The bumpy road to Volcker and Vickers : ideas, interests and institutions

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The Bumpy Road to

Volcker and Vickers

Ideas, Interests and Institutions

Mirte van Loenen - 5921163

4-7-2014

Master Thesis Political Science Specialisation: International Relations Research Project: Our Global Political Economy in the Shadow of the Crisis Supervisor: Prof. G.R.D. Underhill

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1. Introduction

Since the beginning of the financial crisis in 2008, a lack of (proper) regulation of banks and financial markets is often seen as one of the causes of the crisis. There had been a wave of financial deregulation (Lo, 2012: 9) and the resulting financial regulation focused too much on the national level instead of the international level (FSA, 2009: 36). It is therefore no wonder that since the start of the crisis, many proposals have been made worldwide to strengthen financial regulations. These proposals focus on different elements of the financial system. Some focus on increasing the quantity and quality of bank capital, some on increasing capital buffers, others on improving the quality of supervision of banks and others on macro-prudential analysis (FSA, 2009).

However, the proposals mentioned above are quite general and do not aim to change the financial system fundamentally; they aim to strengthen the players in the current financial system. Next to these more general proposals, some regulatory reform proposals are focused on the role and activities of banks. It is often argued that banks should focus on their core tasks again, namely taking deposits and giving loans and therefore stop with securitizing, trading, investing and insuring. This would mean that a distinction would be made between the ‘normal’ activities of banks and the ‘investing’ activities of banks. In the United States (US) a proposal is made to ban proprietary trading, and in the United Kingdom (UK) a proposal is made to ring-fence banks. Since these kind of proposals do change the financial system, they are key in the reform process after the financial crisis.

However, the development of these proposals was a complicated process. The Volcker rule in the US has grown from 10 pages in its first version to 963 pages in its final version, with 2,826 footnotes as well as 1,347 questions1. Because of the many exemptions on this rule, it is easy for banks to get around it. The Vickers rule in the UK was strengthened in the beginning, however secondary legislation is being made at this moment. Therefore, it can be said that the development of regulation on proprietary trading and the role of banks was key in the reform process after the

1_{Website The Economist ((} http://www.economist.com/news/finance-and-economics/21591587-push-make-americas-banks-safer-creates-new-uncertainties-more-questions, visited on 16-2-2014)

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4 financial crisis, but it has proven to be very difficult. Next to that, the development of the Volcker rule in the US was even more difficult than the development of the Vickers rule in the UK. Since sound financial regulation is very important, it is interesting to examine why setting up proper regulation is so hard and what the possible explanations are for the differences between the US and the UK.

1.1 Research question and cases

This thesis aims to explain why the development of reform measures on proprietary trading and ring-fencing was seen as central but has been so difficult, but also so different in both countries. The research question is therefore:

Why was this reform measure seen as central but has proved so difficult to adopt and implement? What factor can explain the differences in the development of the rules in the US and the UK?

In existing literature, a few explanations can be found. Firstly, it is possible that ideas could have played a role. Before the crisis, the neoliberal idea that (unregulated) markets are efficient was dominant (Best, 2003; Hall, 2009; de Grauwe, 2009; Berger, 2009). The crisis showed that this idea was deficient. It is however the question if neoliberal ideas have weakened after the crisis, or if they are still dominant. Next to that, it is often mentioned that in the years before the crisis banks and financial institutions had excessive influence in financial policy (Mattli and Büthe, 2005; Mügge, 2011; Tsingou, 2003; Underhill and Zhang, 2006, 2008). This was because these institutions had a lot of resources in order to advocate for their interests in an effective way, but also because policy makers often treated them as experts. The recent financial crisis pointed out that the excessive influence of banks and financial institutions may not have served the interest of the society as a whole and should be more limited in the future. Finally, institutions could have played a role because they may serve as a filter for these ideas and interests.

