The Dutch Authority for the Financial Markets (AFM) and Dutch
Central Bank (DNB) in an international context:
A master thesis on how transnational network participation determines
the independence of the AFM and DNB
Robbert Nachbar
s1143573
Date:
08-06-2017
Track:
Governing Markets: Regulation & Competition
Supervisors:
dr. J. Schalk & M.J.A. van der Heijden MSc MA
Second reader:
dr. J. Christensen
Abstract
This thesis discusses how transnational network participation may lead to an increase in de facto autonomy of independent regulatory agencies vis-à-vis their parent ministries. It explores to what extent it is justified that many earlier scholars use the principal agent model to explain ministerial-agency relationships in the light of internationalization. I illustrate that the assumptions within the principal agent model do not hold regarding the case of this thesis, namely the two regulators of the Dutch financial sector: the Authority for the Financial Markets (AFM) and the Dutch Central Bank (DNB). Moreover, this thesis explores how both organizations gained de facto autonomy vis-à-vis the Dutch ministry of Finance through transnational network participation. I argue that an increasing information asymmetry between the regulators and the ministry is the foremost driver of an increase in their de facto autonomy. Also, DNB gains de facto autonomy as a result of institutional change.
1. Introduction . . . .. . . p. 4 2. Literature review . . . p. 7 2.1 The logic for delegation to independent regulatory agencies . . . p. 7 2.2 Internationalization of independent regulatory agencies . . . p. 8 2.3 The concept of bureaucratic autonomy . . . p. 8 2.4 Changing bureaucratic autonomy vis-à-vis multiple actors . . . p. 9 2.5 Shortcomings in the existing literature . . . p. 11 3. Theoretical framework . . . p. 13 3.1 The development of bureaucratic autonomy as a concept . . . p. 13 3.2 Variance in transnational regulatory networks . . . p. 14 3.3 The institutional design mechanism . . . p. 16 3.4 The information asymmetry mechanism . . . p. 17 3.5 Reputational effects mechanism . . . p. 18 4. Research design . . . p. 20 4.1 Case selection . . . p. 20 4.2 Process tracing . . . p. 21 4.3 Data collection and analysis . . . p. 21 4.4 Threats to inference . . . p. 22 4.5 Operationalization of key concepts . . . p. 23 4.6 Coding scheme . . . p. 25 5. DNB and AFM in historical perspective . . . p. 27 5.1 An introduction to Dutch financial sector regulation . . . p. 27 5.2 The AFM in historical perspective . . . p. 29 5.2.1. General development . . . p. 29 5.2.2. The pre-crisis period. 2002 – 2006: . . . p. 31 5.2.3. The reform period. 2007 – 2010: . . . p. 34 5.2.4. The post-crisis period. 2011 – 2017: . . . p. 36 5.3 DNB in historical perspective . . . p. 38 5.3.1. General development . . . p. 38 5.3.2. The pre-crisis period. 2002 – 2006: . . . p. 41 5.3.3. The reform period. 2007 – 2010: . . . p. 44 5.3.4. The post-crisis period. 2011 – 2017: . . . p. 45 6. Empirical analysis: the effects of transnational network participation on bureaucratic
6.1 The value of the principal agent model . . . p. 49 6.2 Exploring the mechanisms . . . p. 52 6.2.1. The institutional design mechanism . . . p. 52 6.2.2. The information asymmetry mechanism . . . p. 54 6.2.3. The reputation effects mechanism . . . p. 56 6.3 A comparison between the AFM and DNB and other relevant findings . . . p. 57 6.3.1. How do transnational networks relate or differ? . . . p. 58 6.3.2. Explanation for good reputation of Dutch financial sector regulators . . . . p. 59 7. Conclusion & reflection . . . p. 61 8. Literature . . . p. 65
Principal-agent scholars have extensively discussed how ministries – being principals – provided independent regulatory agencies - being agents – with regulatory tasks (Pollitt et al., 2004). Arguments in favor of a process of delegation vary from an increased allowance for expertise to isolating regulatory tasks and policy from politics (Gilardi, 2002). Over time, however, the traditional relationship between ministries and independent regulatory agencies altered. Independent regulatory agencies increasingly interact with international actors, for instance in transnational regulatory networks, in order to address regulatory challenges that cross national borders. As a result of this process, which is defined as internationalization, policy is no longer solely developed by nations’ executive and legislative branches, but also by regulatory actors in an international context. Also, new principals may emerge for independent regulatory agencies (Coen and Thatcher, 2008; Egeberg and Trondal, 2009; Levi Faur, 2011). Most interestingly to this thesis, scholars have found evidence for a correlation between transnational regulatory network participation of independent regulatory agencies and an increase in their bureaucratic autonomy vis-à-vis their parent ministry (Bach and Ruffing, 2013). In this thesis, the concept of bureaucratic autonomy is defined as an actors’ ability to translate its own preferences into actions (Maggetti, 2007).
Although some scholars discuss possible mechanisms that account for an increase in bureaucratic autonomy (Yesilkagit, 2011; Bianculli et al, 2015; Ruffing, 2015), these are only limited understood (Ruffing, 2015). So far, the mechanisms have not been applied to different cases to verify their causal chain in multiple contexts. Also, up until now they have not been studied collectively, to research possible interlinkages between the mechanisms. Moreover, almost all of these scholars make use of the principal-agent framework and its underlying assumptions, such as opposing interests between the principal and the agent. In practice, however, such assumptions may not hold. In other words, the knowledge of today in regard to mechanisms that explain the increase of an independent regulatory agency’s bureaucratic autonomy as a result of transnational network participation is limited. Altogether, this is problematic, because the correlation may be spurious. I.e., the mechanisms have not (or only very limited) been verified, and it thus may be that other factors than transnational network participation define the outcome in de facto autonomy of an independent regulatory agency.
Therefore, it is the aim of this thesis to verify the insights that currently exist. It does so by exploring to what extent the principle agent model and the mechanisms hold in regard to the case of financial sector regulation in the Netherlands. It is not the aim of this thesis to fully reject or deny the principal agent model or the different mechanisms. Instead, I seek to verify if the principle agent models’ assumptions hold and I specifically focus on building knowledge in regard to the conditions under which the mechanisms are likely to occur.
