Macroprudential Regulation in the Face of Financialisation: implications for ideational progress in financial stability

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Macroprudential Regulation in the Face of Financialisation:

Implications for Ideational Progress in Financial Stability

MSc Thesis by Jackie Spang

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Master Thesis Political Science (International Relations) Graduate School of Social Sciences, Universiteit van Amsterdam

Word Count: 19,401 Submitted July 2020

Supervisor: Professor Daniel Mügge Second Reader: Dr. Julian Gruin

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Acknowledgements

I would like to express my deepest gratitude for my supervisor, Professor Daniel Mügge, who in extraordinary circumstances provided me with support, thought-provoking discussion, and invaluable feedback. It has been a privilege to write this thesis under his expertise and guidance. Furthermore, I am grateful to Professor Geoffrey Underhill, who played a significant role in developing my ideas. I would also like to thank Dr. Julian Gruin, my second reader, for taking the time to review this thesis. Despite the valuable and extensive feedback received, all errors are my own.

Finally, this thesis would not be possible if not for the unwavering support of my family. With the utmost sincerity, I thank them for empowering me in all I do.

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Abstract

The macroprudential approach to regulation of the global financial system represents a significant ideational change in the way regulators, scholars, and participants understand financial markets. However, as it has unfolded alongside the

financialisation of the global economy, it has remained limited in considering perspectives from the financialisation scholarship which often present pertinent critiques of the financial system. As such, the contribution of this thesis is twofold. The first is an attempt to systematise the under-researched relationships between financialisation and macroprudential regulation (MPR) and their stances on financial stability. The second is to understand macroprudentialists’ limited uptake of

important, but more radical ideas arising out of the financialisation literature. With the use of a theoretical framework based around the ideational change literature and Cartensen and Schmidt’s (2016) conceptualisation of ideational power, I analyse the current implementation and the discourse around the future orientation of

macroprudential policy from prominent officials. I argue that though macroprudential theory and financialisation scholarship share a deep dissatisfaction with the global financial system, MPR has not absorbed further-reaching critiques from the

financialisation scholarship because regulators themselves are influenced by financialised ideals regarding the identification and quantification of risk, the

usefulness of financial innovation, and the technical formality of research and new ideas. As such, regulators are constrained in their ability to take on contributions which offer useful analysis of current challenges such as the rise of non-banks. Meanwhile, they are being confronted with the increasingly challenging feat of ensuring a resilient and stable financial system throughout the process of financialisation.

Keywords: financialisation; macroprudential regulation; financial stability; ideational change; global financial system

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List of Abbreviations

BIS Bank for International Settlements FSB Financial Stability Board

ECB European Central Bank EMH Efficient Markets Hypothesis ESRB European Systemic Risk Board FOC Fallacies of Composition

G20 Group of 20

GFC Global Financial Crisis GFS Global Financial System IMF International Monetary Fund KKM Keynes, Kindleberger, Minsky LTV Loan-to-Value

MPR Macroprudential Regulation NFC Non-financial Corporation

NBNI SIFIs Non-Bank Non-Insurer Systemically Important Financial Institution SIFI (d/g-) Systemically Important Financial Institution (domestic/global-)

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Introduction

The global financial crisis (GFC) was a stark awakening as to how calamitous financial crises can be for the global economy, with its consequences reverberating across the world in economic, political, social, and cultural realms. Moreover, the economic catastrophe infamously exposed the previously insufficient regulatory approaches to the global financial system (GFS), leading to the widespread uptake of a macroprudential approach to regulations. The macroprudential approach reflects a system-wide view of regulation along with a novel set of assumptions about the unstable nature of financial markets. This approach diverges significantly from its microprudential predecessor, which focussed on individual institutions’ soundness with assumptions of rational agents, market discipline under perfect information, and efficient markets. Indeed, macroprudential regulation’s (MPR) “ultimate contribution is to spotlight the volatile and inherently unstable nature of contemporary financial systems,” standing in stark contrast to past regulatory consensuses (Baker, 2013, p.117). In that sense, the mainstream development of MPR, crystallised by the G20’s policy prioritisation thereof (Baker, 2018), represents an admission that financial markets are not always perfectly efficient, thereby increasing the scope for regulators to intervene in their functioning, coordinate risks accumulated through interaction, and actively promote resilience through episodes of distress. This is unquestionably a significant ideational change in the way regulators, scholars, and participants understand financial markets.

Alongside this regulatory movement, a crucial development in recent decades has been the ‘democratisation of finance’ (Erturk et al., 2007), which has developed alongside the process of financialisation (Van der Zwan, 2014). Financialisation has been defined in many ways, though a famous and apt definition from Epstein (2005) characterises it as “the increasing role of financial motives, financial markets,

financial actors and financial institutions in the operation of the domestic and

international economies”. As this process has unfolded globally, it has captured more parts of the economy, increasingly involved individuals in financial markets, and generated a considerable stream of scholarship focussed on understanding its dynamics and implications. However, the notion that financialisation itself impact

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financial stability and the manner in which it is understood and regulated is still underappreciated in the literature.

There is a potential tension between financialisation expanding the impetus for financial stability and the weakened ability to adequately address financial stability when financialisation processes take place. This tension guides the focus of my research toward understanding the major development in regulation since the GFC. In this sense, this re-regulation of finance attempts at a fix for the tension between the now institutionally-accepted inherent instability of financial markets and the ongoing financialisation of the economy and persevering dominance of finance. Paradoxically, as these developments have led to the ideational acceptance of

sweeping macroprudential reform, they have also made the task of ensuring financial stability all the more arduous, as financialisation has shaped financial markets,

banking practices, and plausibly, regulators. This thesis therefore seeks to unpack this tenuous relationship and understand the limited extent to which the ideational implications of financialisaton are addressed within the international macroprudential policymaking community.

As such, the evolution of MPR alongside that of financialisation presents a potential challenge for financial stability, though this relationship remains underexplored and hazy. Indeed, a gap remains in understanding how

financialisation has shaped or constrained the ideational shift embodied within the macroprudential regulatory movement and the ‘feeble’ nature of post-crisis reform (Rixen, 2013). The contribution of this thesis to filling that gap is twofold. The first is an attempt to systematise these under-researched relationships between

financialisation and MPR and their stances on financial stability. The second is to understand macroprudentialists’ limited uptake of pertinent, but more drastic ideas arising out of the financialisation literature.

