How Important Was “Regulatory Capture” in Causing the Global Financial Crisis?

Topics: Bank, Financial services, Financial crisis of 2007–2010 Pages: 5 (1600 words) Published: November 11, 2012
The purpose of this paper is to show that the “regulatory capture” has played a role not easily measurable in causing the global financial crisis. To illustrate this, the first step will to describe the “regulatory capture” in its three possible qualifications; then, I will explain, providing some examples, how each of these categories played a possible role in posing the basis for the financial crisis. While illustrating the different forms of capture I will present some questions that leave space to different answers. Finally, I will conclude that the regulatory capture have surely played a role in generating the crisis, but it is not possible to evaluate the effective role it had in causing it.

“Regulatory capture” is not easily definable, but it can be illustrated referring to three different theories. The first theory is the Pierson & Hacker’s theory of direct influence; the second one is the structural influence developed by Strange; and the last one is the intellectual capture discussed, among many, by Turner.

The first theory refers to the direct influence over regulators achieved through lobbying, political campaign finance and through the renowned revolving doors. The Bureau of Investigative Journalism, indeed, showed, in July 2012, that in London “an extensive trawl of registries, consultations and hundreds of interviews ha(d) identified 129 organisations engaging in some form of lobbying for the finance sector, with over 800 people employed directly and at a cost of £92.8m. Lobbyists include in-house bank staff, public affairs consultancies, industry body representatives, law firms and management consultants.” Moreover, Joseph Stiglitz shows in his last book “The price of inequality” (CNBC interview, 2012) that in the USA it was banks that pushed for the 1999 repeal of the Glass-Steagall Act and that they have also been lobbying against financial reform, the single most pressing issue facing the world's economy. In addition to this, it must be added that, in particular, the campaign finance (the financial investment that has “really paid off”, paraphrasing Stigliz) has played a significant function in the creation of important connections between the political world and the financial one. In fact, as the Warwick Commission (2009: 28) said the financial industry gave generously to all political parties across the board, and donors one day sometimes became policy officials the next day. Similarly the revolving doors, which in the US can take the name of “Government Sachs”, have built a solid bridge between legislators and regulators and the financial industry. However, dealing with this issue requires to face problematic questions involving public interest and “capture” itself. In particular, what should be questioned is to which degree putting experienced bankers of the major banks at the top level of regulatory agencies could represent a benefit for the society (in terms of better policies and regulation) or rather the more advanced stage of lobbying. Indeed, the dramatically increase of complexity of financial system requires regulators who can perfectly know the sophisticated dynamics through which risk is priced and managed. For instance, to this extent, allowing ex bankers to be the regulators would represent an efficient solution. However, financial crisis has shown that facing financial innovation and regulation by an excessive “laissez faire” can be very risky because of market inefficiency. This would suggest that sometimes regulator is in charge of putting limits to financial activity. Would ex bankers be willing or sufficiently independent to do it when necessary? This is the major source of doubt regarding the bankers-regulator solution.

The second theory, as said above, is the structural influence. We can think about it as the capacity of an individual or a group to influence the circumstances in such a way that the individual or group’s influences have the priority over others’...
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