The Determinants of Disproportionate Regulatory Reactions to Banking Crises Among EU Member States

Governments do not respond proportionally to the signals they receive from their environment, especially during periods of crisis. Instances of overreaction and underreaction have been particular evident during the last financial crisis among European countries. Previous researches show that while the vast majority of European countries facing systemic financial crisis overacted by relying on public liability guarantee and budget commitment, regulatory reforms were characterized by a greater variation. Most of European countries tended to combine a mix of stringent and lenient measures of regulatory and surveillance reform. Similarly, stringent regulatory measures of liquidity and risk diversification requirements were a common but not a general pattern. By relying on a set of indexes of regulatory responses to the 2007-8 financial crisis, we aim to determine to what extent institutional rigidities, the main explanation of policy disproportionality literature, played a role in undermining governments’ capacity to reform proportionally to the financial crisis they were facing. This explanation is tested against alternative political and institutional determinants of disproportionality. We expect that government ideology, the extent of financialization, and the quality of democracy matter in determining the proportionality of financial regulatory reform among European countries.