The thesis is organised as follows. I begin by outlining the contributions of each macroprudential theory and the financialisation literature and identify

complementarities in order to establish their relevance to one another. I reconstruct the ‘First Debate’ of MPR in order to highlight its origin as intensely critical of the GFS and the efficient markets hypothesis (EMH), the highly influential financial

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economics theory which underpins pre-crisis regulatory stances. The EMH comprises two central premises: 1) that financial markets are informationally

efficient, and 2) that financial markets will bring about socially optimal outcomes. By dissecting both of their positions with respect to the EMH and its two central

premises, it is possible to identify the intellectual overlap between the scholarly projects of MPR and financialisation. I classify two broad streams within the financialisation literature by their internal- or external orientation in the study of increasingly dominant financial logics, motives, practices, and markets, which also correspond to the two central premises of the EMH. As the internal financialisation literature and macroprudential approach share the rejection of the EMH premise that financial markets are efficient with information, it is possible to analyse how their stances regarding the GFS have come to diverge so greatly. Conceptualising MPR through its place in the First Debate, therefore, is an important starting point for understanding how the shared rejection of a paradigm leads to the distinct ideational convictions evident in the current policy implementation.

Once this overlap has been identified, I clarify the methodology and theoretical framework which guide the following analysis. The theoretical framework is based around the ideational change literature, which will guide the investigation into why the more drastic critiques from financialisation are not evident in MPR. I will compare the current features of MPR against the contributions from scholars of

financialisation to highlight their current divergence and then examine to what extent their conjecture reverberates within or helps to understand current policy discourse. By scrutinising a range of recent policy speeches regarding the current and potential state of MPR from international macroprudential policy setting institutions including the Bank for International Settlements (BIS), the Financial Stability Board (FSB), the International Monetary Fund (IMF), the European Central Bank (ECB), and its European Systemic Risk Board (ESRB), I will elucidate the trends and priorities emerging from the discourse to better understand constraints to the ideational acceptance of financialisation critiques in the future development of MPR.

I argue that though macroprudential theory and financialisation scholarship share a deep dissatisfaction with the GFS, MPR has not absorbed broader critiques of the GFS from the financialisation scholarship because regulators themselves are

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influenced by financialised ideals whilst being confronted with the increasingly challenging feat of ensuring a resilient and stable financial system. In this sense, macroprudentialists retain ‘power through ideas’, whereby further thought reinforces current ideas about which critiques are permissible. For example, financialised ideals maintain that the identification and quantification of risk are sufficient for its

management and uphold the perceived supremacy of formal, technical modelling for further research. This restricts the possible range of policy reform and discussion to those criticisms which fit into the existing authority of ideas, precluding critiques from financialisation to enter into consideration of MPR. In other words, financialisation results in a longer, more complex to-do list for regulators, whilst financialised ideals such as excessive quantification and technicality compromise macroprudentialists’ faculties for considering pertinent ideas and solving those tasks.

This results in policy which is constrained by the ideational and material implications of financialisation. In terms of material implications, the macroprudential disregard for financialisation leads to troubling effects insofar as it encumbers

regulators from understanding and addressing risks and underlying drivers of change within the financial system. Conceptualising financialisation as a key determinant in the evolution of macroprudential policy as well as a fundamental factor of its

implementation and success allows policymakers to better understand the

challenges to financial stability. In terms of ideational implications, financialisation leads to problematic financial logics and motives such as the quantification, management, and commodification of risk, the positively-biased predisposition toward financial innovation and expansion of markets, and the unquestioned scientificity of financial research. These ideals are evident in macroprudential policymaking and restrict it from incorporating financialisation ideas. This troubles, and even paralyses, MPR insofar as it is able to deal with challenges such as the rise of non-bank finance. Moreover, the averseness in adopting contributions from the financialisation scholarship enables and legitimises financialisation without normative questioning of its compatibility with financial stability.

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Section I: Systematising MPR and Financialisation

In this section, I will explore the origins and ideational underpinnings of macroprudential thought as well as the financialisation literature in order to

contextualise their intellectual contributions. Beginning with macroprudential thought, I highlight the key motivations and turning points which began emerging in the early years of the 21st century. This leads into a review of what I shall call the ‘First

Debate’ of MPR, namely that between the micro-prudential regulation and MPR. With convincing evidence from the GFC, MPR entered into the mainstream, bringing with it a shift in the standards of thought regarding financial markets and the GFS. I then suggest that these macroprudential ideas can be understood as critical analysis of the financial system, particularly in comparison with the time’s leading paradigm of the EMH. Though MPR has gained mainstream status, it is important to recognise its origins as a strong oppositional force to the dominant theory and regulatory practices of the time.

Next, I turn to overview the foundations of the financialisation literature and discuss how this stream of academic thought is also rooted in critical analysis of the GFS. Furthermore, I address how the actual process of financialisation played a role in supporting the development of macroprudential ideas. Finally, I argue that there is ultimately a complementarity in the origins of MPR and the financialisation literature in their critical foundations, dissatisfaction with the GFS, and calls for systemic change. Each of the two academic projects identify snags and systemic errors, both theoretical and empirical, within the financial system leaving them unequivocally convinced that unmonitored financial markets are inherently flawed. Though MPR is now part of the mainstream of regulatory thought, it is worth acknowledging its critical stance on the GFS in a time where such a position was thought to be radical. By way of their disparaging analyses, there exists an obscure complementarity in the origins and intentions of the scholarships. Understanding these shared perspectives then allows for analysis of the variegated ideational success of related, but more drastic critiques between the two scholarly projects and the current macroprudential policy implementation.

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I. Origins of Contemporary MPR

Since MPR has been a significant policy initiative in the last decade or so, it is easy to forget that many of its tools and policies are far from novel. Elliott et al. (2013) document the history of macroprudential-type measures in the United States, whilst Brunnermeier and Schnabel (2015) describe the history of central banks’ restrictions and interventions globally and Monnet (2014) presents the European versions. For example, some early tools include underwriting standards with Loan-to-Value (LTV) limits and bank reserve requirements, which date back to the 19th century in the US

(Elliott et al., 2013). These contributions highlight the sophistication of past

macroprudential-style tools, whether or not they went by that name, and serve as reminders that there is a long, rich history behind central bank interventions, credit regulations, and systemic-level restrictions. There is undoubtedly academic value in incorporating the historical perspective of central bank interventionism in financial markets in the evolution of MPR.

Whilst central bank restrictions and interventions are not new phenomena, the institutionalisation of MPR and its constituent intellectual shift marks an

unprecedented, paradigmatic turn in financial regulatory policymaking. For instance, arguments about the procyclical, unstable nature of financial markets, including the Financial Instability Hypothesis (FIH) posited by Hyman Minsky (1975), failed to gain traction within the pre-crisis paradigm. The widespread acceptance of contemporary MPR therefore marks a significant ideational shift, as will be discussed in greater detail below. As such, analysis will be constrained to centre around the

contemporary birth of MPR, more or less in temporal alignment with the

financialisation of modern economies. This contemporary period refers to the decade or so leading up to the GFC and the decade that has followed it. Indeed, years of global financial liberalisation from the 1970’s onward motivated some early cries for macroprudential policy. However, as macroeconomics emerged from the Great Depression, institutionalised MPR was born out of and legitimised by the GFC (Kenç, 2016).

