The Political Economy of Basel III: Soft Law, Domestic Institutions, and Regulatory Outcomes (P5)

The 2008 Global Financial Crisis served as a catalyst for closing the regulatory and supervisory loopholes left by the Basel II international banking regulatory framework. What emerged from the negotiation process was Basel III - a new regulatory framework aimed at reducing systemic risk, both domestically and internationally, by increasing capital requirements, strengthening risk-assessment processes and deepening supervisory mechanisms. A key limitation, however, was the soft-law nature of Basel III: lacking any kind of implementing powers, international banking regulation must pass through national legislative systems for ratification, and subsequently be implemented by domestic independent regulatory agencies, often central banks and/or financial supervisory authorities. The outcome has been a globally uneven path to compliance. This paper aims to delineate the implementation trajectories and points of arrival of the twenty-five members of the Basel Committee for Banking Supervision (BCBS) in a time frame that goes from 2017, when the Basel III finalized draft was published, to 2023, the soft-law deadline for implementation. In particular, this research attempts to identify explanations for the differing implementation paths of international soft-law banking regulations at the domestic level, taking stock of a highly salient and politicized example. Compliance with Basel III regulations occurs within a multilevel institutional environment, composed of actors with conflicting interests. Fuzzy-set Qualitative Comparative Analysis (fsQCA) is employed to unpack the diverse causal paths leading to varying degrees of implementation and compliance. In line with the Comparative Political Economy (CPE) and Regulatory Governance literatures, four conditions are operationalized to explore the drivers of implementation trajectories: the de jure independence of national agencies; the de facto independence of national agencies, using a measure of accountability and responsiveness to legislative bodies; the risks of regulatory capture, proxied through a “revolving door” metric; and the classification of national economic models along varieties of financial capitalism categories. Furthermore, an in-depth analysis of single cases, tracing legislative discourse, and public consultations from organized interest groups is conducted. Based on a sampling of the fsQCA results, the cases highlight the evolving relational structures between legislative principals, regulatory agents, and regulated industry actors. This allows for a deeper theoretical reflection on the mechanisms affecting the shifting role of national regulatory agencies, as a product of an evolving international and domestic political landscape. This paper seeks to contribute to the debate concerning the comparative political economy of domestic regulatory agencies methodologically, empirically, and theoretically. From a methodological perspective, the paper constructs a novel dataset based on the BCBS implementation dashboard and the data collected to operationalize the four conditions. Moreover, we make use of fsQCA, a technique that is not yet widely used to outline compliance with international soft-law regulations and embraces complexity through configurational logic. Empirically, the research goes beyond past case-study contributions, delineating implementation pathways for all BCBS members. Lastly, the paper furthers reflections regarding the limitations of both institutionalist and market-based explanations by presenting a more comprehensive understanding of the principals and principles guiding regulatory agencies.