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What Makes an Interest Group Successful? an Examination Into the Determinants of Financial Interest Group Success

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What Makes an Interest Group Successful? an Examination Into the Determinants of Financial Interest Group Success What makes an interest group successful? An examination into the determinants of financial interest group success David van Oostveen Student Number: 10289437 Supervisor: Gijs Schumacher Second reader: Joost Berkhout MA Political Science: Political Economy University of Amsterdam June 2017 1 Acknowledgements I would firstly like to thank my supervisor Gijs Schumacher for his help. He offered stern but friendly advice and this was especially invaluable for the more technical aspects of my thesis. Other teachers at the UVA were always receptive towards meeting me to discuss ideas or answer questions about their own work. Special thanks to my friends and family who supported me in this time of relative isolation. Additional gratitude for my parents who were patient listeners and always ready to bounce ideas back and forth. A special additional note of love for my girlfriend, who was ever supportive and offered calming words when I was frustrated. I must admit that this was the most stressful, illuminating and rewarding project during my academic career, leaving me torn between happiness at new breakthroughs and low-key depression at seemingly unsurmountable errors. After a due break, I hope to encounter more challenges such as these. 2 Abstract This thesis examines the determinants of financial interest group lobbying success at the Basel Committee on Banking Supervision (BCBS). While accused of dispersing private sector preferences in international financial regulations, there has been little research into the objective measurement of private sector influence at the BCBS. In this thesis it is argued that financial interest groups are influential due to their economic size, their information supply, and the diversity of interest groups that attend the BCBS consultations. These grounded assumptions are tested as three separate hypotheses, each hypothesis arguing that there will be statistically significant impact of the determinants on the lobbying success of interest groups. These hypotheses are tested using a newly constructed database containing the interest groups participating in the public consultations of the BCBS from 2003-2016. The findings of this thesis were inconclusive, since no statistically significant relationships were found. The lack of statistically significant results might however be one of the most relevant findings of this thesis. The BCBS consultations might be unsuited for automated text analysis due to the presence of a multidimensional structure of conflict. Further explanations for the results include differences in preferences between various financial interest groups, and/or that most BCBS documents are already privately contested before they are publically disputed. 3 Table of contents Contents What makes a lobbyist successful? ......................................................................................................... 1 An examination into the determinants of financial interest group success ....................................... 1 Table of contents ..................................................................................................................................... 4 1. Introduction ..................................................................................................................................... 5 2. Methodology ................................................................................................................................... 9 3. Theoretical framework .................................................................................................................. 13 4. Data collection and analysis .............................................................................................................. 17 5. Preference attainment .................................................................................................................. 21 a. Validation check ........................................................................................................................ 22 6. Determinants ................................................................................................................................. 28 7. Statistical analysis .............................................................................................................................. 30 8. Conclusion ..................................................................................................................................... 38 9. Bibliography ................................................................................................................................... 39 10. Appendix .................................................................................................................................... 43 4 1. Introduction Since the 1970’s, finance as an industry has become increasingly global and central to the world economy. Financial trade across borders was initially largely unregulated and unsupervised. This led to a series of bankruptcies and subsequent coordination problems between several national jurisdictions where these banks were operating. To regulate and address these transnational coordination problems, several transnational institutes were founded (Goldbach 2015).1 The Basel committee (BCBS) was founded in 1974 to ensure more transnational harmonization of banking standards (Goldbach 2015; Woods 2005). It initially served as an informal meeting forum for banking supervisors from the ten founding countries but gradually transformed into an institutionalized regulatory authority with a written charter. Nowadays it fulfills three distinct functions; First, sharing information about best practices, second, harmonization of the setting and content of national laws on finance, and third, enhancing cooperation by stressing the enforcement of national rules and sharing intelligence (Slaughter 2004, p 54-69).2 Seats in the Committee are occupied by important supervisors from the member countries and decisions are made on the basis of consensus. Formally, decisions have to be approved by the Governors and Heads of banking Supervision (GHOS), which is comprised of central bank governors and heads of banking supervision.3 However, decisions made by the Committee are always approved by the GHOS (Buchmüller 2008, p 19-20). Since country membership of both is the same, the Committee is the crucial place of decision making. The Committee steers various ad-hoc working groups, which are comprised of national regulators who are temporarily attached to a working group. Its secretariat is composed of only twenty people, of which only five are permanent staff members (Goldbach 2015, p 34-35) One of its more surprising and enduring aspects is its lack of a legally binding charter, meaning its regulations and standards are not binding on members. Despite this, the Basel Committee’s standards and regulations are adopted worldwide (McKeen-Edwards & Porter 2013; Helleiner & Pagliari 2011; Young 2011; Singer 2007; Goodhart 2011). This adoption stems from its reputation as promoting and harmonizing good practices worldwide in addition to being seen as measures of good financial governance by the World Bank and the IMF (Young 2011; Barth et al. 2006). The Basel Committee is thus quite different from other transnational governance institutions. It has no binding regulations, it is comprised of unelected officials, and it lacks a large staff. However at the same time the BCBS fulfills a vital role in standard and regulation setting for one of the biggest and most important industries worldwide (Goodhart 2011) From its inception in 1974 until today, the Basel Committee has increasingly allowed financial firms to provide information and input on the regulations and standards the Basel Committee has been designing. A hallmark for cooperation with financial firms was the decision to rely on internal 1 An immediate impetus can be found in the failure of Bankhaus Herstatt and the US Franklin Bank. Both failures led to problems for other banks with whom both had finished trades but funds from both were not forthcoming due to bankruptcies. Involved nations argued over who should have jurisdiction and responsibility while other banks veered towards bankruptcies. 2 A sometimes fourth mentioned function is increasing the trust and cooperation between supervisors due to the regular exchange of information and practices (Kapstein 1996) 3 The initial membership was confined to the ten G-10 countries that founded the BCBS. There has been an incremental process in adding more developing countries to the BCBS and GHOS. See http://www.bis.org/bcbs/membership.htm 5 bank risk management calculations for setting capital standards. The BASEL I standards incorporated this in 1996, with Value-At-Risk (VAR) models from banks partially determining the banks’ own capital requirements (Underhill et al. 2010). The increasing reliance on statistical risk models led the BCBS to form close working relations with technically advanced banks in developing new regulations (Goodhart 2011). From 1996 onwards the BCBS also started to hold public consultations to receive input on consultation papers outlining the proposed new regulations and standards for financial firms. These public consultations quickly became an important avenue where firms and interest groups could communicate their preferences to the BCBS. This increased access of banks and their interest groups to one of the premier issuers of regulations and standards designed exactly for these banks
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