Hostname: page-component-76fb5796d-zzh7m Total loading time: 0 Render date: 2024-04-26T04:37:41.204Z Has data issue: false hasContentIssue false
  • English
  • Français

Global finance as a politicized habitat†

Published online by Cambridge University Press:  06 June 2017

William Kindred Winecoff
Get access Rights & Permissions [Opens in a new window]

Abstract

Predominant models of financial regulation based on representative agents—in both the public interest and public choice traditions—assume that competitive pressures in financial markets undermine prudential behavior by firms in the absence of regulation. One empirical expectation of these models is behavioral: firms should adjust their risk-taking behaviors in response to the regulatory environment they face but should not over-comply with regulations. That is, the central tendency of bank behaviors should hew closely to regulatory minima and the variance should be small. I first demonstrate that this expectation is not borne out by the empirical record and then advance a theoretical argument that does not rely on a representative agent model. I argue that firms face a range of incentives from markets and governments that condition their risk-taking behaviors, and firms choose a “preferred habitat” within a market structure. Some of these incentives are towards greater risk-taking, while others are in the direction of greater prudence. This framework provides opportunities for examining financial market actors in a realistic context, and offers ways to unify micro-level and structural analyses of the political economy of global finance.

Type
Research Article
Information
Business and Politics , Volume 19 , Special Issue 2: Property Rights, Financial Risk, and the Politics of a Networked Global Financial System , June 2017 , pp. 267 - 297
Copyright
Copyright © V.K. Aggarwal 2017 and published under exclusive license to Cambridge University Press 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

†

An earlier version of this paper was presented at the 2016 Annual Meeting of the American Political Science Association. For excellent comments on previous versions I thank Sarah Bauerle Danzman, Dan Drezner, Tim Marple, Thomas Oatley, Herman Schwartz, Travis Selmier, Kevin Young, and two anonymous reviewers. I especially thank Iain Hardie for initially pointing me to the preferred habitats literature. This paper was improved immensely by their suggestions and criticisms. Remaining errors are mine, of course.

