Chapter 5 shows how reflexive central bank leaders sought to adapt the new policy paradigm in a way that was compatible with the institutional context. This involved both the political economy within which their central bank was embedded (both with respect to the way that central bank independence was installed and the industry relationships they had to entertain) and the way that central bank accountability was secured. I unearth a muted embrace of the new macro-prudential mandate, in particular the discretionary anti-cyclical part, owing to the lack of scientific legitimacy of these new ideas and the fear of politicization inherent in this new regulatory approach. Overall, I find that the bureaucratic work to adapt and operationalize the macro-prudential mandate led to a prioritization of the goal to increase the resilience of the system, whereas the anti-cyclical goal became a secondary element, although the studied countries differed in their emphasis on anti-cyclical action. Such anti-cyclical action exposed central banks to the risk of agonizing both political elites and the financial industry, making reflexive agency leaders shy away from its full enforcement.

Chapter 4 zooms in on the attempt of the expert network to shape the post-crisis financial regulatory agenda from the beginning of the crisis in 2007 to 2009. While central to the crisis analysis from the beginning, the chapter shows how most of the macro-prudential regulatory reform efforts were not able to impose themselves, in particular the installation of anti-cyclical policy tools for the shadow banking sector. While efforts seeking to address the interconnectedness of the financial system and increase its resilience by raising capital buffers of systemically important banks were agreed upon at the international level, efforts to address the procyclical character of the financial system were largely transformed into research projects, seeking to prove the existence of such procyclical phenomena. The chapter links these developments to the immaturity of the idea of the financial cycle, which up to that point had remained marginal in academic and regulatory science. Rather than being agreed on at the global level, the installation of monitoring frameworks and anti-cyclical tools was then delegated to the national level, where central banks were placed in charge.

Chapter 1 introduces the reader to macro-prudential policy and exposes the reader to the problem of persistently instable financial markets, which raise the question of if and how far the macro-prudential regulatory program post-crisis had any effect. In contrast to binary paradigm shift views, which see no to little change, I introduce a multidimensional view of regulatory change that can detect massive change in the economic ideas underlying financial regulation, while pointing to the administrative and political limitations that prevent these ideas from becoming fully performative. Pointing to these contradictions, the chapter introduces the analytical framework and the main contributions of the book, followed by an outline of the different chapters.

Chapter 8 traces the effect of the newly implemented measures into the upswing of the cycle from 2013 onwards. While early warning frameworks detected a cyclical credit expansion to corporations and to the housing sector, anti-cyclical measures were often hemmed in by the political resistance, both by ministries of finance and the financial industry. This opposition slowed and reduced the degree of anti-cyclical action taken, limiting its mitigating effect. Similarly, I show how the macro-prudential concerns over the growth and transformation of the shadow banking sector from 2013 onwards led to attempts to limit their growth and remove the structural fragilities that threatened the financial system with both a procyclical expansion of this sector in good times and its potentially calamitous decline in bad times. Fueling this procyclical upswing with their massive quantitative easing programs, central banks found themselves unable to rein in these structural frailties, facing once more extensive opposition to any regulatory changes. In turn, these structural frailties, which materialized episodically in bouts of illiquidity, forced central banks to backstop these markets.

Chapter 7 recounts the attempt of central banks to expand their regulatory remit and apply similar anti-cyclical measures to the shadow banking sector. Seeking to translate their newly gained insights into the cyclical risks emanating from the repo-market, central banks faced opposition by both market regulators and the financial industry. This transformed their attempts at regulation into a mere large-scale research endeavor, requiring them to prove the procyclical behavior of these markets based on extensive data collection before any action could be taken. Frustrated in their attempts to control the procyclical behavior of these short-term funding markets, central banks actors used their control over the final implementation of Basel III regulations to impose frictions on this market. Occurring by stealth, this structural regulation allowed critical central bankers to overcome the political opposition to these acts. At the same time, it imposed a continuous drag on the liquidity provision by broker-dealers in these markets, imposing a fragility that central banks would have to offset in future emergency lending programs.