Documenting the process of ideational change that drove MPR forward, Baker (2015) describes the ‘foothold’ that macroprudential ideas had in important policy

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circles before the GFC. In the early 2000’s, ‘a small but growing inner circle of cognoscenti’ developed the frameworks which formed the basis for the

macroprudential turn ignited by crisis (Borio, 2011). Formal institutions, especially the BIS, housed small but prominent offshoots of heterodox thinkers including

Claudio Borio, William White, and Andrew Crockett who began raising awareness of macroprudential concepts whilst their colleagues operated within the conventional sphere. Baker (2018) recalls that these macroprudential foundations were formed also by a stream of research from academics in the Financial Markets Group at the London School of Economics including Charles Goodhart, Markus Brunnermeier, and Hyun Shin. At the time, their contributions amounted to humble calls for “subtle modifications in current policy frameworks” and “an equally subtle paradigm shift in prevailing views about the dynamics of the economy” (Borio and White, 2004, p.32).

II. The First Debate

Indeed, macroprudential thinkers faced a challenging intellectual environment before the GFC such that even ‘subtle’ changes could not be reconciled with the

predominant paradigm of efficient markets. I shall call this challenge held between conventional microprudentialists and at the time heterodox macroprudentialists the ‘First Debate’. Reviewing the central tenets of each of these camps provides historical context and highlights the shortcomings in regulatory thought which allowed crisis to ensue. Moreover, discussion of this First Debate is crucial for understanding the overlap between macroprudential thought and financialisation critiques which will guide later analysis.

II.i Microprudential Thought

From the 1970’s onward, ‘the most remarkable development’ in the financial sphere was characterised by significant financial liberalisation, resulting in a ‘market-led international financial system’ by the early 1990’s (Borio and White, 2004, p.7). This global deregulatory movement was largely supported by the rise of neo-classical-style financial economics in the academic world (Epstein and Wolfson, 2013).

Indeed, the EMH as formalised by Eugene Fama (1970) coincided neatly with policy-making at the time and provided it the theory and statistical analysis techniques needed to inform “not only the practice of regulation, but also the structure of the

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financial services industry” (Eatwell, 2009, p.37). As such, regulatory consensus was based around conceptions that the market mechanism ensures exploitation of

information by rational agents, thereby bestowing market prices with unrivalled quality. It follows that market risk can be calculated, modelled, priced, and efficiently distributed through market forces.

Thus, the regulatory paradigm at the time allowed for financial innovation and free market activities, with a primary focus on the ‘familiar trilogy’ of transparency, disclosure, and effective risk management (Eatwell, 2009). The aim of regulation is, therefore, ensuring complete information to allow for the smoothest functioning of markets (Merton, 1990) and assumes that under conditions of (near-) complete information, socially efficient outcomes emerge. Further, by allowing institutions to develop their own risk management tools through innovation of instruments like new derivatives, modelling, and statistical analysis, they allow for more efficient

distribution of risk.

The EMH paradigm can therefore be seen to comprise two central premises: 1) that financial markets are efficient so long as there is transparency and sufficient information, and 2) that financial markets will bring about socially optimal outcomes. By this reasoning, information is the key to maintaining a system which is not only internally efficient, but also externally distributes resources and risk in social optimality.

The EMH paradigm thereby excluded the possibility of systemic problems, resulting in a narrow focus on individual institutions and ‘idiosyncratic risk’ (Crockett, 2000). What is now known as ‘microprudential’ regulation dominated the regulatory framework before the crisis. With information as the token for efficiency, it can also be understood as central to ‘safe’ business practices – the more information, transparency, and effective risk management, the more financial institutions are aware of the risks they are taking. Minimising information asymmetries thus minimises uninformed risk-taking and incentivises ‘safer’ behaviour. As such,

microprudential regulation was aimed at ensuring individual institutional soundness, with the logic that more information promotes individual strength and if each of the constituent institutions are sound, then the system must be as well. Moreover, it

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sought to prevent ‘costly failure’ in the case of shocks, mostly through the use for capital regulation on each institution (Hanson et al., 2011). This idiosyncratic risk was thought mostly to stem from exogenous shocks to the financial system, so

ensuring soundness of institutions largely meant ensuring individual institutions could bear losses in the case of such a shock hit them (Clement, 2010, p.64).

Furthermore, capital regulations, the central aspects of both Basel I and II regulations, sought to make institutions ‘internalise’ the risks to which they were exposed by ensuring they restored adequate capital ratios in the face of losses (Eatwell, 2009; Hanson et al., 2011). Though regulations were aimed at individual solvency, microprudential standards were based on ‘the representative institution’ by aggregation, rather than individual requirements tailored to the institution (Crockett, 2000). In this sense, the primacy of informational transparency is evident again, as ensuring institutional soundness relied upon regulatory ideals of the ‘familiar trilogy’ which could be applied to all institutions, rather than examining the specific risks and relative importance of each institution. Moreover, many parameters for capital

regulation were dictated by each institution’s own internal risk models (Kashyap and Stein, 2004) as supervisors relied heavily on information and transparency to

promote ‘market discipline’, thereby ensuring risk management in the face of growing complexity (McDonough, 2002). Thus, the paradigm of market efficiency went so far as to justify private, market-based supervision (Tsingou, 2008).

II.ii Macroprudential Thought

The MPR ideational shift is owed at least partially to an entirely different ‘traditional theory’ to that of microprudential thought (Davis and Karim, 2009, p.3). Contributions from ‘Financial Instability’ theorists such as Kindleberger (1978) and Minsky (1975)— both of whom stem from Keynesian tradition—provide fertile ground for the

macroprudential critique. This ‘KKM tradition’ (Kirshner, 2014) highlights the importance of endogenous instability, allowing shocks to come from within the system such that interactions among institutions can create credit or asset price booms and subsequent crises. As Baker (2013, p.117) suggests, MPR brings into modern regulatory policy the assumption of “the volatile and inherently unstable nature of contemporary financial systems,” thereby cementing traditional instability

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theory into modern policy discussions. Though the aptness of their early claims is harrowing in the wake of the GFC, it was not until the crisis and concurrent surge of MPR that these academic contributions penetrated into policymaking discussions.

From this basis, the macroprudential approach departs significantly from past microprudential regulations. Clement (2010) suggests two core dimensions of the macroprudential approach: the time dimension and the cross-sectional dimension. According to his formulation, the time dimension stresses how risks build up throughout the financial cycle whilst the cross-sectional dimension considers how similar exposures and interconnectedness amongst financial institutions, in particular systemically significant ones, affects risk in the system (ibid., p.64). Along these two dimensions, the macroprudential approach differs systematically from its

microprudential predecessor by acknowledging the importance of interactions amongst institutions and system-level supervision.

