evidenced by
the volume and content of comment letters but
also by the BCBS own quantitative impact studies
(QISs), which showed both gains and losses for
banks around the world. To be sure, some policy
decisions are very expensive for banks to adjust to,
while others offer banks cost savings. The important
point here is that there is considerable variation:
banks and regulators do not agree, and in many cases
costs are considerable.
3.4. Reg Rage
One can actually show the extent to which interna-
tional regulatory rules are contested by looking at
general industry views and tracing the balance of
positive or negative sentiment expressed toward
these rules. One way to assess the sentiment within
a regulated industry is to look within specialist
publications that are marketed toward and auth-
ored by members of the nancial industry. In this
vein, the monthly magazine The Banker provides an
especially systematic tracking of nancial sector
sentiment toward a variety of new regulatory rules
as they are being developed at both the national and
international levels. Specically, since November
2005, the column Reg Rage has been reporting
on various nancial regulatory events. Authors of
this monthly column have reported each regulatory
event since that time on a continuum ranging, for
example, from Reg Zen to Irritation to Exas-
peration and, nally, to Reg Rage. While the
precise metric used has not been consistent since
the column started, we can measure more crudely
the positive, negative, and more neutral sentiment
expressed in this column (the actual scale reported
within The Banker varied over time, so I collapsed
5- and 6-point scales to 3-point scales oriented
around the position of acceptance/neutral, which
did not change over time). Table 1 shows the
balance of sentiment expressed toward national
and international regulatory rules produced from
November 2005 to December 2012.
These data suggest a picture of contention rather
than a position of rosy agreement. By this metric,
the nancial industry is either neutral or willing to
accept almost a third of all new regulations whether
at the national or international level. However,
there is also a signicant degree of disagreement
with regulatory output, and this seems to be more
intense when it comes to international regulations.
These data are hardly precise evidence that the
nancial industry and international regulators dis-
agree with respect to the content of regulations, but
these data and the hundreds of comment letters
produced by nancial industry groups in response to
nancial regulations are certainly suggestive evi-
dence that international regulatory bodies and -
nancial industry groups often do not see eye to eye.
3.5. Challenges since the crisis
One might reasonably object to my narrative thus
far that what is important is not a general snapshot
of nancial industry inuence or contention but
rather how things are changing. This issue allows
me to assess the third empirical proposition ad-
vanced above. In the next section, I argue that
the inconsistency of industry inuence has increased
since the recent global nancial crisis and the ex-
tent to which nancial industry groups and interna-
tional regulatory bodies disagree has increased.
This, I argue, points to a picture suggesting that
nancial industry groups have declined in power and
importance since the crisis as they have faced a
number of unique challenges due to the context of
the crisis and its aftermath.
Since the global nancial crisis, business groups
have had many of their traditional lobbying tools
adversely affected, making lobbying a more uphill
battle than before. The context in which the nan-
cial industry has had to engage in advocacy has
changed in two important ways since the crisis.
First, nancial regulation has become a salient is-
sue: people discuss nancial regulation on a more
regular basis than before. Financial regulation has
698 K. Young
Table 1. Financial industry attitudes to new nation-
al and international regulations
National
Regulations
International
Regulations
Positive 14% 7%
Acceptance/
Neutral
28% 28%
Negative 58% 65%
traditionally been characterized by what Culpepper
(2011) calls a situation of quiet politicsa situa-
tion whereby business groups are able to exercise
inuence because they are the only ones mobilized
for the issue (this has recently begun to be explored
in the case of nance in Baker, 2010; Pagliari &
Young, 2013). What this has meant is that a rela-
tively narrow collection of specialists within regu-
latory agencies and nancial industry groups were
the principle actors discussing, debating, and con-
testing nancial regulatory content. That changed
in a big way since the crisis. Financial regulation
moved from the business section to the current
affairs section of newspapers, and lms like Inside
Job (2010) and Too Big to Fail (2011) and many best-
selling books helped to popularize a national discus-
sion about nancial regulation that stands in sharp
contrast to the pre-crisis years. Now, most Ameri-
cans have some view of nancial regulation, and
policy makers face big incentives to listen or at least
be attentive to these new conditions.