References

Abbott, Kenneth W., Green, Jessica F., and Keohane, Robert O.. 2016. “Organizational Ecology and Institutional Change in Global Governance.” International Organization 70(2): 247–277.CrossRefGoogle Scholar
Admati, Anat, and Hellwig, Martin. 2014. The Bankers' New Clothes: What's Wrong with Banking and What to Do about It. Princeton, NJ: Princeton University Press.CrossRefGoogle Scholar
Allen, Franklin, and Babus, Ana. 2009. “Networks in Finance.” In The Network Challenge: Strategy, Profit, and Risk in an Interlinked World, edited by Kleindorfer, Paul, Yoran (Jerry), Wind, and Gunther, Robert. Upper Saddle River, NJ: Wharton School Publishing.Google Scholar
Bagehot, Walter. 1873. Lombard Street: A Description of the Money Market. London: Henry S. King and Co.Google Scholar
Barth, James R., Caprio, Gerard Jr., and Levine, Ross. 2013. “Bank Regulation and Supervision in 180 Countries from 1999 to 2011.” Journal of Financial Economic Policy 5(2):111–219.CrossRefGoogle Scholar
Basinger, Scott J., and Hallerberg, Mark. 2004. “Remodeling the Competition for Capital: How Domestic Politics Erases the Race to the Bottom.” American Political Science Review 98(2): 261–276.CrossRefGoogle Scholar
Bech, M.L., and Atalay, E.. 2008. “The Topology of the Federal Funds Market.” Frankfurt, Germany: European Central Bank Working Paper 986.Google Scholar
Behr, Patrick, and Schmidt, Reinhard H.. 2016. “The German Banking System: Characteristics and Challenges.” In The Palgrave Handbook of European Banking, edited by Beck, Thorsten and Casu, Barbara. London: Palgrave Macmillan.Google Scholar
Beunza, Daniel, and Stark, David. 2012. “From dissonance to resonance: cognitive interdependence in quantitative finance.” Economy and Society 41(3): 383–417.CrossRefGoogle Scholar
Brady, Steffanie A., Anadu, Ken E., and Cooper, Nathaniel R.. 2012. “The Stability of Prime Money Market Mutual Funds: Sponsor Support from 2007 to 2011.” Boston, MA: Federal Reserve Bank of Boston Risk and Policy Analysis Unit Working Paper RPA 12–3.CrossRefGoogle Scholar
Calomiris, Charles W., and Haber, Stephen H.. 2014. Fragile by Design: The Political Origins of Banking Crises and Scarce Credit. Princeton, NJ: Princeton University Press.Google Scholar
Chen, Han, Clouse, Jim, Ihrig, Jane, Klee, Elizabeth, and Chen, Han. 2016. “The Federal Reserve's Tools for Policy Normalization in a Preferred Habitat Model of Financial Markets.” Journal of Money, Credit, and Banking 48(5): 921–955.CrossRefGoogle Scholar
Cihak, Martin, Demirguc-Kunt, Asli, Feyen, Erik, and Levine, Ross. 2012. “Benchmarking Financial Systems around the World.” Washington, DC: World Bank Policy Research Working Paper 6175.Google Scholar
Cline, William R. 2015. “Testing the Modigliani-Miller Theorem of Capital Structure Irrelevance for Banks.” Washington, DC: Peterson Institute for International Economics Working Paper 15–8.Google Scholar
Cochrane, John H. 2011. “Presidential Address: Discount Rates.” The Journal of Finance 66(4): 1047–1108.CrossRefGoogle Scholar
Cranmer, Skyler J., and Desmarais, Bruce A.. 2011. “Inferential Network Analysis with Exponential Random Graph Models.” Political Analysis 19(1): 66–86.CrossRefGoogle Scholar
Culbertson, J. 1957. “The Term Structure of Interest Rates.” Quarterly Journal of Economics 71(4): 485–517.CrossRefGoogle Scholar
DeAngelo, Harry, and Stulz, René. 2013. “Why High Leverage is Optimal for Banks.” Cambridge, MA: NBER Working Paper 19139.Google Scholar
Drezner, Daniel W. 2007. All Politics Is Global: Explaining International Regulatory Regimes. Princeton, NJ: Princeton University Press.Google Scholar
Drezner, Daniel W. 2009. “Bad Debts: Assessing China's Financial Influence in Great Power Politics.” International Security 34(2): 7–45.CrossRefGoogle Scholar
Eichacker, Nina. 2015. “German Financialization, the Global Financial Crisis, and the Eurozone Crisis.” Amherst, MA: University of Massachusetts Amherst Political Economy Research Institute Working Paper 404.Google Scholar
Elliott, Matthew, Golub, Benjamin, and Jackson, Matthew O.. 2014. “Financial Networks and Contagion.” American Economic Review 104(10): 3115–53.CrossRefGoogle Scholar
Esposito, Elena. 2011. The Future of Futures: The Time of Money in Financing and Society. Cheltenham, UK: Edward Elgar Publishing.CrossRefGoogle Scholar
Esposito, Elena. 2013. “The structures of uncertainty: performativity and unpredictability in economic operations.” Economy and Society 41(1): 102–129.CrossRefGoogle Scholar
European Central Bank. 2010. Recent Advances in Modelling Systemic Risk Using Network Analysis. Frankfurt, Germany: European Central Bank.Google Scholar