This thesis will examine the extent to which ideas, private interests and institutions can explain the development of financial regulation on proprietary trading in the US and on ring-fencing in the UK. This is interesting for several reasons. Firstly, because of this research we get a better

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5 picture of the development of financial regulation after the crisis. Secondly, this thesis tests theories about (the development of) financial regulation before the crisis. Before the crisis, private actors had excessive influence on regulation; is this still the case? Before the crisis, neoliberal ideas were dominant; what ideas are dominant now? Thirdly, the role of institutions on the development of financial regulation has not yet been studied frequently, so this research may also provide insights on the role of institutions on the development of financial regulation. Finally, this thesis compares two cases, namely the development of the Volcker rule in the US and the development of the Vickers rule in the UK. These rules are comparable, but the development and implementation of these rules is different. Therefore, this thesis also examines differences between countries and may therefore give an idea about what ‘worst’ and ‘best’ practices are when developing financial regulation.

The cases selected in this thesis are well suited to this analysis. The Volcker and Vickers rules emerged in two countries that have comparable financial systems and not dissimilar assumptions about financial governance and the market. They shared a lot of ideas and their markets are very global. Their private sectors have similar interests, partly because they consists of many of the same financial institutions. Yet there are institutional differences: the UK is more centralised in terms of institutions of financial governance. It is a parliamentary system and is less penetrable to private interests. These the similarities and differences allow comparison of the effect of institutions and political processes1. In the two following sections, the cases are briefly described. An extensive description of the cases can be found in chapter 3.

1.1.1 Case 1: The Volcker rule

The development of the Volcker rule was very turbulent. The rule, which main aim is to ban proprietary trading, was proposed by the Group of Thirty, a group of 30 internationally renowned finance experts. President Obama called the rule “simple and common sense reform”, but not everyone agreed with him. The rule was subject to much criticism. Eventually, two important

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6 exemptions were made on the rule: limited investments in hedge funds and proprietary trading that was necessary for market making services were allowed in the new version of the rule. This new version was adopted by the Congress in July 2010 as a part of the Dodd - Frank Wall Street Reform and Consumer Protection Act (Krawiec, 2013: 61-63). However, the new exemptions made the implementation of the Volcker rule much harder and five regulatory agencies – the Fed, OCC, FDIC, SEC and CFTC – were instructed to finalize the rule. In this ‘finalization phase’, again numerous smaller exemptions have been made on the rule. The final regulations on the Volcker rule, including these exemptions, are approved in December 2013. After this date, one more exemption is made for small community banks. The majority of the final regulations of the rule is will come into act in July 2015, which is much later than the planned date of July 2012 (Krawiec, 2013: 69-70).

1.1.2 Case 2: The Vickers rule

The development of the Vickers rule in the UK was quite different than the development of the Volcker rule. The Vickers rule was proposed by the Independent Commission on Banking (ICB) in September 2011 and its main aim was to ring-fence banks. After the proposal was made, the UK Government strengthened the rule changing the ring-fence in to an ‘electrified ring-fence’. This means that when banks test the ring-fence too much, they will be split up. This strengthened version of the Vickers rule is adopted by the UK parliament as part of the ‘Banking Reform Act’ in December 2013 (Macartney, 2014: 5-6). This act, including the Vickers rule, will be implemented from May 2015. However, at the moment secondary legislation on the Vickers rule is being made. It is likely that this secondary legislation will contain several exemptions, for example for institutions with less than £25 billion in retail deposits and for underwriting and payments services. However, since no draft version on the secondary legislation is published yet, this is still speculative. The secondary legislation will come into act in 2019. This means that, in contrast to the Volcker rule, the ‘original’ rule is implemented first (Shearman, 2013: 1-2).