Why does this matter? It matters because when
a regulatory area ceases to be associated with quiet
politics, it is believed to constrain the policy
shaping power of the particular business groups
being regulated. When a regulated industry be-
comes salient, it invites more scrutiny on their
activities as well as encourages a greater diversity
of groups to be involved in regulatory discussions.
Specialized NGOs (e.g., Finance Watch in Europe,
which received a s1 million subsidy from the Euro-
pean Parliament, or Americans for Financial Reform
in the United States) represent coalitional efforts
among diverse NGOs and labor unions to muster
their own lobbying efforts to act as a countervailing
force to the private nancial industry. Pagliari and
Youngs (2012) study of lobbying letters directed at
nancial regulatory agencies since the crisis shows a
signicant increase in mobilization of groups that
have traditionally shied away from nancial regula-
tory issues, such as labor unions and NGOs. A greater
diversity of groups are making contact with regula-
tory bodies in nance: the Financial Stability Board
has met with international trade union organiza-
tions, the Basel Committee on Banking Supervision
has conducted high-level meetings with the Inter-
national Chamber of Commerce, and the U.S. Secu-
rities and Exchange Commission has even engaged
with representatives from the Occupy Wall Street
movement. To be sure, access is not the same as
inuence. However, if anything, the greater plurali-
ty of groups engaging in nancial regulation speaks
to the more contested terrain the nancial industry
now faces.
There is evidence that relationships between
nancial industry advocacy groups and nancial
regulators became strained after the crisis. Follow-
ing the collapse of Lehman Brothers and the ensuing
market reactions in the fall of 2008, according to
many participants, there was a signicant drop in
communication between nancial industry associa-
tions and regulatory bodies at both the national and
transnational levels. This might not be terribly sur-
prising as regulators had extremely pressing items
on the agenda to say the least. However, when
nancial sector groups tried to bring themselves
back into dialogue with policy makers, they faced
signicant challenges. As the dust of the crisis began
to settle, private sector groups found it challenging
to re-establish the kind of regulatory dialogue they
had previously enjoyed. This was not, however, a
seamless process, as considerable work had to be
done to try to secure meetings with regulatory bod-
ies, and in some instances, groups had to muscle
into meetings according to many industry represen-
tatives. Dialogue between regulators and nancial
industry groups not only became more formal and
more restricted but nancial industry groups also
learned of new regulatory policy changes at a much
later stage than they had in the past.
Instead of a casual exchange of information with
regulators, nancial industry participants were in-
vited to present short formal presentations and to
answer specic questions elded to them by regu-
lators. In some instances, going off script and
raising issues not already on the agenda has led to
participants being shot down aggressively by regu-
lators. Regulators often have stronger mandates
from their politicians back home than in the past,
insisting they send strong signals that progress on
nancial reform is indeed taking place, which has
had real consequences for how regulators react to
private sector critiques. For example, in private
meetings between the incoming Financial Stability
Board Chairman and then Bank of Canada Governor
(now Bank of England Governor), Mark Carney, the
CEO of JPMorgan Chase, Jamie Dimon, spoke out
aggressively against the new liquidity rules of Basel
III. This had two consequences: the rst was that
Carney reportedly left the room in haste; the second
was that other bankers present at the meeting were
horried at the social opprobrium, later issuing
apologies to regulators (Masters & Goff, 2011;
Younglai & Halstrick, 2011). These changes in the
relationships between regulators and the nancial
industry have taken place in an environment in
which nancial regulation is more stringent and
costly than before and the nancial industry sees
new regulations more critically than in the past.
Using the date from The Banker magazine men-
tioned above, Table 2 reports the extent to which
nancial industry sentiment has changed since the
Policy takers or policy makers? The lobbying of global banking regulators 699
crisis. What these gures show is that positive sen-
timent toward new nancial regulatory output has
declined, while negative sentiment has increased
signicantly since October 2008.