Fligstein, Neil. 2001. The Architecture of Markets: An Economic Sociology of Twenty-First-Century Capitalist Societies. Princeton, NJ: Princeton University Press.CrossRefGoogle Scholar
Fligstein, Neil, and Calder, Ryan. 2015. “Architecture of Markets.” In Emerging Trends in the Social and Behavioral Sciences, edited by Scott, Robert, and Kosslynj, Stephan. Hoboken, NJ: John Wiley and Sons.Google Scholar
Friedman, Jeffrey, and Kraus, Wladmimir. 2011. Engineering the Financial Crisis: Systemic Risk and the Failure of Regulation. Philadelphia, PA: University of Pennsylvania Press.Google Scholar
Goodhart, Charles A.E., and Lastra, Rosa M.. 2012. “The boundary problems in financial regulation.” In Research Handbook on International Banking and Governance, edited by Barth, James R., Lin, Chen, and Wihlborg, Clas. Cheltenham, UK: Edward Elgar Publishing.Google Scholar
Hall, Peter, and Soskice, David, (eds.). 2001. Varieties of Capitalism: The Institutional Foundations of Comparative Advantage. New York: Oxford University Press.CrossRefGoogle Scholar
Hardie, Iain, Howarth, David, Maxfield, Sylvia, and Verdun, Amy. 2013. “Banks and the False Dichotomy in the Comparative Political Economy of Finance.” World Politics 65(4): 691–728.CrossRefGoogle Scholar
Heemskerk, Eelke M., Young, Kevin, Takes, Frank W., Cronin, Bruce, Garcia-Bernardo, Javier, Popov, Vladimir, Winecoff, W. Kindred, Henriksen, Lasse Folke, and Laurin-Lamonthe, Audrey. 2017. “Big Corporate Network Data: Problems, Diagnostics, and Fixes.” Global Networks forthcoming.Google Scholar
Heemskerk, Eelke M., Fennema, Meindert, and Carroll, William K.. 2016. “The global corporate elite after the financial crisis: evidence from the transnational network of interlocking directorates.” Global Networks 16(1): 68–88.CrossRefGoogle Scholar
Heemskerk, E.M., and Takes, F.W.. 2016. “The Corporate Elite Community Structure of Global Capitalism.” New Political Economy 21(1): 90–118.CrossRefGoogle Scholar
Helleiner, Eric. 2011. “Understanding the 2007–2008 Global Financial Crisis: Lessons for Scholars of International Political Economy.” Annual Review of Political Science 14: 67–87.CrossRefGoogle Scholar
Helleiner, Eric, and Pagliari, Stefano. 2011. “The End of an Era in International Financial Regulation? A Postcrisis Research Agenda.” International Organization 65(1): 169–200.CrossRefGoogle Scholar
Howarth, David, and Quaglia, Lucia. 2013. “Banking on Stability: The political economy of new capital requirements in the European Union.” Journal of European Integration 3(3): 333–46.CrossRefGoogle Scholar
Iori, Giulia, de Masi, Giulia, Precup, Ovidiu Vasile, Gabbi, Giampaolo, and Calderelli, Guido. 2008. “A network analysis of the Italian overnight money market.” Journal of Economic Dynamics and Control 32(1): 259–78.CrossRefGoogle Scholar
Irwin, Neil. 2013. The Alchemists: Three Central Bankers and a World on Fire. New York: Penguin Press.Google Scholar
Joyce, Michael, Miles, David, Scott, Andrew, and Vayanos, Dimitri. 2012. “Quantitative Easing and Unconventional Monetary Policy—An Introduction.” The Economic Journal 122(November): F271–F288.CrossRefGoogle Scholar
Kapstein, Ethan B. 1989. “Resolving the Regulator's Dilemma: International Coordination of Banking Regulations.” International Organization 43(2): 323–47.CrossRefGoogle Scholar
Kapstein, Ethan B. 1991. Supervising International Banks: Origins and Implications of the Basle Accord. Princeton, NJ: Princeton University Department of Economics Essay in International Finance.Google Scholar
Kapstein, Ethan B. 1994. Governing the Global Economy: International Finance and the State. Cambridge, MA: Harvard University Press.Google Scholar
Kashyap, Anil K., and Zingales, Luigi. 2010. “The 2007–8 financial crisis: Lessons from corporate finance.” Journal of Financial Economics 97(3): 303–305.CrossRefGoogle Scholar
Kindleberger, Charles P., and Aliber, Robert. 2005. Manias, Panics, and Crashes: A History of Financial Crises. Fifth ed. Hoboken, NJ: John Wiley and Sons.CrossRefGoogle Scholar
Lépinay, Vincent-Antonin. 2007. “Decoding Finance: Articulation and Liquidity around a Trading Room.” In Do Economists Make Markets? On the Performativity of Economics, edited by Mackenzie, Donald, Muniesa, Fabian, and Siu, Lucia. Princeton, NJ: Princeton University Press.Google Scholar
Mackenzie, Donald. 2005. “Opening the black boxes of global finance.” Review of International Political Economy 12(4): 555–576.CrossRefGoogle Scholar
Mackenzie, Donald. 2006. An Engine, Not a Camera: How Financial Models Shape Markets. Cambridge, MA: MIT Press.CrossRefGoogle Scholar