I do so by taking Dutch financial sector regulation as a case. This is of particular interest for a couple of reasons. First, especially after the financial crisis in 2008, financial sector regulators increasingly collaborate on an international level to prevent a systemic crisis from happening again. This, together with the fact that the Dutch financial sector to a large extent is entangled with foreign
financial sectors, makes it highly likely that the Dutch are willing to extensively collaborate on the international level (CPB, 2016). Second, the financial sector is a highly complex and continuously changing environment (CPB, 2016). This requires regulators to develop expertise and, thus, makes it likely that an information asymmetry exists between an independent regulatory agency and its parent ministry. Both of these arguments make Dutch financial sector regulation a most likely case. If an increase of bureaucratic autonomy as a result of transnational regulatory network participation is not found here, it is not likely to be found elsewhere. Third, and final, Dutch financial sector regulation is of particular interest because of its institutional framework. In contrast to most countries, where a model of sector specific regulation is more likely, the Dutch use a so called twin peaks model. As such, the Dutch Central Bank (DNB) is responsible for prudential regulation, whereas the relatively young Authority for the Financial Markets (AFM, established in 2002) is responsible for conduct-of-business regulation. The twin peaks model allows for a comparison between both organizations. This being said, the research question of this thesis is as followed:
How did the participation in transnational regulatory networks in the years between 2002 and 2017 affect the de facto autonomy of the Dutch Authority for the Financial Markets (AFM) and the Dutch National Bank (DNB) vis-à-vis the Dutch ministry of Finance?
This thesis is not only of scientific interest, but also has practical relevance. As discussed in the first paragraph, internationalization entails that the development of regulatory policy not only takes place within a national context with traditional checks and balances, but also in international contexts. Questions have been raised by scholars if this is desirable in terms of accountability (Papadopoulos, 2007). This is not only a scientific debate, but also happens in practice. Currently, the European Commission holds an open consultation, through which all relevant stakeholders may provide the Commission with feedback in regard to the functioning of Europe’s new regulatory framework, the European System of Financial Stability (ESFS). The consultation not only focuses on the effectiveness of the framework, but also questions its legitimacy and the accountability of its actors (EC, consultation document 2017). Although this thesis itself does not enter the normative realm, its findings may contribute to this discussion.
Now that the brief puzzle, research question and practical relevance are discussed, I turn to the structure of this thesis. I consider this introduction as the first chapter of this thesis. Thereafter, the second chapter provides for an extensive literature review, which discusses the relevant literature in regard to the effects of transnational networks on the bureaucratic autonomy of independent regulatory networks. Most importantly, this section illustrates that scholars have found evidence for a correlation between internationalization and an increase in de facto autonomy of independent regulatory agencies. The third chapter contains the theoretical framework of this thesis, in which the existing theories on possible mechanisms that cause this effect are discussed. Per mechanism also an explanatory
hypothesis is formulated. In the fourth chapter, I elaborate on the research design and methods of this thesis. I argue what the research design is like, what measuring techniques are used and what its shortcomings are. In the fifth chapter, I put DNB and the AFM in a historical perspective by combining an analysis of how both organizations participated in transnational regulatory networks with an analysis of how their formal relationship with their parent ministry developed over time. Thereafter, the sixth chapter discusses to what extent the different mechanisms as pointed out in the theoretical framework are applicable to the context of DNB and the AFM. At last, in the seventh chapter, I conclude by presenting the final argument of this thesis. I also discuss its shortcomings and make suggestions for future research in this academic field.
2.1 The logic for delegation to independent regulatory agencies
National governments increasingly decentralize regulatory tasks to independent regulatory agencies (Politt et. al., 2004). Many scholars use a principal-agent perspective to understand this logic of delegation. In its most classical form, a ministry – the principal – deliberately provides an independent regulatory agency – the agent – with specific tasks (Ruffing, 2015). Scholars identified several arguments to do so. First, the classic argument for delegation relates to expert knowledge. Although decentralization generates constraints in terms of control, it also allows for the delivery of expertise. Within a decentralized body that focuses on a specific field, civil servants may specialize and gain knowledge that would not be possible in a more centralized context (Bawn, 1995).
The second argument in favor of delegation derives from the credibility problem. Governments’ preferences tend to be inconsistent over time (Kydland and Presscot, 1977). In regard to regulatory tasks, this inconsistency may be problematic, because private actors need stability to make, for instance, investment decisions. Therefore, to ensure long term policy credibility, governments decentralize regulatory tasks to independent regulatory agencies that are expected to have more stable preferences (Gilardi, 2005a).
A third argument in this regard is linked to political instability. If the political leaders of a government are afraid of being replaced by actors with different preferences, they may delegate specific policy fields to independent regulatory agencies, in order to isolate their policy from politics. Hereby, they hope to sustain their own policy, even after regime change (Gilardi, 2005a). The extent to which this argument is relevant depends on the institutions within a given policy context, because the more veto players with heterogeneous policy preferences occur, the more likely it is that the status quo will be maintained (Hammond, 1996). In other words, the presence of veto players mitigates the political instability as well as the credibility problem (Gilardi, 2005a).
A fourth argument which is used to explain the widespread emergence of independent regulatory agencies refers to a process of emulation. Over the years, according to Gilardi, independent regulatory agencies emerged, because they were regarded as a taken for granted solution to regulatory problems (Gilardi, 2005b). On the one hand, emulation is regarded as irrational, because governments may unintentionally emulate their foreign counterparts, without having evidence for the effectiveness of independent regulatory agencies. On the other hand, especially in times of uncertainty, emulation may be rational. Governments may not have the resources to develop their own policy tools. Instead, intentionally emulating other governments that are perceived to be successful, may be the best policy option during such uncertain times.
Now that the arguments for delegation are discussed, in the next paragraph I elaborate on how this classic ministry-agency relationship changed as a result of increasing internationalization.
2.2 Internationalization of independent regulatory agencies
altered. Independent regulatory agencies increasingly collaborate with foreign counterparts in transnational networks in order to address regulatory issues that cross national boundaries (Levi-Faur, 2011). Especially in Europe, where independent regulatory agencies shift activities to the European level. This process is referred to as a process of Europeanization (Ruffing, 2015). International co-ordination and harmonized standards are indispensable for the common market. Therefore, national independent regulatory agencies cooperate with their foreign counterparts in (European) transnational networks. Initially, most transnational networks tend to be informal, lack hierarchy and do not have far reaching formal powers. Within these networks, independent regulatory agencies negotiate and discuss regulatory policy with one another, without the enforcement of binding regulation. Such networks tend to be greatly dependent on the European commission (Coen & Thatcher, 2008).
Moreover, according to Levi Faur, a process of agentification takes place. His large-N study shows that networks of independent regulatory agencies in Europe are likely to be transformed into European regulatory agencies, with a hierarchy, administrative apparatus and – to some extent – formal powers (Levi Faur, 2011). Hereby, the European agency becomes an entity on itself, that is composed of different independent regulatory agencies of the member states.
Most commonly, scholars use the classical principal-agent framework to discuss processes of internationalization in the form of transnational network participation by independent regulatory agencies. Initially, the independent regulatory agencies had only one principal, namely the ministry. However, as a result of transnational regulatory network participation, additional principals may occur. For instance, some scholars regard the European Commission as an extra principal (Coen and Thatcher, 2008). Moreover, Levi Faur discusses how the newly emerged European agencies may become a new principal of independent regulatory agencies at the member state level (Levi Faur, 2011). According to scholars that use the principal-agent framework perspective, internationalization significantly influences an independent regulatory agency’s behavior and its maneuverability in the national as well as international context. This brings the discussion in the realm of bureaucratic autonomy, on which I will elaborate now.