A particularly useful organisation of macroprudential ideas is found in Baker’s (2018) contribution. I will broadly follow his structure in the remaining review of macroprudential thought. As per his categorisation, the macroprudential ontology comprises fallacies of composition (FOC), endogeneity, procyclicality, and

complexity as central, distinctive features (ibid., p.301-5). Firstly, the FOC feature highlights issues stemming from taking an overly individualistic approach to risk and supervision, whereby “micro-rational behavior does not generate macro-rational outcomes” (Ülgen, 2017, p.7). Hanson et al. (2011, p.5) suggest this is the most ‘basic critique’ with an example: a microprudential policy in which individual banks must maintain a certain capital ratio can be collectively damaging during times of economic difficulty when it forces many institutions to decrease lending all at once. As such, the FOC feature emphasises the importance of a macro-lens, rather than expecting to understand systemic consequences by merely looking at individual behaviour.

Secondly, the endogeneity feature addresses the aforementioned issues arising from the origins of shocks. Indeed, the macroprudential perspective locates sources of risk and shock within the system. Rather than focusing on how institutions can absorb exogenous shocks, the primary focus of the microprudential approach, MPR

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understands institutions not only as victims but also as perpetrators, or perhaps less cynically, contributors to shocks in the system. This places “collective behaviours, decisions, risk perceptions and reactions of market participants” centrally as objects

of analysis for risk assessment (Borio, 2003; cited in Baker, 2018). By understanding the endogenous contributions of institutions, MPR takes a range of potential shocks into account which were systematically dismissed by the microprudential regulators.

The third feature of Baker’s macroprudential ontology is procyclicality, which emphasises the role of the financial system and policy frameworks in amplifying the financial cycle. Here, macroprudential thought highlights how perceptions of risk not only change throughout the financial cycle, but also exaggerate the cycle, leading to increasingly skewed risk perceptions and distorting associated prices. Borio et al.

(2001, p.1) pioneered the concept of procyclicality, arguing that “inappropriate responses by financial market participants to changes in risk over time” leads to excessive credit creation and inflated prices in ‘boom’ phase of a cycle. This cycle is portrayed in Figure 1 below. It follows that the ‘bust’ phase of the cycle reverses these tendencies such that excessive pessimism drives the financial cycle down further. Here, recalling the Hanson et al. (2011) example is useful once again. If microprudential policy forces many banks to shrink their assets via reduced lending all at once, the capital ratio policy itself can be procyclical insofar as it further

depresses the financial system, reduces liquidity and lowers expectations. In reverse, capital adequacy requirements, in particular the risk-weighted capital

adequacy requirements utilised in the Basel frameworks, procyclically increase credit supply in times of heightened economic activity as credit risk falls.

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Figure 1. The Procyclical effects of risk perception in financial markets

Finally, a crucial feature of MPR is its focus on complexity. This relates to Clement’s (2010) cross-sectional dimension, in which the macroprudential perspective places analytical value on the inter-connectedness, correlation, and spillovers among institutions. Whilst Baker’s (2018) description focuses on

complexity in the financial system insofar as institutions and their balance sheets are interdependent, Datz (2013) documents the many ways in which complexity has been particularly significant in the wake of the GFC. Indeed, complexity not only describes the relations among institutions, but also the nature of the ‘complex’ firm structures, trading strategies, securities, derivatives markets, and structured products because the ‘commercialisation of complexity’ itself became ‘a profitable business strategy’ (Datz, 2013, p.460). The macroprudential view, therefore, highlights the necessity for using network- or system-level approaches, in which certain nodes can generate more systemic risk than others (i.e. significantly important financial institutions), balance sheet structures are interlinked, and complex firm or product structures obscure the build-up of risk.

Each of these features amalgamate in a view which is deeply critical of the notions that financial markets are efficient, that information and transparency can

Economic upswing

Asset price increase, credit risk decrease

Positively skewed risk perception

Increased risk taking Increased credit

supply Distorted asset prices

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alone promote soundness, that market-led self-regulation is appropriate, that shocks to the system cannot come from within, and that the financial system is stable. Though these ideas have largely been adopted by the mainstream today, they radically challenged the assumptions and beliefs which dominated regulatory discussions just over a decade ago.

III. The Role of Financialisation in the First Debate

It is widely acknowledged that “it took the GFC” to vindicate the ideas set out by macroprudentialists such that regulatory reform could occur (BIS, 2018, p.63).

Indeed, the GFC is commonly cited as the key turning point showing “the inadequacy of pre-crisis prudential requirements” stimulating a global response from regulatory authorities (ibid.). The GFC, however, was not the first financial crisis to hit, but was one of four ‘waves’ of financial crises since the unprecedented volatility starting in the 1970’s (Kindleberger and Aliber, 2011, p.1). Indeed, financialisation has coincided with more frequent and severe financial crises (Schularick and Taylor, 2012; Reinhart and Rogoff, 2011; Eichengreen and Bordo, 2003). Of course, the GFC brought with it the greatest economic downturn since the Great Depression which undoubtedly played a significant role in the ideational shift toward the macroprudential perspective.

However, as this crisis is ‘deeply connected with the processes of financialization’ (Stockhammer, 2010, p.11), it is also worth exploring the direct relationship between these processes of financialisation and the macroprudential turn. Understanding the influence of financialisation in creating the conditions for MPR acceptance bolsters the argument that financialisation, in its own right, is a pertinent development for macroprudentialists to consider. It is also crucial for understanding how

contemporary MPR has developed within the specific economic-historical context of financialisation, allowing for later discussion of how these macroprudential ideas and regulators themselves are influenced by the current finance-dominated

socio-economic reality.

Several scholars address the ‘everyday’ aspect of financialisation, suggesting that the economic shift also represents a broader socio-cultural and individual

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transformation (Langley, 2008; Erturk et al., 2007; Seabrooke, 2010). Certainly, the process of financialisation has drawn in more people as increasing aspects of ‘everyday’ life are subject to financial markets, outcomes, and rationalities. Whether it is housing (Fernandez and Aalbers, 2016), pensions (Van der Zwan, 2017;

Langley, 2004; Engelen, 2003), corporate decision-making (Krippner, 2005), student debt (Adamson, 2009; Eaton et al., 2016), water infrastructure (Pryke and Allen, 2019), or welfare provisions (Dowling, 2017; Sinclair et al., 2019), it is immensely difficult to avoid direct dependence on financial market outcomes in financialised states. For example, the shift toward funded pensions in many countries including the US, UK, and the Netherlands leaves retirement savings dependent upon the whims of financial market outcomes. In other cases, financialised corporate decision-making often means greater investment into portfolio income at the expense of investment into productive capacities or employee benefits.