Mackenzie, Donald, Muniesa, Fabian, and Siu, Lucia, (eds.). 2007. Do Economists Make Markets? On the Performativity of Economics. Princeton, NJ: Princeton University Press.Google Scholar
Marx, Karl. 1867. Capital: A Critique of Political Economy. 1967 ed. New York: International Publishers.Google Scholar
Maxfield, Sylvia, Winecoff, W. Kindred, and Young, Kevin. 2017. “An Empirical Test of the Financialization Convergence Hypothesis.” Review of International Political Economy forthcoming.CrossRefGoogle Scholar
Minoiu, Camelia, and Reyes, Javier A.. 2013. “A network analysis of global banking: 1978–2010.” Journal of Financial Stability 9(2): 168–184.CrossRefGoogle Scholar
Minsky, Hyman P. 1986. Stabilizing an Unstable Economy. New Haven, CT: Yale University Press.Google Scholar
Mishkin, Frederic S. 1980. “Is the Preferred-Habitat Model of the Term Structure Inconsistent with Financial Market Efficiency?” Journal of Political Economy 88(2): 406–411.CrossRefGoogle Scholar
Modigliani, Franco, and Miller, Merton H.. 1958. “The Cost of Capital, Corporation Finance and the Theory of Investment.” The American Economic Review 48(3): 261–97.Google Scholar
Modigliani, Franco, and Miller, Merton H.. 1963. “Corporate income taxes and the cost of capital: a correction.” American Economic Review 53(3): 433–43.Google Scholar
Modigliani, Franco, and Sutch, Richard. 1967. “Debt Management and the Term Structure of Interest Rates: An Empirical Analysis of Recent Experience.” Journal of Political Economy 75(4): 569–589.CrossRefGoogle Scholar
Modigliani, Franco, and Shiller, Robert J.. 1973. “Inflation, Rational Expectations and the Term Structure of Interest Rates.” Economica 40(1): 12–43.CrossRefGoogle Scholar
Mosley, Layna. 2003. Global Capital and National Governments. Cambridge, UK: Cambridge University Press.Google Scholar
Mosley, Layna, and Singer, David Andrew. 2009. “The Global Financial Crisis: Lessons and Opportunities for International Political Economy.” International Interactions 35(4): 420–29.CrossRefGoogle Scholar
Mügge, Daniel. 2005. “Diluting Varieties of Capitalism from below: Competitive imperatives in financial markets and the end of positive coordination.” Presented at the Annual Meeting of the European Consortium for Political Research, Budapest, Hungary.Google Scholar
Muniesa, Fabian, Millo, Yuval, and Callon, Michel. 2007. “An introduction to market devices.” The Sociological Review 55(Supplement s2): 1–12.CrossRefGoogle Scholar
Nelson, Stephen C., and Katzenstein, Peter J.. 2014. “Uncertainty, Risk, and the Financial Crisis of 2008.” International Organization forthcoming.CrossRefGoogle Scholar
Newman, Abraham, and Posner, Elliot. 2011. “International Interdependence and Regulatory Power: Authority, mobility, and markets.” European Journal of International Relations 17(4): 745–770.CrossRefGoogle Scholar
Ngo, Phong T.H. 2006. “A Theory of Precationary Regulatory Capital in Banking.” International Review of Finance 6(3–4): 99–128.CrossRefGoogle Scholar
Oatley, Thomas, and Nabors, Robert. 1998. “Redistributive Cooperation: Market Failure, Wealth Transfers, and the Basle Accord.” International Organization 52(1): 35–54.CrossRefGoogle Scholar
Oatley, Thomas, and Winecoff, W. Kindred. 2012. “The Domestic Rooting of Fi- nancial Regulation in an Era of Global Capital Markets.” In Research Handbook on Hedge Funds, Private Equity and Alternative Investments, edited by Athanassiou, Phoebus. London: Edward Elgar Publishing.Google Scholar
Oatley, Thomas, Winecoff, W. Kindred, Danzman, Sarah Bauerle, and Pennock, Andrew. 2013. “The Political Economy of Global Finance: A Network Model.” Perspectives on Politics 11(1): 133–53.CrossRefGoogle Scholar
Ostrom, Elinor. 1990. Governing the Commons: The Evolution of Institutions for Collective Action. Cambridge, UK: Cambridge University Press.CrossRefGoogle Scholar
Ostrom, Elinor. 1998. “A Behavioral Approach to the Rational Choice Theory of Collective Action.” American Political Science Review 92(1): 1–22.CrossRefGoogle Scholar
Ostrom, Elinor. 2009. “A General Framework for Analyzing Sustainability of Social-Ecological Systems.” Science 325(5939): 419–422.CrossRefGoogle ScholarPubMed
Ostrom, Elinor. 2010. “Beyond Markets and States: Polycentric Governance of Complex Economic Systems.” American Economic Review 100(3): 641–72.CrossRefGoogle Scholar
Peltzman, Sam. 1970. “Capital Investment in Commercial Banking and its Relation to Portfolio Regulation.” Journal of Political Economy 78(1): 1–26.CrossRefGoogle Scholar
Peltzman, Sam. 1976. “Toward a More General Theory of Regulation?” Journal of Law and Economics 19(2): 211–40.CrossRefGoogle Scholar
