From Independence to Politics in Financial Regulation

Independent agencies have long dominated the institutional structure of financial regulation. But after the 2007-08 crisis, this Article argues, the independent agency paradigm is under attack. To monitor financial institutions more thoroughly and address future failures more effectively, the U.S. and other industrialized nations redesigned the framework of financial regulation. Post-2008 laws allocate new powers not to independent bureaucrats, but to elected politicians and their direct appointees\n.\nTo document this global paradigm shift, the Article examines the laws of fifteen key jurisdictions for international banking: the U.S., the U.K., France, Germany, Japan, Spain, Switzerland, Belgium, Ireland, Italy, Denmark, Canada, Australia, Mexico, and South Korea. This analysis points to a marked increase in the influence of elected politicians over banking. Politicians' new powers extend not only over emergencies, but also over financial institutions' regular operations. Politicians are now at the helm of innovative institutional arrangements, typically in the form of regulatory councils that encompass pre-existing independent agencies. In these councils, supermajority requirements and veto rights designate politicians as the ultimate decision-makers.\nThe Article shows how this paradigm shift resulted from the interplay of factors unique to the 2008 crisis and long run trends. The collapse of institutions in diverse areas of financial activity, including investment banks, insurance companies, and thrifts, created a sense that independent regulators as a class had failed. Concerns about regulatory capture, combined with disillusionment with the markets' potential to self-correct, further undermined confidence in past paradigms. Developments in financial markets attracted great interest from ordinary Americans, who over the last two decades have increasingly relied on the financial system for their pension savings, housing credit, and other investments. Politicians could not remain as distant from financial regulation as in the past.\nFrom a normative standpoint, politicians' greater involvement in financial regulation is in line with calls for enhanced presidential control over independent agencies. Scholars have argued that the President's stamp of approval will increase accountability and boost the legitimacy of hard choices, such as bank bailouts. However, greater political involvement might endanger financial stability, this Article argues. Electoral strategizing can influence politicians' bailout choices, as incumbents might be particularly sensitive to upheavals as elections approach. Politicians are also under pressure from groups at ideological extremes, which often express a deep distrust to the financial system. In this climate, financial institutions are likely to lobby politicians more intensely. Thus, the risk of a financial catastrophe may now hinge upon considerations that have little to do with the health of the financial system.

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