The Political Economy of Financial Market Regulation

The Political Economy of Financial Market Regulation

The Dynamics of Inclusion and Exclusion

Edited by Peter Mooslechner, Helene Schuberth and Beat Weber

This book focuses on recent financial market reforms, and their implications for social, economic and political exclusion. In particular it considers the hitherto under-researched question of whose interests govern the design of regulatory mechanisms and who influences the decision-making process. This process is set out as contested terrain, in which there are winners and losers, and in which there are inevitably circles of exclusion. The authors, comprising financial authority experts and academic specialists, expand the concept of exclusion beyond its typical social dimension to incorporate all actors, be they individuals or institutions not permitted to contribute to financial market regulation as a public good. As they point out, this may take the form of political, economic or indeed cultural exclusion. The book examines the conflicts that arise between various interests and how these are managed within the process of regulation.

Chapter 2: Political Economy Approach to Financial Reform

Susanne Lütz

Subjects: economics and finance, financial economics and regulation, political economy, politics and public policy, political economy


Susanne Lütz* 1. INTRODUCTION Regulatory change lies at the core of financial globalization. Deregulation and liberalization have blurred market boundaries and spurred the development of financial innovations which have substantially transformed the character of the finance industry. Market transformations, in turn, have been accompanied by the redefinition of rules, instruments and institutions of prudential regulation. While normative approaches see financial regulation first and foremost as providing collective goods such as financial stability, transparency or investor protection, regulatory reform in finance is nevertheless a contested terrain in which conflicting interests attempt to influence the design of governance mechanisms. Some actors may not be permitted to contribute to the common good, while others are in a hegemonic position to shape rule-setting processes according to their own preferences or national regulatory traditions. It is exactly the pattern of exclusion and inclusion in processes of regulatory change which lies at the heart of a political economy perspective on financial regulation. In line with the overall theme of this volume, I present in this article several analytical dimensions for the purpose of studying regulatory change in finance. The argument is that the preferences of and power relationships between government and market actors are key variables in understanding how regulatory problems are tackled, what kinds of regulatory solutions are chosen and how regulatory change comes about. In the second half of the paper, the analytical categories are applied to two cases of regulatory change in Germany. By drawing on the process of transformation in capital...

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