2.3 The concept of bureaucratic autonomy
As a result of delegation, independent regulatory agencies gain a certain degree of bureaucratic autonomy. The concept of bureaucratic autonomy is discussed by many scholars from different academic fields, but in its minimal sense it ‘’means, above all, to be able to translate one’s own preferences into authoritative actions, without external constraints’’ (Maggetti, 2007: 272). However, according to Sartori (1973), bureaucratic autonomy is not fully present or totally absent. Rather, bureaucratic autonomy should be understood as a relative concept, which means that the extent of external constraints that limit bureaucratic autonomy may vary (Carpenter, 2001). This nuanced definition of bureaucratic autonomy is used within this thesis.
constitution that should safeguard its independence from political influences. Hereby, it has a certain legal base to act according to its own preferences, with a varying degree of interference of other actors. This rather legal definition is known as formal autonomy (Gilardi, 2002). However, an independent regulatory agencies’ ability to act according to its own preferences might differ in practice. On the one hand, political actors may have incentives to limit the autonomy of regulators (Pelzman et al., 1989). On the other hand, independent regulatory agencies may pursue goals that contradict the preferences of the central government (Bawn, 1997). Therefore, to account for the independence in practice, Maggetti (2007) introduced the concept of de facto autonomy. The specific dimensions of formal as well as de facto autonomy that are relevant for this thesis are extensively discussed in the theoretical framework chapter. The specific operationalization of formal and de facto autonomy is discussed in the research methods chapter.
For now, however, it is important to note that the extent of bureaucratic autonomy of an independent regulatory agency initially was only defined by its relationship with its parent ministry. But because of transnational network participation, bureaucratic autonomy is also defined vis-à-vis other actors. In the now following paragraph, I first elaborate on a group of scholars that discuss bureaucratic autonomy vis-à-vis actors within transnational networks. Thereafter, I discuss the group of scholars that discuss the development of bureaucratic autonomy vis-à-vis parent ministries.
2.4 Changing bureaucratic autonomy vis-à-vis multiple actors
Several scholars illustrated that the autonomy of independent regulatory agencies vis-à-vis networks varies. Within networks, not all independent regulatory agencies are equal in terms of preferences, but they also differ to the extent to which they are able to pursue these preferences. Some independent regulatory agencies are more vocal than others (Bach and Newman, 2010). This is confirmed by Maggetti and Gilardi (2011), who showed that independent regulatory agencies that represent larger financial sectors tend to be in a more central position within the network and are also more likely to promptly adopt standards. Also, independent regulatory agencies with larger staff, for instance, prove to be relatively more autonomous (Egeberg and Trondal, 2009; Verhoest et. al. 2010).
Moreover, the battle for independence within international networks is especially seen during the emergence of independent European regulatory agencies, as described by Levi Faur (2011). Although European agencies usually have an own apparatus and to some extent may count on formal powers, they do not emerge without constraints. Independent regulatory agencies of the different member states may regard powerful European regulatory agencies with severe formal powers as a threat to their own autonomy. In this regard, Thatcher (2011), described how networks of independent regulatory agencies formalized themselves, in order to prevent the establishment of powerful European regulatory agencies. What might help to increase the position of the European regulatory agency is its effectiveness and successful operation in the beginning after its emergence. Groenleer (2014) illustrates that European regulatory agencies, which are regulatory entities on themselves, are
taken more seriously if they are perceived to be effective, and, thus, gain more de facto autonomy. However, a specific causal link between the perceived effectiveness of European agencies and the autonomy of independent regulatory agencies vis-à-vis the European regulatory agencies is yet to be studied.
This being said, I now turn to the group of scholars that discussed the autonomy of independent regulatory agencies vis-à-vis their parent ministry. This is the most important part of the literature review, as this thesis focuses on the development of the bureaucratic autonomy regarding two Dutch independent regulatory agencies in the financial sector vis-à-vis their parent ministry. A first and commonly cited research is the analysis by Egeberg and Trondal (2009), in which they seek to explain how European policy is implemented either through national governments, the European Commission or through networks. Their study reveals that so called ‘dual-hatted’ national independent regulatory agencies play a crucial role during the implementation process of EU legislation. Hereby, independent regulatory agencies often closely collaborate with the European Commission, by which they sometimes bypass their parent ministry. This means that independent regulatory authorities on the one hand become more dependent on the European Commission (Martens, 2008), but on the other hand they may become less dependent on their parent ministry. In other words, the emergence of an additional principal for independent regulatory authorities may lead to an increase in de facto autonomy for the independent regulatory agency vis-à-vis the parent ministry.
This finding is confirmed by many later studies. For instance, a large-N study on the autonomy of German independent regulatory agencies shows that their de facto autonomy vis-à-vis their parent ministries is increased after they participate on a European level (Bach and Ruffing, 2013). Several mechanisms are discussed to explain such causal linkages. First, a case study by Yesilkagit (2011) shows that the Dutch Data Protection Authority (DPA) gained autonomy vis-à-vis the parent ministry, because it was provided with formal powers by the European Commission. In other words, the increase in de facto autonomy of the agency vis-à-vis the parent ministry derived from institutional design.
Second, it is argued that independent regulatory agencies gain knowledge in the European networks, which they may strategically use to pursue their own goals, instead of acting according to the preferences of the parent ministry (Yesilkagit 2011; Littoz-Monnet, 2014; Ruffing 2015; Bianculli et al., 2015). More specifically, Ruffing (2015) refers to the concept of negotiation knowledge (Putnam, 1988). Independent regulatory agencies may gain knowledge at the European level during negotiation processes, which they may strategically use against their parent ministry, who is not familiar with this information. Such arguments fall within the classic information asymmetry argument of the principal-agent framework.
2.5 Shortcomings in the existing literature
independent regulatory agencies within (European) networks. Most of the above mentioned scholars use the principal-agent approach to get an understanding of the effects of internationalization on independent regulatory agencies. Other groups of scholars increasingly criticize this supposedly narrow view. For instance, a key assumption within the principal-agent theory is that agents may drift away from the preferences of their principals (Bawn, 1997). Following this logic, in response to possible drifting agents, principals to some extent should monitor their agents, in order to be able to hold them accountable for their deeds. However, according to Schillemans and Busuioc (2014), it is not necessarily the agents that drift away from the principal-agent contract. Instead, their study points out that principals purposively choose not to hold their agents accountable, which is at odds with the assumptions within the principal-agent model. In other words, it is not the agent that drifts away, but it is the principal (Schillemans and Busuioc, 2014). Studies such as these illustrate that the principal-agent model is not perfectly suited for explaining the relationship between independent regulatory agencies and their parent ministry or possible additional principals. Still it is commonly used by most scholars, for instance, because it pays sufficient attention towards the interests of different actors within a principal-agent context where delegation occurs (Coen and Thatcher, 2008). Therefore, I regard the principal agent scholarship as useful, but during the analysis, attention will be payed to possible drifting principals as well.
