The Politics of Too-Big-To-Fail: Explaining Bank Structural Reforms in the UK, France and Germany

How can we explain the significance of structural reforms in the UK to address Too-Big-To-Fail banks versus the weakness of the reforms adopted in France and Germany? This is puzzling given the presence of very large universal banks in all three countries that had suffered significant losses during the international financial crisis. We argue that the politics of banking reform is key to understanding regulatory responses in different national contexts. The paper explains the different approaches pursued in the three countries by analysing the political-institutional response to Too-Big-To-Fail banks and the development of structural reform proposals. Our central claim is that, in important respects, the variegated response to banking reform across the three countries reflects the national structure of state-bank relations, which shaped how elected officials and regulators interpreted and responded to the crisis. We explain why the UK acted quickly to establish the Independent Commission on Banking which helped to insulate the process from industry influence, culminating with the ‘ringfencing’ reforms. By contrast, in France and Germany, early political momentum for banning high-risk proprietary trading was dampened by the interests of the banks, although in different ways reflecting national political-institutional frameworks and longstanding relations between states and banks.