Peltzman, Sam. 1989. “The economic theory of regulation after a decade of deregulation.” In Brookings Papers on Economic Activity: Microeconomics. Washington, D.C.: The Brookings Institution, 1–59.Google Scholar
Pigou, Arthur C. 1932. The Economics of Welfare. London: Macmillan and Co.Google Scholar
Polanyi, Karl. 1944. The Great Transformation: The Political and Economic Origins of Our Time. 2001 ed. Boston, MA: Beacon Press.Google Scholar
Powell, Walter W. 1990. “Neither Market Nor Hierarchy: Network Forms of Organization.” Research in Organizational Behavior 12(2): 295–336.Google Scholar
Rajan, Raghuram G. 2010. Fault Lines: How Hidden Fractures Still Threaten the World Economy. Princeton, NJ: Princeton University Press.Google Scholar
Reinhart, Carmen M., and Rogoff, Kenneth S.. 2009. This Time Is Different: Eight Centuries of Financial Folly. Princeton, NJ: Princeton University Press.Google Scholar
Rosas, Guillermo. 2006. “Bagehot or Bailout? An Analysis of Government Responses to Banking Crises.” American Journal of Political Science 50(1): 175–91.CrossRefGoogle Scholar
Seabrooke, Leonard, and Tsingou, Eleni. 2012. “Revolving Doors and Professional Ecologies in International Financial Governance.” Presented at the PIPES Work- shop, Frederiksberg, Denmark.Google Scholar
Selmier II, W. Travis. 2014. “Why Club Goods Proliferated in Investment Finance.” In Handbook of the International Political Economy of Monetary Relations, edited by Oatley, Thomas, and Winecoff, W. Kindred. Cheltenham, UK: Edward Elgar Publishing.Google Scholar
Selmier II, W. Travis. 2016. “Design Rules for More Resilient Banking Systems.” Policy and Society 35(3): 253–267.CrossRefGoogle Scholar
Selmier II, W. Travis. 2017. “An Institutional Perspective of International Financial Risk.” Business and Politics forthcoming in this volume.CrossRefGoogle Scholar
Selmier II, W. Travis, Penikas, Henry, and Vasilyeva, Ksenia. 2014. “Financial Risk as a Good.” Procedia Computer Science 31(1): 115–23.Google Scholar
Simmons, Beth A. 2001. “The International Politics of Harmonization: The Case of Capital Market Regulation.” International Organization 55(3): 589–620.CrossRefGoogle Scholar
Singer, David Andrew. 2004. “Capital Rules: The Domestic Politics of International Regulatory Harmonization.” International Organization 58(3): 531–65.CrossRefGoogle Scholar
Singer, David Andrew. 2007. Regulating Capital: Setting Standards for the International Financial System. Ithaca, NY: Cornell University Press.Google Scholar
Soramäki, Kimmo, Bech, Morten L., Arnold, Jeffrey, Glass, Robert J., and Beyeler, Walter E.. 2007. “The topology of interbank payment flows.” Physica A 379(1): 317–33.CrossRefGoogle Scholar
Stigler, George J. 1971. “The Theory of Economic Regulation.” The Bell Journal of Economics and Management Science 2(1): 3–21.CrossRefGoogle Scholar
Strohsal, Till. 2013. “Testing the Preferred-Habitat Theory: The Role of Time-Varying Risk Aversion.” Berlin, Germany: Humboldt University Economic Risk Working Paper SFB 649.Google Scholar
Vayanos, Dimitri, and Vila, Jean-Luc. 2011. “A preferred-habitat model of the term structure of interest rates.” London, UK: London School of Economics Working Paper.Google Scholar
Walter, Andrew. 2012. “Over-compliance with Basel Standards.” Presentation.Google Scholar
Winecoff, W. Kindred. 2013. “Global Banking As a Complex Political Economy.” Presented at the Annual Meeting of the American Political Science Association, Chicago, IL.Google Scholar
Winecoff, W. Kindred. 2014. “Bank Regulation, Monetary Incentives, and Macroeconomic Management in OECD Economies.” International Studies Quarterly 58(3): 448–61.CrossRefGoogle Scholar
Winecoff, W. Kindred. 2015. “Financial Power and the Global Crisis: A Network Analytical Approach.” Business and Politics 17(3): 495–526.CrossRefGoogle Scholar
Woll, Cornelia. 2014. The Power of Inaction: Bank Bailouts in Comparison. Ithaca, NY: Cornell University Press.CrossRefGoogle Scholar
Young, Kevin. 2012. “Transnational Regulatory Capture? An Empirical Examination of Transnational Lobbying over the Basel Committee on Banking Supervision.” Review of International Political Economy 19(4): 663–88.CrossRefGoogle Scholar
Young, Kevin. 2014. “The complex and covert web of financial protectionism.” Business and Politics 16(4): 579–613.CrossRefGoogle Scholar
Young, Kevin. 2015. “Not by structure alone: power, prominence, and agency in American finance.” Business and Politics 17(3): 443–472.CrossRefGoogle Scholar
Zysman, John. 1983. Governments, markets, and growth. Ithaca, NY: Cornell University Press.Google Scholar