Altogether, recent qualitative and quantitative analyses provide scholars with important building blocks in understanding the effects of international networks on the de facto autonomy of independent regulatory agencies in relation to their parent ministries. However, the causal mechanisms are only limited understood (Ruffing, 2015). Although the scholars that do discuss possible mechanisms all mention the development of expertise within networks as an important factor, they have not yet developed a coherent understanding of how these mechanisms work out in practice. One explains an increase of de facto autonomy through institutional change (Yesilkagit, 2011), whereas others refer to the importance of reputation (Groenleer, 2014; Bianculli et al., 2015) or an increase in information asymmetry (Ruffing, 2015). To my knowledge, these mechanisms have not been compared or validated in a single study. This is necessary, though, because the mechanisms may interrelate or influence each other. Moreover, the mechanisms mentioned above may be case specific. The effects of transnational network participation on the bureaucratic autonomy of a nuclear safety regulator, as discussed in the research of Bianculli et al. (2015), may be completely different compared to the case of this thesis, namely financial sector regulation. To my knowledge, none of the above mentioned mechanisms are applied to other cases for verification.
In sum, the research that found evidence for the above mentioned mechanisms may contain spurious correlations, that possibly only provide for a quasi-understanding of the relationship between transnational network participation and an increase in de facto autonomy. Therefore, it is the central aim of this thesis to gain more knowledge on the mechanisms that cause independent regulatory
agencies to be more independent from their parent ministries as a result transnational network participation. This being said, I now turn to the theoretical framework of this thesis, in which the different mechanisms and accessory exploratory hypotheses are discussed.
3
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Theoretical framework
The studies that are cited in the literature review above point out that the participation in an international network as an independent variable and the de facto autonomy of independent regulatory
agencies vis-à-vis parent ministries as a dependent variable are positively correlated. In order to understand this correlation, in this section I first elaborate on how the dependent and independent variables may vary. Thereafter, I discuss the different underlying mechanisms that may cause an increase in de facto autonomy.
3.1 The development of bureaucratic autonomy as a concept
As mentioned in the literature review, in regard to the concept of bureaucratic autonomy, scholars distinguish between a formal, legal definition and a definition that refers to independence in practice. Initially, according to Gilardi and Maggetti (2010), formal autonomy (or formal independence as they define it) was developed by a group of scholars who discussed the role of central banks. In general, central banks are formally independent from elected politicians, because they may independently select policy objectives and may use monetary instruments without political interference (Alesina and Summers; 1993). However, over the years numerous other organizations emerged that to some extent were also independent from elected politicians. In order to measure the formal autonomy of these independent regulatory agencies, Gilardi developed four dimensions of indicators that all relate to the institutional characteristics of an agency (Gilardi, 2008). First, formal autonomy depends on how, by whom and for how long the chairperson and management board of an independent regulatory agency is appointed. Secondly, formal autonomy depends on the legal power that elected politicians have over the agency by, for instance, being able to overrule decisions. Third, the formal autonomy of an agency is defined by how its financed and its ability to determine its own internal structure. Fourth, and final, the formal autonomy is defined by the regulatory competencies of an agency. More specifically, this addresses to what extent an agency is formally enabled with tools to enforce regulatory tasks, by monitoring and sanctioning activities (Gilardi and Maggetti, 2010).
However, the formal definition of bureaucratic autonomy does not capture the autonomy of an independent regulatory agency when they manage their day-to-day actions (Maggetti, 2007). In practice, an independent regulatory agency has multiple audiences from which it is more or less independent, namely its political principals, possibly other bureaucratic institutions – such as the European Commissions – as well as the sectors it regulates. Therefore, when discussing de facto autonomy, it is important to specify to which actor the de facto autonomy relates (Gilardi and Maggetti, 2010). This thesis focuses on the former two relationships. In their analysis, Gilardi and Maggetti use several indicators to measure de facto autonomy vis-à-vis a political principals, that go beyond the formal rules between an independent regulatory agency and a political principal. For instance, whereas formal autonomy is measured by looking at the source of a budget, de facto autonomy is measured by taking into account to what extent the budget provider has influence over how the budget is spend (Gilardi and Maggetti, 2010). All relevant indicators that are used within this thesis in regard to formal as well as de facto autonomy are extensively discussed in the operationalization paragraph in the research methods chapter.
As discussed in the literature review, the degree of de facto autonomy is affected by transnational network participation. According to the principal-agent framework, new principals may emerge or the interests of independent regulatory agencies may alter because of transnational network participation. Participation in transnational networks exists in several forms and possibly affects the bureaucratic autonomy of an independent regulatory agency in a varying degree. Therefore, the next paragraph discusses the possible variation in transnational networks. I.e. what can be identified as a network and what different types of regulatory networks exist?
3.2 Variance in transnational regulatory networks
According to Newman and Zaring (2013), all networks share characteristics in terms of who participates, what the process entails, how rules are enforced and the extent to which the network is institutionalized. In this section, I differentiate between four different forms of networks, that vary on these characteristics.
First, networks may solely consist of independent regulatory agencies that cooperate with foreign counterparts on a multilateral base. In this thesis, this type of network is referred to as the category I networks. These networks may be active on either a regional or global level and may be open to all interested actors that are willing to participate or function as clubs, which means that they are only open to members after invitation (Newman and Zaring, 2013). In general, such networks tend to be horizontal and are rather informal. Moreover, its regulation usually lacks a formal base (Zaring, 1998). Nevertheless, some scholars regard these networks as very influential and even consider them to be ‘’the blueprint for the international architecture of the 21st century’’ (Slaughter, 2004). An
example of such a network is the International Forum of Independent Audit Regulators (IFIAR), which only has a very limited secretariat, is primarily focused on knowledge sharing and has no standard setting authorities, let alone formal powers in terms of compliance and enforcement1.
The second type of transnational regulatory networks that I distinguish here refers to networks in which not only independent regulatory agencies participate, but that also consist of an independent secretariat that coordinates the network. Such networks are stronger institutionalized compared to the first type (Coen and Thatcher, 2008). In this regard, countries not only empower their own independent regulatory authorities, but also delegate regulatory tasks to transnational institutions (Bach et al. 2016). As such, the network is characterized by horizontal as well vertical relationships between its actors, depending on the particular institution. As a result of supranational legislation, in Europe, networks are quite common in which either the European Commission and/or a (small) European agency collaborate with independent regulatory agencies of the member states. Scholars have illustrated that relatively soft rules developed within such networks, possibly in the form of standards, may be implemented as binding regulations in each member state (Maggetti and Gilardi, 2014). Therefore, such networks are regarded as relatively influential (Bach et al., 2016). In this thesis,
networks that have such characteristics fall into two categories, depending on the presence or absence of standard setting abilities. Such networks without standard setting abilities are referred to as category II, whereas such networks with standard setting abilities are referred to as category III. An example of a category II network is the Committee of European Security Regulators (CESR). CESR had a small secretariat and was provided with formal advisory powers, but was not a standard setter. However, its successor, the European Security Market Authority (ESMA), does have standard setting abilities. Therefore, I regard ESMA as a category III network.
