Public Salience and International Financial Regulation. Explaining
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Public Salience and International Financial Regulation. Explaining the International Regulation of OTC Derivatives, Rating Agencies, and Hedge Funds by Stefano Pagliari A thesis presented to the University of Waterloo in fulfilment of the thesis requirement for the degree of Doctor of Philosophy in Global Governance Waterloo, Ontario, Canada, 2013 © Stefano Pagliari 2013 I hereby declare that I am the sole author of this thesis. This is a true copy of the thesis, including any required final revisions, as accepted by my examiners. I understand that my thesis may be made electronically available to the public. ii Abstract What explains the shift towards greater direct public oversight of financial markets in international financial regulation that has characterized the response to the global financial crisis of 2007-2010? Over this period, the main international financial regulatory bodies have abandoned the market-based mechanisms that had informed their approach towards the regulation of different financial domains in the years before the crisis and significantly expanded the perimeter of state-based regulation. However, the extent and the timing of this shift cannot be regarded only as the by-product of the crisis, nor they can be explained by the existing interpretations of the political determinants of international regulatory policies. This study builds upon existing state-centric explanations of international regulatory policies, but it goes beyond these works by exploring how the preferences of the most influential countries in response to the crisis have been influenced by variations in the degree of public salience of different financial domains. More specifically, this study argues that the lasting increase in the public salience of financial regulatory policies in the US and different European countries since the last quarter of 2008 has created strong incentives for elected officials in these countries to challenge the market-based approach that had emerged in the decade and half before the crisis and to directly interfere in the international regulatory agenda. In order to explain this shift, this study will analyse the evolution in the international governance of three sets of markets and institutions that have occupied an important position in the international regulatory agenda in recent years: 1) OTC derivatives; 2) rating agencies; 3) hedge funds. Besides making an empirical contribution to the literature on the politics of international financial regulation, this study also contributes theoretically to this literature by deepening our understanding of the nexus between international regulatory coordination and domestic public opinion. iii Acknowledgments This thesis is the end point of a five years long journey that brought me across many more places, cities, and countries than I could have ever imagined when I decided to do a Ph.D. This thesis would not have been possible without the support of a number of people that I was privileged enough to meet during this process. First of all, I need to thank my Ph.D. Supervisor Eric Helleiner. The kind of support, dedication, and enthusiasm that Eric has given me and my doctoral work have certainly exceeded even the most optimistic expectations I had while typing his name on Google in search for potential PhD supervisors. Working under Eric’s supervision during these years has been an invaluable experience, not only intellectually, but also from a personal standpoint. I am also grateful to the other members of my supervisory committee, Bessma Momani and Tony Porter, as well as the examiners Elliot Posner and Olaf Weber. They have provided me with many valuable suggestions and criticisms which will help me carry this project forward. This research project was born in Waterloo. The Global Governance Programme at the University of Waterloo has been an ideal intellectual nest and Waterloo has become a place that I have learnt to call home. This is largely thanks to the support of many friends and fellow students. The list of people to thank would be too long, but I am particularly grateful to Troy Lundblad, Laura Reidel, Michael Stevenson, and Jason Thistlethwaite with whom I have spent many winter days discussing half-baked ideas and sharing coffee and laughs. The University of Waterloo and the Center for International Governance Innovation have also provided the financial support without which this research would not have been possible. This research project has benefited enormously from the period spent as a Visiting Scholar at Columbia University. I am indebted to Initiative for Policy Dialogue and its staff for their support during this period. In particular, I need to thank Stephany Griffith Jones for making this experience possible and for many