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1.2 Theoretical framework

In the literature, an outcome of a policy process is often explained by ideas, interests and institutions. These explanations will also be used in this thesis. Figure 1 shows graphically the theoretical framework of this thesis. Of course, it all started with the financial crisis: a giant world-wide crisis that shook up the ideational and institutional status quo and resulted in numerous reform proposals from governments all over the world. As stated before, the vast majority of these proposals do not aim to change the financial system fundamentally: they aim to strengthen the players in the current financial system. However, some proposals are focused on the role and activities of banks and aim to separate the ‘core’ tasks of banks – taking deposits and giving loans – from other activities like securitizing, trading, investing and insuring. Both the Volcker and Vickers rule aim to do this, and therefore both try to change the financial system. However, both proposals are weakened during the decision-making process, although the Vickers rule to a lesser extent then the Volcker rule. This framework aims to explain the changes in both rules.

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8 As shown in figure 1, the framework starts when the proposals for the rules are made. This means that in this thesis, the analysis begins with the adoption of the proposals and not with their initiation. Firstly, in the two ‘rational-choice’ boxes, it is examined what rational actors with assumed utility functions might do after the rules been announced. Given our understanding of the material interests of the principal players, within what range of options might we expect them to respond? This adds focus to the empirical analysis by providing a set of expectations in which the eventual perceived interests of agents can better be understood. We begin with the expectation that after a crisis, democratic representatives should be seeking to protect the public through by much stronger and perhaps radical changes in legislation. We then analyse the interaction of legislators with the available idea-sets on reform: what sorts of ideas were considered and which became dominant in this phase of the process? Since the ideas of legislators are influenced by ideas of others, this will involve an investigation of the influences at work on legislators: what sorts of public sector organisations or scholarly research played a role in defining the ideational context of reform?

The next step involves the same process in relation to those private actors most affected by the decisions to be taken. We would expect the banks to react negatively and strongly to a proposal that would seriously undermine their business models. But how did they choose their strategies and what ideas were proposed to legitimate their expected opposition to the new measures? Finally, we examine the policy conflict that ensued over the implementation of the Volcker and Vickers rules. This involves examining the role of institutions and the policy process as a ‘filter’ for both ideas and interest as political conflict leads to outcomes. The interaction of ideas, interests and institutions all contributed more or less to the outcome of the process. This phase essentially focuses on the debate over the precise nature and implementation of both the Volcker and Vickers rule once they had been accepted in principle.

Following the adoption of the Volcker and Vickers rules, the institutional setting and supplementary regulations relating to implementation had to be decided for each. The Volcker rule was developed and finalized by five US regulatory agencies, each with their own constituencies and

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9 interests. The Vickers rule led to secondary legislation that was introduced by the Prudential Regulation Authority, a part of the Bank of England. This means that the process starts all over again: while the new rules must be accepted in one form or another, private actors try to serve their interests in this phase too, and institutions may play a role in this phase again. Legislators are of diminished importance in this phase, since they have already decided upon the rule and the debate is largely out of their hands. Private actors and institutions will again contribute to the outcome, which in this phase is the finalisation of the Volcker rule and the secondary legislation of the Vickers rule. However, this secondary legislation being made at the moment and therefore it is unknown what the exact outcome of this phase in the Vickers rule will be.

The next section of the research design will explain briefly, on the basis of academic literature, how ideas, interests and institutions possibly may influence a decision-making process. A more extensive review of the relevant literature is given in the second chapter of this thesis.

1.2.1 The influence of ideas

Many scholars have tried to understand how ideas influence policy making. Campbell (1998: 386-395) describes different ways of how ideas may have influence on policies. First, ideas can serve as programs. These kinds of ideas are often technically and professionally and can therefore prescribe a precise course of policy action. Secondly, ideas can form a paradigm. Paradigms are not as precise and concrete as programmatic ideas, but deal with underlying theoretical and ontological assumptions about how the world works and thereby determine the policy discourse. Thirdly, ideas can be public sentiments. These kind of ideas constrain the range of solutions that are considered as politically acceptable and legitimate. Finally, ideas can serve as frames; they can provide actors with symbols and concepts with which they can frame solutions to policy problems.