Fourth, the most stringent types of network regime is when transnational agencies are established to facilitate regulatory tasks of national regulators. As mentioned in the literature review, such agencies are provided with an own regulatory apparatus and formal powers (Levi Faur, 2011). Primarily, the agency is developed in order to ensure uniform implementation. This does not necessarily mean that independent regulatory agencies are completely dependent on the newly emerged agencies (Bach et al., 2016). This depends on the particular institutional context. In general, however, this type of network is regarded as the most vertical compared to the two types mentioned above and is referred to as category IV networks in this thesis. An example of a category IV network is the European Single Supervisory Mechanism, which consists of an apparatus in Frankfurt, has not only extensive standard setting, but also compliance and enforcement powers. Still it is a network, because the supervision is executed by so called joint supervisory teams, that are composed of independent regulatory agency actors of the different member states.
A schematic overview of the different categories is provided in table I. However, the distinction between different kind of networks as described above is rather artificial, as in reality networks are hard to classify. For instance, a network may consist of a transnational agency with formal powers, but these formal powers may be very limited. Hence, such a network may be either classified as a category III or IV networks. Indicators such as how often and to what extent actors participate also are taken into account in the historical description chapter of this thesis.
Table I. Transnational network categories
Category
I CategoryII CategoryIII CategoryIV
IRA participation Yes Yes Yes Yes
Network has staff No Yes Yes Yes
Standard setter No No Yes Yes
Formal powers regarding enforcement and
compliance No No No Yes
This being said, I now turn to the mechanisms through which the de facto autonomy of independent regulatory agencies may increase vis-à-vis their parent ministry as a result of participation in the various transnational networks described above.
3.3 The institutional design mechanism
As discussed, the classic starting point for studies on ministry-agency relationships is the principal-agent approach (Ruffing, 2015). Hereby, the ministry delegates regulatory tasks to an independent regulatory agency, which allows for expertise, credible commitment and less political uncertainty (Bawn, 1995; Gilardi, 2005a). The ministry remains in charge over the agent and uses monitoring mechanisms to control if the agent acts according to the ministries preferences. Such control is necessary, because independent regulatory agencies may deviate from the preferences of their parent ministries. This phenomenon is known as bureaucratic drift (Bawn, 1997). As pointed out earlier, this is one of the key assumptions within the principal-agent model. As a result of joining a transnational network, the parent ministry may no longer be the only principal of the agent. For instance, for European independent regulatory agencies it is possible that the European Commission becomes an extra principal, having the ability to provide the independent regulatory agency with formal autonomy through network initiatives (Egeberg and Trondal, 2009). This is where a causal chain may start. Put differently, namely, the Commission has the power to limit the control rights of parent ministries over their independent regulatory agencies (Ruffing, 2015). Such a process is not limited to the European context, but may also occur in worldwide or other regional transnational regulatory networks.
Still, Yesilkagit provides for a clear example in the European context. As a result of the European Data Privacy Directive, the Dutch government was obliged to set up a new regulatory framework for data regulation (Yesilkagit, 2011). In doing so, it established a new independent regulatory agency, namely the Dutch Data Privacy Authority (DPA). Once established, the DPA joined a European regulatory network (the Article 29 Working Party). In this network, independent regulatory agencies shared knowledge and best practices, which could be used at the member state level to increase its bureaucratic autonomy. Moreover, as a result of the directive, the Dutch government was required to first consult the DPA, before initiating new legislation regarding personal data or legislation with a substantial privacy aspect. This study shows that a DPA’s advice during such a consultation round was followed up by the Dutch ministry of Health. Yesilkagit concludes that the significant increase in de facto bureaucratic autonomy of the DPA vis-à-vis the Dutch government, can partially be explained because of the DPA’s increase in expertise due to the network. However, more importantly, the institutional power that was granted after the emergence of the Data Privacy Directive was decisive for the increase in the DPA’s bureaucratic autonomy (Yesilkagit, 2011).
Following this same line of reasoning, Ruffing (2015) adds that in response to new institutional rules, a parent ministry may adapt its actual steering and control behavior regarding an independent regulatory agency. As a result, the independent regulatory agency gains de facto autonomy and is less in control of the ministry. This means that the agency may act more according to its own preferences, which, in other words, means that the de facto autonomy of the agency increases vis-à-vis the parent ministry. Initially, this causal chain starts because of an adjustment in the
institutional design of the regulatory field. Therefore, the following exploratory hypotheses will be referred to as the institutional design hypotheses.
Hypothesis I: If the institutional powers of an independent regulatory agency increase as a result of participation in transnational regulatory networks, then it is likely that the de facto bureaucratic autonomy of an independent regulatory agency vis-à-vis its parent ministry will increase.
3.4 Information asymmetry mechanism
Furthermore, in the classic principal-agent discussions, scholars discuss the information asymmetry between a parent ministry and independent regulatory agency by focusing on the agent’s technical knowledge, meaning knowledge on the connection between policy and its outcome (Moe, 2012). The autonomous agent gains expert knowledge, which it may use to judge the technical feasibility of policy options (Ruffing, 2015). This information gap is known, and, following the logic of the principal-agent model, the principal may make use of monitoring and steering mechanisms to stay in control of its agent. For instance, initially, ministries played a role of gate keeper (Bach, 2012). Each and every policy proposal entered the decision making process through the parent ministry. Hereby, the parent ministry was in control of independent regulatory agencies (Ruffing, 2015).
Due to transnational networks, however, independent regulatory agencies gain increasingly influence over policy decisions (Littoz-Monnet, 2014). This especially is the case in agentified networks, which are networks of independent regulatory agencies that are transformed into European regulatory agencies, as referred to in the literature review (Levi Faur, 2011). In such networks, parent ministries may lose their gatekeeper position. This means that ministries who once actively participated in the international policy decision making process, do not attend these meetings anymore by themselves. Instead, on behalf of a member state an independent regulatory agencies may participate in the international decision making process. Hereby, apart from gaining expert knowledge, the independent regulatory agency also gains knowledge on the positions of other member states, and, thus knows what compromises were possible and what other solutions were at the table. The parent ministry is not in the possession of this knowledge, because it does not attend the meetings anymore. In other words, the independent regulatory agency knows the political feasibility of policy options, whereas the ministry does not (Ruffing, 2015). Such knowledge is formerly described as negotiation knowledge (Putnam, 1988). This stream of research assumes that independent regulatory agencies may strategically use expertise and negotiation knowledge to bypass their parent ministries (Egeberg and Trondal, 2009). Therefore, in regard to this mechanism, the following exploratory hypothesis can be formulated, which in this thesis is referred to as the information asymmetry hypotheses.