stimulating chats about financial regulation. I also thank Eva Kaplan and Sarah Green, whose help and friendship have contributed to making this a memorable period. Gaetano Gaballo and Maria Chiara Di Guardo have accompanied me during the long days at the Columbia Business School library when the core of this thesis has taken shape. Most of the writing has actually taken place in a number of bus terminals, train waiting stations, parks, and other unlikely places across Canada, from Vancouver to Halifax, and across the United States, from iv New York City to San Francisco. My eternal gratitude goes to all those bartenders that have tolerated my presence as I camped in busy coffee shops, reaching for the closest power plug to recharge my laptop. This thesis has also benefited enormously from the different academic conferences and workshops where I had the opportunity to present my research. The list of professors and Ph.d. students that I need to thank for their comments and words of encouragement here would be longer than this thesis. The different pieces of this dissertation have come together in London, where I have returned three years after having moved to North America. Teaching at the London School of Economics has allowed me to enter in contact and to learn from a large number of colleagues, fellow Ph.D. candidates, and bright students. In particular, I need to acknowledge the help received during this period by Andrew Walter and Kevin Young. I also need to thank two LSE graduate students, Catherine Hart and Berry Kurland, who have patiently proofread the entire manuscript. Also, working with the International Center for Financial Regulation in London and with its research team has been a precious opportunity and source of ideas. None of the names mentioned has been as affected by my decision to move across the Atlantic as my parents Luisa Ferrari and Antonio Pagliari. I need to thank them for their understanding and their support throughout these years when my desires brought me very far from them. Finally, I should thank Natali, another Ph.D. student with whom my path crossed at the London School of Economics, and who two years later became my wife. Among the many things Natali has taught me, there is certainly one lesson I should never forget. That is what really matters in life are the things that happen when we step away from our research and shut down our computers. I am grateful for continuously reminding me this lesson and for never taking my “One more minute, please. I need to finish something important!” as an answer. v Table of Contents List of Figures viii List of Tables ix Introduction 1 Chapter 1. The Evolution of the Public-Private Divide in the International Regulation of Finance 19 1.1 Plan of the Chapter 19 1.2 The Public-Private Divide from an Historical Perspective 20 1.3 Before the Crisis: The New Paradigm in the Regulation of Finance 22 1.4 The Initial Regulatory Response to the Crisis: Continuity with Market-based Regulation 28 1.5 The Second Stage of the International Regulatory Response to the Crisis 32 1.6 Conclusion 45 Chapter 2. Literature Review 48 2.1 Plan of the Chapter 48 2.2 Functionalist Explanations 51 2.3 Realist explanations 60 2.4 Varieties of Capitalism 64 2.5 Pluralist Explanations 69 2.6 Constructivist Explanations 79 2.7 Conclusion 89 Chapter 3. Issue Salience and Financial Regulation 91 3.1 Plan of the chapter 91 3.2 The Impact of Public Salience on the Policymaking Process 93 3.3 The Issue Attention Cycle 97 3.4 Financial Regulation as a Low Salience Area 101 3.5 Crises and their Impact on the Salience of Financial Regulation 104 3.6 An Empirical Analysis of the Salience of Financial Regulation112 3.7 Conclusion 125 Chapter 4. OTC Derivatives 128 4.1 Plan of the Chapter 128 4.2 The US Roots of the Transnational Private Regime Governing OTC Derivatives 131 4.3 The Continuation of Self-Regulation under the Shadow of the Fed 140 4.4 Derivatives in the Congressional Agenda 144 4.5 Lagging Behind: the Regulation of Derivatives in Europe 160 4.6 The Eurozone debt crisis and the regulation of sovereign credit derivatives 167 4.7 Conclusion 177 Chapter 5. Credit Rating Agencies 179 5.1 Plan of the Chapter 179 5.2 Enron, Parmalat and the Regulation of Rating Agencies before the Crisis 181 5.3 Diverging paths between the US and Europe 187 5.4 The Initial Response to the Crisis in the Regulation of Rating Agencies 196 vi 5.5 Congress and the Regulation of Rating Agencies 203 5.6 The Regulation of Rating Agencies in Europe 210 5.7 Conclusion 223 Chapter 6. Hedge Funds 225 6.1 Plan of the Chapter 225 6.2 LTCM and the Emergence of the International Self-Regulatory Regime 228 6.3 Hedge Funds in Europe before the Crisis 239 6.4. The Regulation of Hedge Funds in Europe during the Crisis244 6.5 The Regulation of Hedge Funds in the United States During the Crisis 258 6.6 Conclusion 269 Chapter 7.