Financial industry groups have not been passive
participants in this process. They have adapted, for
example, by taking on a broader range of advocacy
partners, such as non-nancial rms (Pagliari &
Young, 2012), and by focusing more on policy imple-
mentation than on policy development (Young, in
press). Nevertheless, there does seemto be evidence
for the proposition that disagreement between in-
ternational regulators and nancial industry groups
has increased since the crisis. One key shift that
seems evident in the post-crisis period is that nan-
cial industry groups emphasize the costs of new
nancial regulations on the economy as a whole
rather than on the nancial industry per se. In reec-
tion of this move, industry associations like the Insti-
tute for International Finance and others have
worked hard to produce empirical studies on the
negative effect of Basel III and other regulatory
changes to the global economy. However, at nearly
every turn, regulators at both the international level
and in key jurisdictions in the United Kingdom have
challenged the empirical basis for these claims quite
publically (Pagliari, 2011).
Is nancial industry inuence less consistent than
in the past? This important question cannot be
empirically resolved here, but one relevant compar-
ison can be made between the lobbying and conten-
tion over Basel II, which was negotiated before the
crisis, and the Basel III Accord, which was negotiated
after. Basel III (BCBS, 2010) has been subject to deep
criticism, but there are fewer instances of good
evidence of nancial industry inuence. Industry
groups and regulators have disagreed on a great
many policies within the new accord, but little
seems to be changed at the formers behest. The
BCBS, particularly the American, British, and Swiss
regulators, had an appetite to increase the level of
Tier 1 regulatory capital and the international le-
verage ratio. Financial industry groups opposed both
but were not successful in bringing about their
desiredchanges. The BCBS introduced new (and fairly
strict) regulatory policies for the regulation of bank
liquidity, such as the net stable funding ratio and the
liquidity coverage ratio (LCR) policies, which repre-
sented signicant learning lessons following the
Northern Rock and Lehman Brothers events, respec-
tively. Many individual banks, banking associations,
andothers rallied against the stringency of these new
policies, in particular arguing that the LCR should
allow a wider class of assets to be included in the
denominator. A number of changes were introduced
to the LCR in January 2013, but none of these appear
to be aligned with what nancial industry groups
were lobbying. One change has occurred to the
LCR, which was a key demand of nancial industry
groups, and that is with respect to the timing of the
regulation. Like many aspects of Basel III, the LCR will
now be phased out in successive periods. The recent
changes mean that only 60% of the LCR minimum is
required beginning as originally scheduled in 2015,
with a 10% rise each year until it reaches 100% in 2019
(see BCBS, 2013, p. 2). Other key demandssuch as
the inclusion in the LCR of new securitization prod-
ucts that the nancial industry worked hard to gen-
eratesince the crisis and the inclusion of key nancial
instruments (e.g., covered bonds, which are key
nancial instruments for some countries, such as
Denmark and Germany)were not heeded.
4. Conclusion
This special issue has usefully explored various ques-
tions of the governance of nance. My contribution
to this discussion has been to explore one aspect
of this terrain that often surfaces in discussions of
the governance of international nance: the ques-
tion of private sector inuence. Specically, I have
explored the question of whether we should think of
nancial industry groups as policy takers or policy
shapers.
I have argued that when it comes to international
nancial standards, nancial industry groups con-
front a special set of challenges because the policy
making process they are trying to inuence is both
more opaque and more difcult to hold accountable
when controversial decisions are made. This does not
mean that nancial industry groups are not able to
effect desired changes to international regulatory
rules: they can, and they do. However, when we
consider their role, we should take into consideration
the fact that this policy shaping power is often
highly variable. In particular, when international
regulatory bodies and nancial industry groups
disagree on a policy, nancial industry groups inu-
ence over the content of regulation is signicantly
700 K. Young
Table 2. Financial industry attitudes to new regu-
lations before and after the nancial crisis
Pre-Crisis
Nov. 2005
Sept. 2008
Post-Crisis
Oct. 2008
Dec. 2012
Positive 19% 6%
Acceptance/
Neutral
36% 22%
Negative 44% 73%
restrained, particularly compared to the national
level of governance. Moreover, the global nancial
crisis has made nancial sector lobbying a more uphill
battle than before. While these groups have suc-
ceeded in shaping some recent regulatory policies,
they have become more policy takers than policy
shapers since the crisis.
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