Hypothesis II: If the information asymmetry between an independent regulatory agency and its parent ministry increases as a result of participation in transnational
regulatory networks, then it is likely that the de facto bureaucratic autonomy of an independent regulatory agency vis-à-vis its parent ministry will increase.
3.5 Reputational effects mechanism
Apart from an increase in de facto autonomy through institutional design or as a result of increasing information asymmetry, a third mechanism in the principal-agent model stream of research relates to the perceived effectiveness of actors that participate in transnational networks. For instance, Groenleer (2014) discusses the reputational effects of newly emerged European regulatory agencies. Although his argument is not about national regulatory agencies, the same effects may occur in regard to national independent regulatory agencies. His study reveals that European regulatory agencies that are created with a relative high degree of formal autonomy, are not necessarily more autonomous in practice than European regulatory agencies that are created with a smaller degree of formal autonomy. Although the degree of formal autonomy during the foundation of an agency matters, the degree of autonomy in practice is not fixed (Carpenter, 2001), but depends upon whether an actor is perceived to be legitimate by its audience: ‘’When agencies develop a high level of legitimacy, their goals and policies are not questioned; their existence is taken for granted’’ (Groenleer, 2014: 261). Groenleer’s main finding is that European regulatory agencies may become legitimate, because their audiences – i.e. the European Commission, member state actors and other external stakeholders, such as regulatees – perceive them to be effective. Because these agencies are perceived to be effective, external actors are less likely to intervene, which leads to a genuine increase in de facto autonomy. Moreover, the study points out that if European regulatory agencies constantly emphasize their formal powers, this might hamper the relationship with their audience, which results into less autonomy in practice (Groenleer, 2014). Thus, whereas formal autonomy at the moment of an agency’s birth matters, the autonomy in practice mostly depends on how the agency behaves after it is operational and how its behavior is perceived by its audience.
Other studies point out that the importance of reputation does not only account for European regulatory agencies, but also applies to independent regulatory agencies that participate in transnational networks. In their study, Bianculli et al. (2015) analyze how a Spanish independent regulatory agency in regard to nuclear energy gained de facto autonomy vis-à-vis its parent ministry after it joined a transnational network. Initially, the Spanish agency was perceived to be subjective (pro-nuclear energy) and, therefore, was connected to a weak audience with little influence on the Spanish public debate on nuclear energy. The case study shows, however, that the participation in a transnational network enabled the independent regulatory agency to gain expert knowledge, but also changed its organizational dynamics, such as its structure, culture and coordination. Moreover, the agency managed to occupy a central position within the international network. Because of these developments, the agency was perceived to be neutral, and therefore, more credible by its audience in contrast to other Spanish domestic actors. With the help of its credible reputation, the agency was even
enabled to make regulatory decisions contrary to the Spanish president, which is an indicator of a significant increase in de facto autonomy vis-à-vis its principal (Bianculli et al., 2015).
Altogether, these studies illustrate that the perception of external actors in regard to an independent regulatory agency’s effectiveness may play a decisive role in determining its de facto autonomy. Therefore, I have formulated the following exploratory hypothesis, which will be referred to as the reputational effects hypothesis:
Hypothesis III: If the independent regulatory agency is perceived to be effective by its
audience as a result of participation in transnational regulatory networks, then it is likely that the de facto bureaucratic autonomy of an independent regulatory agency vis-à-vis its parent ministry will increase.
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Research design
In this chapter, I elaborate on the research design of this thesis. As mentioned earlier, the aim of this thesis is to increase the understanding of the causal mechanisms between the participation of independent regulatory agencies in transnational networks on the one hand and the increasing de facto autonomy of these organizations vis-à-vis their parent ministry on the other. Scholars have already found evidence for this correlation (for example: Bach and Ruffing, 2013). A major limitation of these co-variational studies, is the fact that they do not capture possible other factors that may influence de facto autonomy. It lacks a causal chain that explains, step by step, how the outcome came to being. I.e. spurious correlations may exist. In this regard, however, a limited number of scholars has started to
explore mechanisms that possibly explain how transnational networks participation increase de facto autonomy (Yesilkagit, 2011; Groenleer, 2014; Bianculli et al., 2015 and Ruffing, 2015). I use these studies to develop explanatory hypotheses and apply them to the case of this thesis. This thesis, thus, is a theory-driven research and is explicitly focused on validating these mechanisms and the conditions under which they apply. It does so by using a single case study design. Such a design allows for explaining causal mechanisms within a case. Instead of looking across different units, single case studies provide for an in-depth analysis that focus on finding evidence by doing multiple observations in regard to the selected case (Toshkov, 2016).
In this chapter, I first explain why the case of the financial sector is of particular interest. Thereafter, I explain the research method of causal process tracing, which is used to explore the causal chain that led to the increase in de facto autonomy of both organizations. This paragraph also takes the methods’ shortcomings in terms of scientific inference into account. Third, the data collection and analysis of this thesis are discussed. Fourth, and final, the key concepts of the theoretical frameworks are operationalized to measurable indicators and a coding scheme is provided.
4.1 Case selection
The case of the financial sector is selected for several reasons. First, across the globe, the financial sector and its regulation is rapidly changing. Especially after the outbreak of the worldwide financial crisis in 2008, regulation of the financial sector changed significantly. On a global and regional level, such as in the European Union, regulators increasingly collaborate in order to prevent a financial crisis from happening again. As a result, regulators of the financial sector are delegated with more regulatory tasks.2 Also, the financial sector itself is continuously changing, because of technological innovations
(CPB, 2016), which requires financial sector regulators to continuously gain expertise and constantly adapt to the changing circumstances. Because of the need for expertise, a possible information asymmetry between the independent regulatory agency and the parent ministry is fairly likely. Moreover, Dutch financial sector regulation is of particular interest, because the Dutch have a relative substantial financial sector compared to their GDP and their financial sector is to a high degree entangled with foreign financial sectors (CPB, 2016). This makes good regulation and international cooperation of independent regulatory agencies even more important. Also, the Dutch have a so called twin peaks model, in which a distinction has been made between prudential regulation, which falls under the jurisdiction of DNB, and conduct-of-business regulation, for which the AFM is responsible. This distinction allows for a comparison between both organization and enables to analyze to what extent the mechanisms are applicable under different conditions.
Altogether, the elements mentioned above make the Dutch financial sector a most likely case
2 https://www.accountant.nl/nieuws/2014/6/dnb-krijgt-kleinere-directie-bij-bankenunie/ (visited on 24-4-2017)
to observe an increase in de facto autonomy of the Dutch independent regulatory authorities. It is the aim of this thesis to find evidence for this claim.