Moreover, the growing dependence of the macroeconomy on the financial system has left the well-being of the ‘real economy’ at the mercy of financial stability, such that the central aim of modern regulatory policy is to avoid the severe

macroeconomic costs of financial crises (Crockett, 2000). The health of the financial system is a crucial determinant of the functioning of the entire economy “to a

qualitatively different extent from most other sectors” (Brunnermeier et al., 2009, p.3) and more so than it has been before. Insofar as “financial relations involve every individual, directly (if enrolled within market activities) or indirectly (if affected by others’ activities)”, financialisation has expanded the scope and consequences of financial instability such that no one can avoid them (Ülgen, 2017, p.6).

Indeed, Schularick and Taylor (2012) review the economic history of financial crises and articulate two distinct ‘eras of finance’, namely the pre- and post-war periods. They find that excluding the Great Depression, the cumulative real output and real investment losses of financial crises from 1870 to 1945 were small and statistically insignificant compared with the post-war period, which they suggestively attribute to the notion that “the financial sector has grown and increased leverage, expanding the size of the threat even as the policy defences have been

strengthened” (ibid., p.1042). Financialisation has made financial crises matter more, both from the ‘everyday’ and the macroeconomic perspective.

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As financialisation has broadened and deepened the impact of financial crises, so too could it be seen to influence relevant policy mandates and discussions. The ‘democratisation of finance’ (Erturk et al., 2007) encourages a broader aim of financial regulation, not only to stabilise the financial system, but also to hinder real impacts and protect social outcomes. In this sense, financial stability has become a public good, as it is non-rivalrous and non-exclusive with social benefits unrealisable without public intervention (Dutta, 2018). It follows that the ideational acceptance of MPR represents an admittance of the unavoidable ‘societal consequences’ of financial relations in financialised societies (Ülgen, 2017, p.8). Where retirement outcomes, student loan costs, or mortgage availability, for example, are dependent on financial markets, financial stability becomes a public necessity. Alternatively, where financial crises devastate the real economy and its participants, for instance, by generating unemployment or costing tax dollars for bail-outs, financial stability is paramount regardless of direct participation. As such, the reconfiguration of financial stability as a public good requires a new level of regulatory action, providing fertile ground for academic contributors to step up to the challenge with innovative ideas (ibid., p.8). Thus, the ideational turn toward MPR is not only a result of the stark awakening brought about by the GFC, but also has a distinct and direct relationship with the process of financialisation.

IV. Financialisation Literature: Trends within the Broadness

As I aim to disentangle the foggy, yet instinctive intersections of financialisation and MPR, it is imperative to distinguish between the historical, socio-economic process of financialisation, on the one hand, and the financialisation literature as a descriptive and normative stream of academia which tends to throw critical light on this process on the other. In a similar manner, it is possible to distinguish between the

macroprudential policy which has unfolded in practice and the macroprudential perspective as a scholarly project which also provides descriptive and normative claims regarding the state of the financial system. Using these distinctions, the previous section has discussed how the process of financialisation has both

influenced the scholarly project of the macroprudential perspective and provided new impetus for the macroprudential policy initiatives.

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It is important to discuss the academic underpinnings of MPR and the

financialisation literature in order to identify how these concepts are interrelated and influence one another but develop divergent ideational convictions and remain divorced in current scholarly and policy discussions. In other words, I must establish their points of overlap and relevance to one another before proceeding to analyse their differences. Indeed, the financialisation literature is useful for MPR insofar as it documents, measures, and analyses changes in the financial system and the

political, social, cultural, and economic implications thereof. Its critical impulse drives the breadth and depth of issues under analysis, so much so that it is liable to

criticism of being ‘diluted’ or ‘too broad’ (Mader et al., 2020). However, the scholars are unified in the sense that “their point of departure is critique, not acceptance, of the empirical developments they analyze,” including the ‘emancipation’ of finance from subservience to the real economy and its ‘embedding’ into society (ibid., p.6).

In my view, the scholarship comprises two broad trends which respectively focus on internal and external relations of the financial system. The internal focus relates to the first premise of EMH, that financial markets are efficient, and offers new or critical ways of understanding and addressing issues within the financial system, providing additional, alternative, or nuanced intellectual contributions to the instability and dysfunctionality of the financial system (Mackenzie, 2006b; 2011; Besedovsky, 2018; Stellinga and Mügge, 2017; Kessler and Wilhelm, 2013; Nersisyan and Dantas, 2018; Sweeney, 2019; Ban and Gabor, 2016; Caverzasi et al., 2019). This stream highlights problems such as risk quantification and marketization, complexity, theory performativity, reflexivity, shadow banking, inter-connectedness, and non-neutrality of practices like securitisation. It also sheds critical light on modern financial

economics theories. The second trend cultivates critiques for the second claim of the EMH: that financial markets will bring about socially optimal outcomes. This stream of literature emphasises the uneven and overwhelmingly unsuccessful attempts to use financial markets and practices to bring about socially efficient outcomes for social, political, and economic matters, ultimately impacting the aforementioned ‘everyday’ aspects of life.

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V. Financialisation and Macroprudential: Overlapping Critiques?

In their rejection of the EMH paradigm and each of its premises, the macroprudential and financialisation literature overlap. Particularly with regard to the EMH’s first premise, both macroprudentialists and financialisation scholars argue vehemently against the notion that financial markets are efficient with informational abundance.

However, there are also significant differences in the critical voices emerging out of each of the scholarships. This is most appropriately summarised with regard to the second premise of the EMH, that financial markets bring about socially optimal

outcomes in their distribution of resources and risk. For contributors to the financialisation literature, analysis is rooted in a perception of finance as an “autonomous realm” which is “not subservient to the real economy” such that its growing effects on society are unwelcomed changes which hardly “provide the best possible mode of social regulation” (Storm, 2018, p.304; cited in Mader et al., 2020). Indeed, viewing finance as having grown into a self-serving realm precludes it, or at least substantially hinders it, from taking on its socially and economically useful role as efficient distributor of resources to the real economy. Moreover, the extensive investigations into the ‘financialisation of X’ expose the ways in which reliance on financial markets, motives, practices, or institutions have produced corrosive,

inequitable, unstable, or precarious outcomes. As such, the literature is based upon and unites around an unwavering rejection of the second premise of EMH.

Meanwhile, the macroprudential perspective takes a more agnostic view on the social, political, or cultural consequences of greater financial integration.

Macroprudentialists concern themselves with the inherent instability of financial markets and seek to stabilise the system, thereby focussing primarily on the first premise of EMH. However, whilst being cognisant of the growing size and complexity of the financial system, they tend to refrain from normative debates regarding the appropriateness of these developments. Moreover, there is little evidence to suggest that MPR proponents understand finance to have commandeered its own realm or that they take any issue with its role in society. The prevailing view is more traditional in that financial markets serve the productive economy and are overwhelmingly useful in doing so, as long as they are stable. In that sense, the macroprudential

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approach stays focussed on addressing the flaws they observe in financial markets such that they can deliver socially optimal outcomes, without questioning more fundamentally to what extent, or in which situations, resource distribution should be delivered by financial markets.