In the political economy are ideas often seen as very important as well. Several political economists see ideas as the crucial drivers of policy, and a change in ideas as the crucial driver of transformations (Blyth 2002; Widmaier et al. 2007). They point in particular to ideas that form a

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10 paradigm. In economic history, we have seen this kind of a set of influential ideas multiple times. Since the 1980s, there has been a neoliberal paradigm. The most important assumption of this paradigm is the assumption of ‘market-efficiency’. Because of this idea, regulators assumed that markets were self-stabilizing and only used market based regulatory tools (de Grauwe, 2009: 83-84). The idea that markets are efficient and regulation will distort this efficiency are dominant (de Grauwe, 2009; Berger, 2009). The recent financial crisis has proved that neoliberal ideas of efficient markets are wrong. The neoliberal paradigm is thus challenged, but it is uncertain whether it will be also replaced by a new paradigm. Some scholars, like Levi-Faur (2011) and Baker (2013), are convinced that neoliberal ideas will become less dominant and that markets will be regulated more. However, others (De Grauwe, 2009; Turner, 2011) argue that a shift in ideas will be very unlikely, because economists and policy makers are comfortable with their old ideas and will continue doing that.

In the cases of this thesis, two different, conflicting ideas can be found. The Volcker rule and the Vickers report focus on banning proprietary trading and establishing the ring-fencing of banks, with the aim to reduce systemic risk. This fits with the ‘new’ idea that free, unregulated markets are not necessarily efficient and can lead to big risks. However, the Volcker and Vickers rule are probably weakened because of a fear for a loss of liquidity, efficiency and profits of banks. These fears fit into old, neoliberal ideas. It is interesting to examine what kind of ideas were dominant in the development of the Volcker and Vickers rule for two different reasons. Firstly, it may be an explanation for the weakening of the Volcker rule and/or the strengthening of the Vickers rule in the first phase of the development of the rule. Secondly, it can tell us something about the extent to which an ideational shift is going on.

1.2.2 The interests of private actors

It seems that there is a consensus between political scientists on the fact that private actors have had excessive influence on financial regulation in the years before the crisis, due to various causes (Mattli

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11 and Büthe, 2005; Mügge, 2011; Tsingou, 2003; Underhill and Zhang, 2006, 2008). Probably the most important cause is the fact that capital mobility - as an increasingly prominent feature of the global economic order - has limited governments’ ability to make independent macro-economic decisions (Underhill and Zhang, 2006: 19). Because of this, national governments were more or less forced to rely on private actors when it came to regulation. Next to that, these private actors were often treated as experts by governments (Mattli and Büthe, 2005: 230). A final cause of the influence of private actors in financial markets is the fact that these private actors have large (financial) resources which they can use to advocate for their interests (Tsingou, 2003: 9). The influence of private actors on financial regulation does not necessarily need to be negative. In fact, it can result in more effective regulation. However, excessive influence of private actors creates a number of problems, like a lack of legitimacy and democratic responsibility (Underhill and Zhang, 2006 and 2008).

In conclusion, in the years before the financial crisis private actors have had excessive influence on financial regulation. While a normal degree of influence of private actors may be useful, for example because of efficiency concerns, excessive influence of private actors is problematic. It is therefore interesting to see if things have changed because of the crisis, and if the influence of private actors was really more limited in the reform process during and after the financial crisis. The cases of this thesis are about this reform process, namely regulation on proprietary trading and on ring-fencing of banks. Therefore, these cases are very appropriate to examine the contemporary influence of private actors.

1.2.3 The role of institutions

Next to ideas and private actors, also institutions can have an important influence on a regulatory process; they can serve as a filter for certain preferences and ideas. The influence of institutions on financial regulation has not been described as extensively as the influence of private actors and ideas on financial regulation. However, it is possible to highlight four important institutional dimensions.