Chapter 3 traces the history of the macro-prudential thought collective before the crisis of 2008. It shows how it was driven by concerns over the deregulation of financial systems in the context of the breakdown of Bretton Woods, and how this community of central bankers was pushed aside by the micro-prudential expert network that crystallized in the Basel Committee for Banking Supervision. It shows how despite the active attempts of the latter to silence these systemic concerns over the increasing integration of capital markets and banking business, this community forged a nascent alliance with academics to systematize and theorize the systemic implications of financial system changes. This expert network then was further empowered by the increasing bouts of financial instability as they occurred from the 1990s onwards, leading to the installation of the Financial Stability Forum in 1999, which became a central locus for the formulation of macro-prudential thought.

Chapter 6 traces the implementation of the most prominent anti-cyclical element into the global regulatory overhaul post-crisis, namely the countercyclical capital buffer, the only anti-cyclical regulatory tool in the global Basel III regulation. As I show, operationalizing this tool and executing the countercyclical mandate required the creation of robust early warning systems that could detect and signal the buildup of cyclical systemic risks sufficiently ahead of time in order to enable timely preventive action. The chapter traces the work of applied economists in the three central banks under study, showing how their decade-long research effort provided such monitoring frameworks, which not only provided robust signals but also shifted the academic scientific discourse on this issue, providing the stylized facts that challenged a sanguine view of financial markets. The study at the same time finds that these early warning frameworks were often implemented in the design of stress tests, allowing central bank policymakers to engage in discretionary countercyclical action without overtly exposing themselves to the politicization of these acts.

As a result of the work of applied economists within central banks, economic knowledge about financial instability grew impressively after the crisis. Yet this new knowledge is applied in an asymmetric manner. Whereas it has become the foundation for the quick intervention to contain financial instability as it unfolds, requiring little to no additional evidence to become effective, the very same knowledge faces substantial hurdles when it seeks to intervene in financial markets in a precautionary manner, making such ad hoc interventions necessary in the first place. This asymmetry reveals the paradox of evidence-based macro-prudential regulation. Whereas conclusive evidence beyond any doubt is necessary to intervene and constrain financial actors in the upswing, such evidence becomes unnecessary when procyclical amplifications of financial stress threaten to undo the entire web of the interconnected financial system. Herein resides, I argue, the tragedy of the macro-prudential reform efforts, which, while producing knowledge about the dangers and mechanisms of financial instability, are incapable of mustering the political will to engage in preventive action.

Chapter 2 provides the reader with a state of the art on the political science literature on paradigm shifts and its failure to materialize post-crisis. It seeks to nuance this binary view by using the social constructivist approach to the political power of economic ideas, emphasizing the preconditions the new idea set needed to fulfill to become operational. It combines these arguments with the sociology of economics and science and technology studies, which focus on the modalities of regulatory science and its interaction with academia. It insists that for economic ideas to become politically powerful, they need to be able to construct “risk objects” about which sufficient secured knowledge exists to justify public intervention.

Chapter 9 details the backstopping of the shadow banking system during the beginning of the COVID-19 crisis in March 2020, when central banks around the globe, in particular the Federal Reserve, the Bank of England and the European Central Bank, engaged in massive asset purchases to stabilize the financial system. Within a few weeks, these central banks purchased more than a trillion dollars of assets in order to stem an incipient run on the shadow banking system. Seeing themselves forced to backstop the short-term money markets in this manner in order to contain financial instability, central banks subsequently engaged in attempts to remove the run risks inherent in that part of the shadow banking sector, yet, as the research shows, to little or no avail. Having contained financial instability in a way that largely escaped public attention and hence without arousing political salience, central banks were incapable of overcoming the resistance by powerful financial actors to any further regulation. That is to say, central banks containing financial instability find themselves incapable of removing the underlying structural frailties that make their intervention necessary in the first place.