As per this conceptualisation, the point of overlap between macroprudentialists and financialisation scholars lies in their critical stances on the first premise of the EMH. A visual representation of this relation is provided in Figure 2 below. This overlap makes for an interesting comparison of the differing ideational convictions of each of the academic streams and their institutional adoption. Whilst many of the factors of macroprudential ideational success have been discussed in this section, in the following sections I will turn to understanding the limited consideration of some more radical propositions as brought about by the financialisation literature.

Figure 2. Overlapping critiques of the pre-crisis EMH paradigm

Indeed, the financialisation scholarship is broad and its scholars subject a breadth of socio-political and cultural matters to discussion. However, significant scholarship is dedicated to thorough understanding of mechanisms and logics within the financial system which are pertinent for policymakers. Moreover, the very

process of financialisation itself brings about economic dynamics relevant for

EMH

Premise 1: Financial markets are efficient so

long as there is transparency and sufficient information

MPR rejection Internal financialisation _rejection

Premise 2: Financial markets will bring about socially optimal

outcomes

External financialisation rejection

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financial regulation. The limited extent to which financialisation scholarship has been successful in pervading policy discussions can serve as a useful empirical case of the drivers of ideational acceptance and guide understanding of the ideational and material limits on macroprudential policy or the potential for a Second Debate.

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Section II: Methodology and Theoretical Framework

I. Methodology

It is possible to exploit the overlap between the two academic contributions of MPR and financialisation as a starting point in order to understand the limitations to

incorporating the contributions from the internal financialisation literature which more fundamentally addresses the consequences of financialisation for the financial system and its stability. The following sections will be dedicated to understanding how related criticisms of the GFS have led to a policy implementation which

dismisses more radical critiques from financialisation. Using a theoretical framework driven by the literature surrounding ideational success in policymaking, I will analyse ideational power within macroprudential policy circles. This will allow me to

investigate which critiques from the financialisation literature have entered the policymaking realm and understand the many instances in which it has not. Ultimately, the theoretical framework will help explain why ideational change in regulatory thought has been limited in acknowledging issues flagged by

financialisation scholars, thereby leading to shortcomings in the MPR orientation and weakened potential for a Second Debate.

My discussion surrounding the ideational success of different academic contributions requires support from the relevant theoretical literature in order to adequately operationalise the role of ideas in policy change. Indeed, using a theoretical framework based on the main points emerging from extensive

discussions in the political economy literature will offer useful conceptualisations of how certain ideas have empowered policy change and paradigmatic shifts in the wake of the GFC.

The methodology and structure of the remaining sections is as follows. I will first overview what the current implementation of MPR looks like in order to identify its key features, which will then be contrasted against the contributions of

financialisation scholars. Once the current stances of each MPR and financialisation are clarified and their differences identified, I will evaluate the policy discourse regarding the future of MPR in order to evaluate to what extent and why the

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financialisation issues. To gauge the current policy discourse, I will rely upon policy orientation speeches from prominent officials with support from annual reports. A list of speeches analysed with information about their contexts and speakers is supplied in the Appendix. Each of the speakers is a prominent official from an international institution relevant in the global policy-setting of MPR and each institution is represented at least twice. The themes of all of the speeches involve the future of MPR and highlight their views of what the most pressing policy issues are.

Furthermore, I will support this analysis with insights gleaned from annual reports as well as official training programs designed for policymakers. These additions will provide context regarding the current work and explore the future needs as anticipated by the institutions.

With each of these supporting sources and the policy orientation speeches, I will be able to assess the current discourse in order to identify prevalent ideas, views, and framings of problems. By applying insights from the financialisation scholarship and the theoretical framework surround ideational acceptance, I intend to shed light on the roadblocks toward greater acceptance of critiques from these scholars which would lead to more holistic reform discussions.

II. A Review of the Ideational Change Literature

Peter Hall’s (1993) pivotal article offers a framework for understanding the nature of policy change, with three orders of change and a central focus on ideas for

explaining stability as well as paradigmatic shifts. As per his conceptualisation, the first order of policy change comprises adjustments using known policy instruments, whilst second order change occurs when new policy instruments are utilised to satisfy unchanged policy goals, and third order change is represented by shifts in the policy aims themselves. Hall (1993, p.280) attributes significant explanatory power of when this kind of paradigm change occurs to ideas, suggesting that “issues of

authority are likely to be central” when politicians seek which technical advice to take from experts, particularly in times of crisis. As such, exogenous shocks and

anomalies which are incongruent with the dominant paradigm are likely to raise issues of authority. In this sense, policymakers are ever-changing in their process of social learning, whereby simple learning engenders first- and second order change

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and complex learning brings about replacements in authority, third order change, and a shift in paradigms.

To illustrate Hall’s framework, it is useful to utilise examples of each of the orders of change. First order change within financial regulation could be represented by an adjustment of some of the tools used to supervise financial institutions – for example, requiring monthly regulatory compliance reports as opposed to quarterly ones.

Second order change involves the introduction of new instruments for policy, such as additional requirements for new loans or more extensive transparency measures. Third order change shifts the goal of policy itself, as has been the case when regulators placed focus on systemic risk as opposed to solely addressing idiosyncratic risk (Baker, 2018).

In an attempt to simplify Hall’s framework, Baumgartner (2013, p.255) argues that a key element of policy change is not only new ideas, but the ‘degree of discredit to the status quo’. Taking into account the degree of weakness of the existing

paradigm, he argues, could provide a simpler alternative to three distinct levels of policy change as proposed by Hall (1993). As such, Baumgartner’s contribution serves as a useful reminder for the other ‘part of the equation’ which is that the extent of upheaval of the current paradigm, or the magnitude of the anomaly relative to existing ideas, is central for providing impetus for policy change as well as

influencing the necessary scope of reform. In that sense, the degree of dissonance between unfolding events and the dominant ideational paradigm would in turn drive the degree of policy change. In the aforementioned example, Baumgartner would suggest that the GFC was so incompatible with the pre-crisis paradigm, that ideational change was required to accommodate this anomaly.

Standing on the shoulders of Hall’s seminal article, a ‘second generation’ of ideational scholars emerged who shared the sentiment of centring focus on ideas, but insisted upon a deeper understanding of the interpretation, agency, and dynamic ideas necessary to understand anomalies and shocks (Cartensen, 2015, p.295). A paramount contributor from this generation is Mark Blyth, who in his book formulates a theory of ideas that “aims to demonstrate not only that ideas matter, but precisely when, why, and under what conditions they matter”, guiding political scientists away

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from fruitless debate over whether ideas matter, toward a pragmatic framework of institutional change (Blyth, 2002, p.18). By this understanding, paradigmatic shift does not just happen because anomalies create discord with current ideas. Central to Blyth’s conceptualisation of the role of ideas is the notion that most policymaking decisions take place under conditions of Knightian uncertainty, where crisis requires diagnosis, interpretation, and explanation. As such, “ideas are fundamental to

explanation” of the uncertain world and serve as guides for the disparity between knowable, calculable probabilities of outcomes and the real uncertainty which ultimately encumbers decision-making (Schmidt, 2008, p.319).

