The political economy of financial regulation of US investment banking

Abstract

This thesis analyses the political economy of the financial regulation of US investment banking, which is an under-researched topic within the IPE of finance. Various academics claim investment banks – or “Wall Street” – have significant influence on regulatory decision-making as well as policy making more generally so that they can shape the outcomes to suit their preferences. As this thesis will show, the vast majority of these claims are not rooted in empirics. The dissertation examines the factors and circumstances that led to a de-regulatory outcome in the area of financial regulation of investment banking. Five case studies are analysed in this regard: the repeal of the Glass Steagall Act, which is split into three case studies given the length of the period of observation and complexity involved, the Commodity Futures Modernisation Act, which legalised the non-regulation of OTC derivatives markets in the USA, and the Securities and Exchange Commission’s alternative net capital rule regime and Consolidated Supervised Entities Programme. The author tests to what extent interest group based explanation, the role of ideas, the judiciary as well as regulators’ statutory authority played a role in arriving at deregulation. The thesis’s case studies span a period of fourty years.
When analysing the cases, the thesis finds that investment banks’ interest groups were important in providing regulators with information, however the role of the judiciary in interpreting existing laws and thereby given them a different meaning carried as much weight in deregulatory policy outcomes as the aspect of regulators’ own regulatory amendments. Generally speaking, absent legislative change, regulators were successful in achieving their policy outcomes if they were largely aligned with the ideational consensus of the regulatory and market community and acted within their statutory authority. Regulators failed when they acted within their authority, but went against the ideational consensus of the entire regulatory and market community. The thesis shows that these episodes of de-regulation were in fact not driven by “Wall Street” and its lobbyists, but the result of complex chains of causalities in which the judiciary and regulators played major roles.