The Political Economy of Financial Regulation: Liberalization and the Transformation of European Regulatory Enforcement

Over the last thirty years the institutional landscape of European financial regulation has been transformed as nearly all EU countries have established independent securities and banking regulators possessing wide de jure capacities to impose a range of ex post sanctions in response to violations of market rules. Despite substantial scholarship on this institutional transformation and the Europeanization of financial regulation (e.g. Kelemen 2011; Levi-Faur 2005; Thatcher 2002), few political economists have examined how institutional reforms have altered the actual enforcement practices of financial regulators, and whether enforcement patterns have been influenced by economic structures. Following scholars of liberalization who emphasize that “freer markets” require “more rules” (e.g. Vogel 1998), we would expect for the growth of European capital markets to be accompanied by an increase in ex post sanctions, and for countries with larger capital markets to assess higher levels of sanctions. Alternatively, the inertia of longstanding regulatory and legal traditions (Kagan 1997; Vogel 1986) and the persistence of differences in the organization of capitalism across countries (Hall and Soskice 2001) might limit this pressure for convergence. Regulators in liberal market economies centered around arms-length market relationships should have more capacity to impose significant penalties than regulators in coordinated-market and statist economies where successful production strategies depend upon embedded relationships. Examining longitudinal enforcement data at the major financial regulators in the UK, France, Germany, and the United States, and the enforcement of inside trading rules across 28 countries from 2009-2010, I assess and compare the pattern of enforcement by financial regulators. I find that ex post sanctions in the UK, France, and Germany all increase with the establishment of independent regulators and the enactment of new European market abuse directives, albeit not always in ways that correspond with capital market size. The enforcement of market abuse rules in the European Union is now on par with that of the United States where regulatory sanctions have historically been most severe, with similar numbers of convictions and similar length of imprisonment for insider trading in recent years. However, enforcement patterns continue to diverge in ways predicted by varieties of capitalism theory. The size of monetary penalties remains much larger in liberal market economies: US, UK, and EU regulators impose fines of a different order of magnitude than in coordinated or mixed market economies, even when accounting for differences in capital market size. Moreover, liberal market economies frequently impose high fines and restitution judgments against retail banks, while banks in France and Germany remain mostly insulated from large, public monetary judgments. Finally, while financial institutions have been forced to provide significant levels of consumer restitution in the United States and United Kingdom, there have been no such judgments in France, Germany, or other continental European countries.   Works Cited Hall, Peter A. and David Soskice. 2001. ‘An Introduction to Varieties of Capitalism’. In Hall and Soskice (eds), Varieties of Capitalism: Institutional Foundations of Comparative Advantage, Oxford: Oxford University Press, 1-68. Kagan, Robert. 1997. “Should Europe Worry About Adversarial Legalism.” Berkeley Law Scholarship Repository Kelemen, Dan. 2011. Eurolegalism. Cambridge, MA: Harvard University Press. Levi-Faur, David. “Global Diffusion of Regulatory Capitalism,” The ANNALS of the American Academy of Political and Social Science 598:12. Thatcher, Mark. 2002. “Regulation after Delegation: independent regulatory agencies in Europe,” Journal of European Public Policy 9(6): 954-972. Vogel, David. 1986. National Styles of Regulation: Environmental Policy in Great Britain and the United States. Ithaca, NY: Cornell University Press. Vogel, Steven K. 1998. Freer Markets, More Rules: Regulatory Reform in Advanced Industrial Countries. Cornell University Press.