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12 Firstly, the existence of privileged groups is an important dimension, because when institutions privilege certain groups that form the core bases of support for incumbent governments, it is likely that the preferences or ideas of these groups are influential (Garret and Lange, 1995: 632). Secondly, the extent to which other interest groups are involved is of importance, because when no other interest group is consulted about an upcoming policy change, it is even more likely that the preferences of the privileged groups are influential. A third institutional dimension that can have influence on regulatory change is the number of veto players in a political system. When there are more veto players in a political system, more players have to agree with each other and therefore it becomes harder to change the status quo (Tsebelis, 2002: 42). Finally, when examining the role of institutions on regulatory change, it is also important to consider independent regulatory agencies (Garret and Lange, 1995; 633).

When analysing the role of institutions, attention has to be paid to privileged groups, the involvement of interest groups, the number of veto players and independent regulatory agencies. The role of institutions on financial regulation has not been described very often yet. Therefore it will be interesting to examine if institutions played a role in the development of the Volcker and Vickers rule, what institutional factors were most influential and to what extent the institutions in the US and the UK differ.

1.3 Argument

Now that the theoretical framework of this thesis is discussed, this section will briefly give an overview of the general argument based on the empirical analysis conducted later in this research. This argument will follow the theoretical framework. Later in this thesis – in the empirical chapters and in the conclusion – an explanation per case is given.

According to the theoretical framework, the analysis of both cases started with an examination of the rule of ideas. It is found that in both cases, neoliberal ideas are not dominant. This is a first important finding, in since existing academic literature there is a discrepancy between

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13 scholars who are convinced that neoliberal ideas will become less dominant (Levi-Faur, 2011; Baker, 2013) and scholars who claim that a shift in ideas will be very unlikely (De Grauwe, 2009; Turner, 2011). The results of this research indicate that neoliberal ideas indeed became less dominant. In addition, it is found that new ideas about more regulation and protection of customers are dominant in the UK, while in the US old and new ideas are of equal importance. In the US, in particular republicans still adhered to old ideas. Since the Volcker rule clearly does not fit into these old ideas, republicans were possibly inclined to make exemptions on the rule, which may explain why the Volcker rule is weakened in the first phase.

Secondly, it is examined to what extent private actors managed to exert influence. It is found that in both countries especially big banks and their industry groups had a lot of influence in the decision-making processes. Only in the first phase of the Vickers rule, they did not manage to exert influence. Interests of private actors are thus an important explanation of the weakening of both rules. It is often mentioned that in the years before the crisis banks and financial institutions had excessive influence in financial policy (Mattli and Büthe, 2005; Mügge, 2011; Tsingou, 2003; Underhill and Zhang, 2006, 2008). The results of this study indicate that this is still the case.

Finally, it is examined what role institutions had in the development of both rules. In the theoretical framework, four important institutional dimensions are distinguished. Firstly, it is examined if a privileged group existed in the decision-making process of the Volcker and Vickers rules. The results of this thesis point out that, in the development of both rules, the financial sectors was a privileged group. Governments are dependent on this sector because of the campaigning money they give them, and relationships between regulatory agencies and the financial sectors are close because of the ‘revolving door’. The fact that the financial sector is privileged is shown by the numerous chances they get to express their opinions in for example Congressional/Parliamentary hearings or in meetings with regulatory agencies. This makes the financial sector even more influential. Secondly, it is found that almost no other (social) interests groups or organisations are involved in the decision-making processes, whereby a counterweight for the interests of financial

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14 institutions is missing. Thirdly, both rules had important veto-players that influenced the development of the rules. In the Volcker rule, a vote of a certain republican was needed to pass the rule. This republican would only vote in favour of the rule if the hedge fund and market making exemptions were made. In the Vickers rule, after the LIBOR-scandal the Parliamentary Commission on Banking Standards was established. This influential commission proposed the ‘electrified ring-fence’, whereby the rule was strengthened. Finally, it is found that the opinions of regulatory agencies responsible for the finalization of the Volcker rule differed widely. It is likely that all regulatory agencies needed to make concessions on the final regulation, what partly explains the weakening of the Volcker rule in this phase. In the Vickers rule, only one regulatory agency is responsible of the secondary legislation. This makes numerous exemptions less likely.