4.2 Process tracing
A method that is commonly used to identify causal mechanisms is causal process tracing (Blatter and Haverland, 2014), which is a ‘’within-case method of analysis that concentrates on the processes and/or mechanisms that link the causes and effects within specific cases’’ (Blatter and Haverland, 2014: 2). The main assets of causal process tracing is that the method takes the - possibly very complex – context of a case into account, by specifically paying attention to the timing of events, the behavior of relevant actors and possible interrelating effects (Blatter and Haverland, 2012). According to Blatter and Haverland, it does so by providing for an in-detail storyline of all relevant events in regard to a specific case. Within such a narrative, possible smoking-gun observations are of special relevance. Ideally, but unfortunately very unlikely, a combination of smoking-gun observations show that a series of events are highly likely to be causally linked, by which the chance is reduced that the specific outcome of a sequence is the result of randomness. Furthermore, causal process tracing does not only use smoking-guns to make an argument, but also relies on confessions of relevant actors. I.e. it requires actors to confirm other observations, which makes it more or less likely that a causal chain is present. By their nature, confessions are less strong evidence compared to smoking-gun observations, but they are more likely to be observed.
In sum, the method of causal process tracing is used in this thesis, because it allows for an in-detail analysis of how the de facto autonomy of DND and AFM vis-à-vis their parent ministry came to being in the highly complex environment of financial sector regulation, in which many different actors operate. However, it is not process tracing in its most pure form. Given the extensive scope of this thesis, it is impossible to do all relevant observations that are required to construct a solid causal chain. Nevertheless, I sought to do as much relevant observations as possible, in order to maximize the internal validity of this thesis.
4.3 Data collection and analysis
The data collection and analysis of this thesis consists of two different steps. In the first part of the (descriptive) analysis, I put the AFM and DNB in a historical perspective, by discussing how their degree of formal autonomy developed between 2002 and present. Moreover, the variance in formal autonomy over time is linked to their participation in transnational regulatory networks in this period. These years are of particular interest, because of the severe financial crisis that emerged in 2008, after which the regulation of the financial sector changed significantly. Formal autonomy is measured by analyzing documents that provide the two agencies with a degree of independence by contract. Such documents are annual reports, international memoranda of understandings within networks, EU directives, legislation letters and possible other legal sources. Transnational network participation is also measured by analyzing these documents.
Thereafter, when the variance in formal autonomy and transnational regulatory network participation over time is clear, I focus on measuring de facto autonomy of both organizations since 2002. Measuring de facto autonomy is rather ambitious, given the threats to inference as discussed in the following paragraph of this chapter, but I do so by using qualitative data sources. For this thesis, namely, internal as well as external actors of both the AFM and DNB have been interviewed about how they perceive reality regarding the independent regulatory agencies. In total 9 respondents have been interviewed, of which an overview is provided in the appendix. The respondents were either experts in their field, professor, or (former) senior officials of the AFM and DNB. I used a semi-structured method for the interviews.
4.4 Threats to inference
Although a wide range of documents is analyzed and numerous respondents with different viewpoints are interviewed, this thesis has to cope with a number of threats to inference. As this thesis solely focuses on within-case observations, it is not the aim of this thesis to generalize its findings to other cases. Instead, data is collected and analyzed in order to understand how participation in transnational regulatory networks possibly increase the de facto autonomy of independent regulatory agencies. Therefore, the challenges of this thesis all relate to the shortcomings of causal process tracing as a method and the method of data collection and analysis.
First, it is key to once more emphasize the – to some extent naïvely – ambitiousness of this thesis, by aiming for finding evidence in regard to causal mechanisms. In general, causal mechanisms are unable to be observed directly (Toshkov, 2016), because a researcher cannot rewind back in time and actually observe a process at the time it took place. Instead, by using a method of process tracing, researchers can construct a narrative about what is most likely to have happened. Such an approach definitely has it shortcomings. In theory, for instance, this thesis finds an outcome of a certain degree of autonomy in combination with rather convincing confessions of respondents. It is tempting to construct a narrative out of these observations and conclude by stating to have found rock solid evidence for specific causal mechanisms. However, it is impossible to know if the research captured all relevant observations, i.e. if other relevant observations are possibly excluded. This is a problem that cannot be fully overcome (Toshkov, 2016). Thus, although this thesis hopes to build knowledge in regard to the mechanisms between transnational regulatory network participation and an increase in de facto bureaucratic autonomy, a modest and cautious attitude is appropriate when considering its findings.
The second threat to inference relates to the conducted interviews. During the interview, respondents may justify their decisions by referring to specific goals or a particular logic. In reality, however, the respondents may have acted on a much less rational base in an uncertain environment. This threat is known as ex post rationalization (Blatter and Haverland, 2014). Related to this, respondents may give social desirable answers. Although many of the respondents have a relative
objective position, I also interviewed two former members of the board of the AFM, who may overdraw their decisions and output. Moreover, these respondents referred to situations that took place more than five or even fifteen years ago. Given the limited memory capacity of the human brain, their statements may not fully be in line with the actual situations. Therefore, the statements of especially these - but also the other - respondents are validated with other observations of the document analysis and other interviews.
The third and last threat to inference discussed here, relates to the extensive scope of this thesis. Although only a single case is studied, this particular case is very complex and consists of many actors who possibly play part in the causal chain that I would like to trace. Given the limited number of interviewees and documents that I have analyzed due to my limited time and recourses, it is highly likely that not all relevant observations are conducted for this research. Therefore, a selection has been made of the most important documents and key persons, that are most relevant to this thesis. In the empirical analysis chapter, all of these observations are related together, which is the foundation for the argument of this.
4.5 Operationalization of key concepts
Although I already elaborated in the theoretical framework on how this thesis measures transnational regulatory network participation, as being the independent variable, I have not yet discussed how the other key concepts are measured. Therefore, I now illustrate how I measure formal autonomy, de facto autonomy and other relevant concepts within the mechanisms between the variables.
Measuring formal autonomy is quite common among scholars (Bianculli et al.: 2015). In short, this thesis measures the concept of formal autonomy by analyzing the major institutional shifts in regard to DNB as well as the AFM in the years between 2002 and 2017. This period is of particular interest, because during these years both organizations increasingly participated in transnational networks. A framework with a wide range of indicators to measure the concept is developed by Gilardi (2008). This framework, which consists of four dimensions, is also used in this thesis. Table II provides for an overview of the four dimensions and the relevant indicators.
Table II. Formal autonomy operationalization. Source: Gilardi 2008 Chairperson and management
board
What is the term of office?
How are board members appointed or dismissed? How compatible is the office with other offices?
Other formal requirements of independence? Relationship with elected
politicians
How is independence formally stated? May decisions be overturned? Finances and organization
What is the source of the budget?
Are there requirements regarding the structure of the internal organization?
Regulatory competencies
To what extent does the organization have rule-making capabilities? To what extent does the organization have monitoring capabilities?