Indeed, the call to move beyond the simple ‘ideas matter’ statement is echoed by Cartensen and Schmidt (2016), who devise an approach to ideational power which allows for a specific conceptualisation of how ideas can shape outcomes,

institutions, and other actors. The scholars theorise three types of ideational power: ‘power through ideas’, in which actors can convince others of their perspective using reasoning or argument, ‘power over ideas’, in which actors can resist or dismiss consonant positions or impose their meaning of ideas on others, and ‘power in ideas’, in which actors are capable of fixing meaning, institutionalising, and shaping further thought such that it reinforces the existing authority of the ideas (ibid., p.323). By providing specific definition to the ways in which ideas can lead to changes, the scholars offer a useful framework by which ideational phenomena can be analysed.

Employing a pragmatic approach to ideational power in policy paradigms, Wilder (2015) views paradigm-building as strategic ‘ideational bricolage’ which is subject to political compromise, academic debate, defence of the current paradigm, and

implementation, resulting in policy paradigms which reflect the diversity and

inconsistency of their inputs. Indeed, Cartensen (2011, p.156) highlights that agents do not perfectly absorb complete paradigmatic ideas but act as ‘bricoleurs’ to

interpret and shape their own understandings of dominant idea systems such that in the face of change, ideas are employed pragmatically in ways that may not follow “the logic of a certain abstract paradigm”. The agent-centric approach harmonises well with Cartensen and Schmidt’s (2016) formulation, demonstrating that paradigms are ultimately the products of ideational power struggles and are more malleable and less purely idealistic than the ‘first generation’ allows.

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III. Theoretical Framework

Though my review of the ideational change literature is far from exhaustive, it is possible to come away with a theoretical framework for understanding the role of ideas in the variegated successes of macroprudential and financialisation ideas. My analysis follows Cartensen and Schmidt (2016) in understanding three avenues of ideational power, using them as the ontological basis for structuring the investigation into financial regulatory policy change. Furthermore, whilst upholding the

significance of exogenous shocks – in this case, the GFC – this thesis will follow Blyth (2002) in assigning value to the interpretative frames which emerge through uncertainty to guide the diagnosis and prescribe the fixes for crisis.

This approach aims to fall under what Schmidt (2008) terms ‘discursive

institutionalism’, focussing on ideas as one significant locus of power, allowing for interests to be instrumental in agency whilst acknowledging they are dynamic and dependent upon both ideational and material contexts, and viewing ideas as the moving targets of intersubjective critical engagement which can be both liberating and constraining to policy change. Finally, the concept of ideational bricolage within paradigms will remain a useful lens through which to recognise inconsistencies, obscurities, or constraints on policy change.

As such, I will evaluate the policy stances from a range of influential policy speeches from the BIS, FSB, IMF, ECB, and ESRB which represent the state of the art of macroprudential policymaking, its ambitions for the future, and the current challenges as acknowledged by the policymaking community itself. After introducing the criticisms brought to light by financialisation scholars, I will evaluate to what extent these criticisms are recognised and addressed by macroprudential

policymakers. Once it has been established how infrequently policymakers heed those problems presented by the internal financialisation literature, it is possible to theorise what the major impediments are to the consideration of financialisation and its calls for more drastic reform, why some ideas have had more success than others, and what has limited the uptake of broader ideas from the financialisation literature.

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In other words, as significant ideational change has ensued in the form of MPR, why has it not taken potentially useful, but more sweeping ideas from financialisation scholarship seriously? The hypothesis under investigation is that as MPR has

developed within the context of financialisation, the policy paradigm itself is influenced by ideational standards and perceptions of which critiques are valid or not. In other words, the dominance of financial logics and motives also seeps into the macroprudential approach, such that critiques are considered only in the form of quantitative assessments or risk models from financial economists. I expect this to exemplify Cartensen and Schmidt’s (2016) conceptualisation of ‘power through ideas’, as financialised perceptions of acceptable ideas shape the policy discourse. Through this narrow scope of which problems in the financial system are permissible for discussion among macroprudentialists, financialisation critiques can be excluded. Moreover, I expect to find evidence of policy bricolage as regulators do not perfectly absorb ideational paradigms but deal with challenges as they arise with the tools they have available to them. All of these ideational constraints are expected to help to explain the limited consideration of financialisation critiques, despite its relevance for macroprudentialists.

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Section III: MPR Implementation and its Criticisms

I. Current State of Macroprudential Policy

With nearly unanimous acceptance of MPR as a concept amongst central bankers globally, its definition, interpretation, implementation, and impacts are highly

variegated. That said, identifying some key features of the global implementation of MPR is crucial for comparison with the contributions of financialisation scholars. In their account of the current state of MPR, scholars Kashyap et al. (2016, p.22) strive for clarity by articulating a preferred definition for the macroprudential objective of financial stability which highlights the “goal of delivering financial stability as

supporting the real economy”. By this account, activities which do not support real growth ‘could be jettisoned’ (ibid). Instead, financial mechanisms such as

intermediation and payment services, which do support economic activity, must be secured by MPR.

Macroprudential policy is implemented at the national level as well as the

supranational level in the EU by the European Central Bank (ECB). It is also devised through cooperation with international financial governance institutions such as the BIS, International Monetary Fund (IMF), and Financial Stability Board (FSB). The governance arrangement varies by country, with some opting for central bank control over MPR through either a board, governor, or internal committee and some setting up external committees to govern MPR (IMF-FSB-BIS, 2016).

As previously mentioned, the objectives of macroprudential policy are to limit systemic risk and its consequent financial system impairment to reduce the severity and frequency of financial crises, with the intermediate aims of increasing financial system resilience and containing time- and structural-dimensional vulnerabilities (IMF-FSB-BIS, 2016). In order to accomplish these aims, MPR uses tools to address different problems throughout the system. Crucially, Tucker (2014a, p.4-5; emphasis in original) notes that MPR tools are not just shifted ‘regulatory goal posts’, but rather

“the benchmark instruments of macro-prudential policy are the capacity to vary” the

requirements they create, allowing them to move the goal posts as needed. As such, the tools used for MPR are dynamic by design and are intended to recalibrate as financial and economic conditions evolve.

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In discussing the instruments used for MPR, it is possible to categorise them either by reference to the type of vulnerability they address (time or structural) or by their demand- versus supply-targeting approach. Galati and Moessner (2018) opt to classify instruments by their demand (borrower) and supply (lender) targets which can often affect both the time and structural dimensions of vulnerability. Prevalent tools on the borrower side include caps on the debt-to-income (DTI) ratio and the loan-to-value (LTV) ratio and those on the lender side include countercyclical capital buffers, leverage ratio caps, capital surcharges, liquidity requirements, loan limits, and loan-to-deposit ratios (ibid., p.738). This conceptualisation highlights the largely traditional understanding of banking which still presides over macroprudential policy tools as they are geared toward banks and their traditional relations as lenders to household and corporate borrowers.