1.4 Data and methodology

In this thesis it is examined what the possible explanations are for the development of the Volcker and Vickers rules. The units of analysis are very specific: the development of two specific regulation programs are analysed. The research design of this study is thus a case study with two different but comparable cases. The most important advantage of a case study is that it allows to obtain an in-depth and complete understanding of the chosen unit of analysis (Bryman, 2008: 53-57). Especially when doing research on policy development, such in-depth and complete understanding is necessary, because without a complete understanding no relevant conclusions can be drawn.

This thesis only examines possible explanations for the development of the Volcker and Vickers rules, but the underlying question of this thesis touches a bigger topic, namely “why is it so difficult – pre- and post-crisis – to develop a solid and strong financial regulatory system?”. It is undoable to answer this question in general, but the cases in this thesis may however serve as revelatory cases; cases that give the opportunity to observe an analyse a phenomenon previously inaccessible to scientific investigation (Yin, 2003: 42). This does not mean that the results of this case

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15 study are generalizable to all other cases, but that the results of this study may give a hint of the answer on the above mentioned underlying question.

The next sections will explain how the influence of ideas, the influence of private actors and the role of institutions are measured and which data will be used. However, they are all part of a general methodology called ‘process-tracing’. This method is used by scholars to uncover the steps by which causes effect outcomes. They attempt to do this by examining groups’ preferences, their influence attempts, their access to decision-makers, decision-makers’ responses to the influence attempts, the degree to which groups’ preferences are reflected in outcomes and groups’ statements of (dis-)satisfaction with the outcome. Generally, this method attempts to identify the causal process between independent variables and the outcome of the dependent variable (Dür, 2008: 562). In this thesis, the dependent variables are the outcome of the decision-making processes on the Volcker and Vickers rules, and the independent variables are the influence of ideas, the influence of private actors and the role of institutions. The strength of this methodology is that it allows you to get an in-depth understanding of a certain process and it provides you with reasonably good knowledge of nearly all factors inﬂuencing a political decision (Dür, 2008: 563). Normally, semi-structured interviews are an important part of this method, since these will give insights into developments that could not be gained from document analysis and/or surveys. Because of time and geographical restrictions, it was not possible to conduct interviews in the research for this thesis. However, there was enough information available via online source to draw relevant conclusions from.

1.4.1 Measuring the influence of ideas

In this thesis, firstly the influence of ideas is measured. As mentioned, there is a possibility that ideas can (partly) explain the development of the Volcker and Vickers rules: for example, when old, neoliberal ideas were dominant in the development of the Volcker rule this may explain the fact that the rule is weakened. To examine if this is the case, a content analysis method will be used, to assess content of ideas and their consistency over time. This is an approach to the analysis of documents

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16 and texts that seek to examine content in terms of predetermined categories and in a systematic and replicable manner (Bryman, 2008: 274). To conduct this method, characteristics that belong to two conflicting idea-sets, as described in the theoretical framework, are determined. This is done by firstly looking at the policy debate and the criticisms of banks and choose the actually-employed terms for ‘new’ ideas. Then the same is done for old, neoliberal ideas by examining what terms pro-market- advocates use. These identified characteristics are shown in table 1. On the basis of these characteristics, documents are coded. The result of this coding can demonstrate which kind of ideas were dominant during the decision-making process. After the documents are coded, numbers on how often ideas are expressed will be converted to percentages, in order to expose their relative proportions.

