Institutional Change in the Regulation of Financial Markets
A network projectTopic and Goals of the Network
The near-collapse of the global financial system with its imminent consequences for the real
economy is generally perceived as a crisis. Crises command the attention of politicians, experts
and the general public, and are expected to trigger responsive action. The financial crisis has at
first focused attention on measures to contain it, for instance on crisis management. By now, the attention
of politicians, economists and the media concentrates on the hoped-for recovery of the economy,
while scientific attention is still riveted on the causes of the crisis: How could a financial
crisis that had been widely believed to be impossible occur, how can it be explained? Prevalent explanations
focus on individual behaviour, on structural features of financial markets, and on the failure to regulate
them in such a way that their crisis potential, the "market failure" to which they were prone, is contained.
If a regulatory deficit is a major cause of the crisis, changes in the regulatory institutions seem to be called
for, and have indeed been discussed ever since the crisis became manifest. If economic crises are a trigger
of institutional change, of change in the mode in which markets are socially embedded, changes in the regulation
of financial markets triggered by the crisis pose a challenge both to analysts of institutional change, and to an
economic sociology concerned with the way in which markets are enabled, shaped and controlled by non-economic factors –
two analytical perspectives pursued at the MPIfG.
The process of institutional change in the regulation of financial markets that has already started and will presumably continue, with variable force, for at least the next year raises a host of questions about the change process at large, questions with considerable theoretical implications. Will new regulatory agencies be established, or will existing regulatory agencies be given new competences? Will regulatory agencies use existing competences differently, and will inter-agency relations have changed in the end? In what direction will the existing regulatory regimes (norms, standards) have changed? Will that change have been only incremental or basic, and will it be emergent or intentional? Who are the actors asking for, supporting, and implementing change, who opposes specific changes with what arguments? At which territorial level do we find the most important change agents, the national, the European, or the international, and at which level will the change have been most pronounced? If the major external change agents turn out to be politicians, what role have expert bodies played in the process, and what will be the balance between external intervention and self-regulation of market actors? Do different actors involved in the change process, both as subjects and objects of change, interpret or define the "problem" that is to be solved by a changed regulatory regime differently, and how important are such cognitive models or theoretical maps?
Questions such as these that refer to the change process at large can only be answered if we observe in detail the past, present and future changes in financial regulation coming in the wake of the crisis. The basic elements of financial market regulation are regulatory bodies, and instruments of regulation (norms, standards, sanctions). Targets of regulation are mainly banks, funds, and insurance companies, but also institutions that serve and enable financial transactions such as rating agencies and exchanges. Regulatory bodies exist at the national level (central banks, treasuries or finance ministries, independent regulatory agencies), at the level of the European Union (e.g. the ECB), and at the international level, where they include the G20 and the Financial Stability Board, the Bank of International Settlements and various agencies related to it, the Basel Committee on Banking Supervision, and the International Accounting Standards Board. Regulatory instruments are legal norms (e.g. taxation, CEO compensation), standards and obligatory procedures referring to accounting, risk management, bank activities (e.g. leveraging, credit giving, trading) and financial products (e.g. OTC-derivaties, CDS).
Obviously no single research institution would be able to set up immediately an empirical project covering all of these elements of financial regulation in the requisite detail. The MPIfG has therefore located ongoing research that deals with some specific element of financial regulation. The MPIfG has formed a collaborative international network of researchers whose joint efforts enable us to identify and explain the kind of institutional change taking place in the regulation of financial markets in response to the latest crisis.
The process of institutional change in the regulation of financial markets that has already started and will presumably continue, with variable force, for at least the next year raises a host of questions about the change process at large, questions with considerable theoretical implications. Will new regulatory agencies be established, or will existing regulatory agencies be given new competences? Will regulatory agencies use existing competences differently, and will inter-agency relations have changed in the end? In what direction will the existing regulatory regimes (norms, standards) have changed? Will that change have been only incremental or basic, and will it be emergent or intentional? Who are the actors asking for, supporting, and implementing change, who opposes specific changes with what arguments? At which territorial level do we find the most important change agents, the national, the European, or the international, and at which level will the change have been most pronounced? If the major external change agents turn out to be politicians, what role have expert bodies played in the process, and what will be the balance between external intervention and self-regulation of market actors? Do different actors involved in the change process, both as subjects and objects of change, interpret or define the "problem" that is to be solved by a changed regulatory regime differently, and how important are such cognitive models or theoretical maps?
Questions such as these that refer to the change process at large can only be answered if we observe in detail the past, present and future changes in financial regulation coming in the wake of the crisis. The basic elements of financial market regulation are regulatory bodies, and instruments of regulation (norms, standards, sanctions). Targets of regulation are mainly banks, funds, and insurance companies, but also institutions that serve and enable financial transactions such as rating agencies and exchanges. Regulatory bodies exist at the national level (central banks, treasuries or finance ministries, independent regulatory agencies), at the level of the European Union (e.g. the ECB), and at the international level, where they include the G20 and the Financial Stability Board, the Bank of International Settlements and various agencies related to it, the Basel Committee on Banking Supervision, and the International Accounting Standards Board. Regulatory instruments are legal norms (e.g. taxation, CEO compensation), standards and obligatory procedures referring to accounting, risk management, bank activities (e.g. leveraging, credit giving, trading) and financial products (e.g. OTC-derivaties, CDS).
Obviously no single research institution would be able to set up immediately an empirical project covering all of these elements of financial regulation in the requisite detail. The MPIfG has therefore located ongoing research that deals with some specific element of financial regulation. The MPIfG has formed a collaborative international network of researchers whose joint efforts enable us to identify and explain the kind of institutional change taking place in the regulation of financial markets in response to the latest crisis.
Organization and Contact
Till Martin Kaesbach
Phone +49 221 2767-508
Phone +49 221 2767-508