In their formulation, the IMF, FSB and BIS (2016) identify a list of instruments organised as either broad based capital tools, sectoral capital and asset side tools, liquidity-related tools, and structural risk tools. Broad-based capital tools include dynamic provisioning, countercyclical capital buffers, time-varying leverage ratio caps, and macro-supervisory stress tests. Households, housing, and corporate sectors are addressed by MPR with sectoral capital requirements and risk weight floors, caps on share of exposures to specific sectors, and loan-to-value (LTV), debt-to-service-income (DSTI) and loan-to-income (LTI) ratios. Differentiated reserve requirements, liquidity coverage ratio (LCR) variants, core funding ratio caps, levies on volatile funding, and loan-to-deposit (LTD) ratio caps seek to attend to liquidity issues. Tools to address structural risk include capital surcharges for domestic- and global-SIFIs, extra loss absorbency requirements, changes in risk weights and large exposure limits (IMF-FSB-BIS, 2016, p.10-11). The instruments used highlight the quantitative nature of current regulations, as they reflect the perceived ability to measure and enforce exactly what the appropriate levels of certain ratios or caps should be. Moreover, the capital surcharges for d/g-SIFIs reflect the perceived control over cross-sectional risks through additional percentage charges on those institutions considered to be SIFIs.

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Using many of these ratios as indicators along with a prepared set of indicators for each type of tool informs regulators how and when to tinker with the instruments. For example, at different stages in the credit cycle, regulators can enforce different levels of capital buffers or leverage ratio caps. Having this toolkit ready, it is

suggested, allows regulators to adjust limits, ratios, and caps as required to stabilise or form buffers accordingly to the financial climate. Indeed, much of the current macroprudential discussion surrounds appropriate tactics, levels, and uses of these tools. For instance, a widely debated topic is the necessary size of the

countercyclical capital buffer (Bank of England, 2016; BIS, 2017; BIS, 2018; Aikman

et al., 2018).

Whilst there is some acknowledgement of the ‘tricky questions’ imposed by non-bank financial institutions (Borio, 2014; 2014a; Caruana, 2014; Dirks et al., 2014), these instruments demonstrate that current MPR remains steadfastly focussed on banks. Though macroprudential theory highlights the cross-sectional dimension of risk as ones which build up through interlinkages, common exposures, and

complexity in the financial system, the current MPR implementation maintains banks as the locus of these interactions. Thus, even policies aimed at other sectors are carried out through banking requirements.

Indeed, Schoenmaker (2014, p.6) highlights that “most economists have more affinity with the time dimension than with the cross-sectional dimension” of systemic risk. It seems the challenge of formulating policy which captures the effects of network externalities, inter-connectedness, and complexity garners significant hesitation and analytical limits, particularly when policy is designed for enactment upon individual institutions of systemic importance.

This is cemented by the macroprudential task of identifying domestic- and global- Systemically Important Financial Institutions (d/g-SIFIs). Indeed, the FSB, Basel Committee on Banking Supervision (BCBS), and national authorities, together currently only assign globally systemically important status to banks (G-SIBs). They released insurers from the g-SIFI list to be regulated by the International Association of Insurance Supervisors (IAIS) from the beginning of 2020. Moreover, the effort to identify non-bank non-insurer SIFIs (NBNI g-SIFIs) ultimately proved unsuccessful

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as FSB regulators struggled for suitable identification metrics beyond ‘size’, which were problematic and largely resisted by the industry (Kranke and Yarrow, 2019).

As such, it is possible to formulate a list of the key features of the current macroprudential implementation which I will contrast with contributions from the financialisation literature. These are depicted below in Figure 3.

Figure 3. Key Features of Current MPR

As reviewed above, it is easily identifiable that MPR targets banks as key arbiters of systemic risk in both the time- and cross-sectional dimension. As the toolkit

shows, placing limits and enforcing buffers on banks deals is the primary mechanism by which regulators can address issues in both dimensions. Moreover, as seen by the available tools for combating structural or cross-sectional risk are all dependent upon the identification of systemically important institutions, with varying limits, buffers, and surcharges placed on any institution falling within categories of systemic importance. Again, on the international level, these are all banks. Finally, the tools entitle regulators to ‘move the goal posts’ at different stages in the financial or credit cycle, such that change in the financial system over time is accounted for with this

Features

of current

MPR

Targeting banks as key arbiters of systemic risk in both the time-and cross-sectional

dimension

Identifying ‘systemically important’ institutions remains the benchmark

for targeting systemic or cross-sectional risk Dynamic use of macroprudential ‘toolkit’ accounting for evolution in financial cycle Quantitative

indicators, caps, and ratios guide identification of risks

and enforcement of MPR

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liberty to adjust the use of tools. In the following section, these features will be put under scrutiny with respect to the financialisation literature.

II. The Financialisation Critiques of Current MPR

By identifying these prominent features of MPR, it is possible to contrast their implications with the contributions from ‘internal’ financialisation scholars who draw attention to problems within the financial system. Again, there is great variety and there are probably many critiques that can be drawn out from this literature. I narrow these down to three broad problems presented by financialisation scholars which are not only important for their financial stability implications, but also fall within the ‘official realm’ of what macroprudential regulators are mandated to do. Whilst some of the broader critiques from the financialisation literature, especially of the ‘external’ variety, could be seen as valid criticisms aimed at the wrong regulators, the issues highlighted below are pertinent to the immediate task of ensuring financial stability.

For example, where many ‘external’ financialisation scholars may level criticism at the increasing dominance of financial markets, logics, and practices in other areas of social or cultural life such as excessive financial commodification or financialised social policy, macroprudentialists might deem these to be outside the scope of their jobs. As such, the four points of criticism I articulate below, informed by extensive analysis within the financialisation scholarship, are specifically chosen to not only be germane for MPR but implicate the danger of maintaining an excessively narrow regulatory agenda. In other words, this section works to elucidate that dismissing ‘broader’ questions as irrelevant, extraneous to their job, or too political deteriorates macroprudentialists’ abilities to adequately address financial stability concerns and depoliticises the task and their own role in ensuring financial stability.

The first critique of the current MPR regime is that its conceptualisation of banks is too static, thereby neglecting the significant transformation which banks

themselves have gone through as a result of the process of financialisation. Without systematic consideration of how banking itself has changed and continues to evolve as a result of the pressure of a financialised economy, regulators will discount important developments in the business models of their key regulatory targets. The

Macroprudential Regulation in the Face of Financialisation: implications for ideational progress in financial stability