Table 1: Characteristics of two idea-sets

‘New’ set of ideas Old set of neoliberal ideas

More (state-based) regulation Control of capital markets Reduction of (systemic) risks

Distinction between different functions of banks Protection of depositors Effective markets Liquidate markets Free markets Bank profits Market-based regulation

In this thesis it will be examined what idea-set was dominant during the decision making-process. It is assumed that when old ideas were dominant this may be an explanation for a weakening in the rules, while when new ideas are dominant this is not expected. As mentioned in the theoretical framework, the focus of this part of the thesis is on ideas of legislators, since they directly affect the outcome of the process. However, ideas of legislators are influenced by other actors. Firstly, research shows that scholars and scholarly research have the capability to influence regulatory ideas and public policy (Forbes, 2011: 217). Therefore, ideas expressed by scholars are examined as well. Next to that, public sector organisations and public interest groups may influence ideas of legislators, since (most) legislators try to serve society as a whole and therefore will be receptive for their ideas. Ideas of (a representation of) relevant public sector organisations and public interest groups will therefore by analysed as well.

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17 This method has multiple advantages. Firstly, this method allows us to get a complete picture of the ideas that were dominant in different domains during the decision-making process of the Volcker and Vickers rules. Secondly, it is a transparent research method; replications and follow-up studies are feasible. Thirdly, with this method, it is possible to analyse the influence of ideas, without having access to the legislators and other relevant persons itself. A disadvantage of this method is that it is not possible to do a content analysis complete objectively; your own interpretation will always play a role in the final results. However, the coding scheme in table 1 will make sure that the analysis is as objective as possible.

To detect the ideas of scholars, firstly the content of statements of scholars present in Congressional Hearings (US) or Parliamentary Hearings (UK) is analysed. Next to that, the main points of the most cited articles on the Volcker and Vickers rules are examined an it is established to what idea-set these main points belong. Because the Volcker and Vickers rules are recently developed, not much has been written about it. That is the reason that only the three most cited articles per rule are taken into account. The three most cited articles on the Volcker rule are from Duffie (2012), Whitehead (2011) and Richardson et al. (2010), while the three most cited articles on the Vickers rule are from Ojo Marianne (2014), Goodhart (2012) and Gosh and Patnaik (2012). As you can see, some of these articles are published after the rules are adopted. However, publishing an article takes a lot of time and the scientists probably started to write their articles a long time ago. I assume that their ideas have been communicated to both governments before the publication of their articles and therefore could have had influence on the development of the rule.

Subsequently, ideas of relevant public sector organisations and public interest groups are examined. In both countries, expressions of the Chamber of Commerce, the umbrella organisation of Labour Unions and relevant public interest groups are analysed using the above described content analysis method. I chose for these mix of organisations because they represent different parts of the society, namely businesses, employers and consumers. In order to find statements on the Volcker or Vickers rule by these organisations, Congressional/Parliamentary Hearings, their websites and the

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18 Financial Times are explored, as well as written reactions on (parliamentary) consultations. However, sometimes only one or two of these sources contained relevant statements.

Finally, ideas expressed by legislators are examined. In order to determine which ideas were dominant by legislators themselves in the US, the records of all 30 Congressional Debates between January and July 2010 are analysed. In all these debates, the Volcker rule has been discussed. Next to that, Financial Times articles in which republicans or democrats expressed their views are examined. In the UK, five debates of the House of Commons about the Vickers rule are analysed, as well as Financial Times articles.

1.4.2 Measuring the influence of private actors

In the second part of the analysis of the cases, the influence of private actors on the development of regulation on proprietary trading and ring-fencing is measured. Influence is generally understood as an actor’s ability to shape a decision in line with her preferences (Nagel, 1975: 29). Measuring influence is incredibly difficult to do, but crucial when you want to discover to what extent private actors have had influence on the development on financial governance. The method that I will use to do this is called preference attainment. This method compares the outcomes of decision-making processes with the preferences of actors. The idea is that the difference between the result of the process and the preference of an actor displays the influence of that actor. Importantly, this method can detect influence even when nothing visible happens, for example because some lobbying is secret. This method is often used in policy fields where the preferences of actors are quite straightforward, for example in monetary policy (Dür, 2008: 566-567).