To what extent does the organization have sanctioning (enforcement) capabilities?
This being said, I now turn to the dependent variable of this thesis, namely the degree of de facto autonomy of the AFM and DNB after transnational regulatory network participation. This refers to the degree to which the AFM and DNB can act independently from the Dutch government. Just as other scholars have done (Bianculli et al., 2015; Ruffing, 2015), in this thesis de facto autonomy is measured by asking to actors to what extent they perceive to be independent from the Dutch government. This way of measuring de facto autonomy definitely has its limitations, because a respondent’s perception of reality may to some extent be different than the actual situation. Therefore, this thesis aims to verify observations, by taking multiple actors with different viewpoints into account.
The other key concepts within the mechanisms are operationalized as followed. First, the institutional design mechanisms refers to the concept of institutional powers. This concept is measured by analyzing the major changes in the legal base of both organizations that can be traced backed to transnational network participation. The second mechanism speaks of an increase in information asymmetry between the independent regulatory agency on the one hand and the parent ministry on the other. This is measured by asking respondents to what extent they perceive this gap in information between the two actors. The third mechanism refers to an agency’s reputation among its audience. This is measured by asking to internal as well as external actors to what extent they perceive the AFM and DNB to be effective or to have a positive reputation in another regard.
4.6 Coding scheme
As mentioned in the paragraph, de facto autonomy will be measured by interviewing respondents about their perception of de facto autonomy of the AFM as well as DNB. These interviews will also be used to analyze if the different mechanisms as discussed in the theoretical framework are applicable to the case. Before moving on to the descriptive analysis part of this thesis, I first discuss how the different mechanisms may be present. In this regard, for each mechanism the required conditions are set out. Moreover, I elaborate on potential quotes per mechanism, that may prove or disapprove the presence of the different assumptions of each mechanism.
The institutional design mechanism
According to the logic of the institutional design mechanism, an independent regulatory agency may gain de facto autonomy as a result of institutional change. Evidence for this mechanism starts at the presence of institutional change that directly derives from transnational regulatory network participation, by which the agency is provided with more formal powers. This is a key condition within this mechanism. Thereafter, the quality of the evidence may be improved by confessions of
internal actors of the AFM and DNB, who state that they perceive to have more de facto autonomy vis-à-vis the ministry of finance after the shift in institutional powers. For instance, internal actors of the AFM and/or DNB may indicate that the ministry of Finance downgraded its monitoring and steering behavior after the implementation of an EU directive or the signing of an international agreement, such as a memorandum of understanding. Moreover, during interviews also external actors of the AFM and/or DNB may point to reduced monitoring and steering behavior of the ministry as a result of institutional change.
Evidence that may contradict this mechanism refers to quotes by internal and external actors of the AFM and DNB, that indicate that the ministry of Finance did not reduce its monitoring or steering behavior after institutional change. Instead, actors may even state that the ministry actually increased its monitoring and steering activities after the AFM and/or DNB was provided with more institutional power. Moreover, by contrast, actors may perceive an increase in de facto autonomy, but without a preceding institutional shift. Also, there may be a discrepancy between the autonomy by institution and the autonomy in practice. Then the institutional design mechanism is also not applicable.
The information asymmetry mechanism
Within the information asymmetry mechanism, two key concepts stand out, namely gate keeper positions and negotiation knowledge. In short, this mechanism refers to the following process: independent regulatory agencies gain de facto autonomy vis-à-vis their parent ministry, because the ministry loses its gatekeeper position in transnational networks. As a result, the agency is provided with negotiation knowledge, which it may strategically use to bypass the ministry. Evidence for this mechanism may be quite hard to find, because it not only assumes that the AFM and DNB have contradicting preferences compared to the ministry of Finance, but it also assumes that the AFM and DNB act according to these preferences, by strategically using knowledge that they derive from the network, in order to bypass the ministry of Finance. I.e. actors have to confess that they, or their counterparts, act in contrast to the interests of the Dutch government. Most likely, this is not something actors will confess. However, some respondents did elaborate on situations during which they were in conflict with the ministry. This being said, quotes that can be used as evidence for this mechanism may refer to internal actors that perceive to have used negotiation knowledge in order to act in contrast to the interests of the ministry of Finance.
By contrast, there may be far more quotes possible that to some extent contradict this mechanism. For instance, the mechanism does not account if an actor indicates to have the same interests as the ministry of Finance. Moreover, if an actor states that the AFM or DNB has acted in contrast to the interests of the ministry of Finance, but did not use the expertise it gained through the network, then the mechanism also does not account for the difference in de fact autonomy.
above, I will also consider less strict mechanisms that also relate to information asymmetry. For instance, if an actor indicates to perceive more expertise through the network, which it uses to more successfully shape the policy process independent from the ministry of Finance, then I will also consider this as being part of an information asymmetry mechanism.
Reputational effects mechanism
The final mechanism discussed in this thesis relates to how an independent regulatory agency is perceived by its audience. According to this logic, an agency gains more de facto autonomy if it is considered to be effective by its audience, which includes the ministry, but also other relevant stakeholders, such as the regulated industry and the public. Evidence for this mechanism may occur in the form of internal as well as external actors – who I consider to be audience – of the AFM and/or DNB who state that transnational networks enabled both organizations with a good reputation, by which they became more independent from the ministry of Finance.
Evidence in contrast to this mechanism, may be quotes of actors in which it is stated that the reputation of the AFM and/or DNB is not effective. Moreover, even if the AFM and/or DNB are considered to be effective, and therefore have a good reputation, this may not derive from their activities in transnational networks. Possibly, the organizations were already perceived to be effective before cross border activities. Therefore, if an actor states that the AFM and/or DNB is considered to be effective, but not necessarily as a result of transnational network participation, this is also considered as evidence against the reputational effects mechanism. However, such findings are not necessarily in conflict with the overarching argument. It may be that reputation is of relevance in the other mechanisms, without being an independent mechanism by itself as discussed by Bianculli et al. (2015).
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DNB and AFM in historical perspective
Now that the literature review, theoretical framework and research design have been discussed, this chapter provides for an in depth analysis of how the AFM and DNB developed in the years between 2002 and 2017. In short, this chapter has two aims. First, it is meant to provide an overview of variation in the independent variable of this thesis, namely transnational network participation by the AFM and DNB. It does so by providing an overview of how and to what extent transnational network participation manifests itself. Second, this chapter discusses the variance in the main driver of the dependent variably of this thesis, namely the variance in formal autonomy of the AFM and DNB in the years between 2002 and 2017. Although formal autonomy by itself is not decisive (Groenleer, 2014), scholars have pointed out that it is an important driver for de facto autonomy (Hanretty & Koop, 2013). Altogether, this should pave the way for the empirical analysis of chapter 6, in which I discuss how the two variables are interrelated or to what extent the outcome in de facto autonomy of the AFM and DNB may be influenced by other factors.