An advantage of this method is that it is relatively easy to do in a short timeframe where there is no possibility of doing interviews. A disadvantage of this method is the black-boxing of the process: because only the ‘input’ and ‘output’ of the process is taken into account it can be difficult to control for alternative factors explaining a coincidence between preferences and outcomes (Dür, 2008: 568). It is possible that by conducting this method, alternative factors explaining a coincidence

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19 between preferences and outcomes are neglected. For example by the Volcker rule it could be that scholars agree with banks that the rule should be modified, and that their opinion it is ultimately decisive. Stating that banks had a lot of influence would in this case be wrong because it was actually the scholars who had influence. To prevent these kind of mistakes, in this thesis it is also tried to demonstrate lobbying on the Volcker and Vickers rule by making use of lobbying-databases. It is assumed that when preferences of financial institutions correspond to the changes that have been made and active lobbying on the topic can be demonstrated, it is very likely that financial institutions got influence.

In this thesis, the preferences of different private actors are examined. Firstly, the preferences of the largest banks in the United States and the United Kingdom are analysed. Because these banks bear by far the largest part of the systemic risk in the financial sector (Whitehead, 2011: 181) and rules on proprietary trading and ring-fencing aim to reduce this systemic risk, it is likely that these banks will suffer the most from the rule and therefore are most likely to advocate for changes in the rule. In the US, the biggest banks are JP Morgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs Group, Morgan Stanley, Bank of New York Mellon, U.S. Bancorp, HSBC North America Holdings and PNC Financial Services Group1. Because the UK is a smaller country, it has only four really big banks, namely HSBC Holdings, Barclays, the Royal Bank of Scotland and Lloyds Banking Group2.

Next to the preferences of big banks, preferences of smaller banks will be examined. They may be much less active in proprietary trading than large banks, and the new rules may affect them hereby in a lesser extent. To examine the preferences of small banks in the US, preferences of so-called ‘community banks’ are analysed. This are small banks with aggregate assets less than $1 billion, who have a simple range of products and focus on ‘relationship banking’ in the communities they serve (Keeton, 2003: 15). Since the above discussed big banks are international, have often more than $1000 billion in assets and serve a complex range of products small community banks

1_{Website Relbanks (}_{http://www.relbanks.com/top-us-banks/assets}_{, last visited on 18-1-2014)} 2

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20 differ widely from the big banks. It is therefore possible that their preferences on the Volcker rule will differ as well. The preferences of six randomly chosen US community banks are examined, namely the One PacificCoast Bank, the Community Bank N.A., the Community Bank Oregon, the First Northern Bank, the Union First Market Bank and the Northern State Bank of Virginia. In the UK, five randomly chosen small banks with less than ₤600 million in assets are analysed, namely Airdrie Savings bank, Julian Hodge bank, Secure Trust bank, Raphaels bank and Wesleyan Bank.

Thirdly, the preferences of hedge funds are analysed. Due to the new rules, it is more difficult for banks to invest their money and trade with their money. Since investing and trading money is the core business of hedge funds, they have less competition when banks are being restricted. However, banks are restricted to invest in them as well, so the Volcker and Vickers rule may harm hedge funds too. The preferences of the five biggest US hedge funds - Bridgewater Associates, Och-Ziff Management Group, Paulson & Co, Blackrock Advisors and Highbridge Capital Management – and the four biggest UK hedge funds - Man Group, Brevan Howard Asset Management, Winton Capital Management and Bluecrest Capital management - have been analysed1

Finally, preferences of the most important an influential industry groups who represent one of the above mentioned private actors are examined. In the US, these are the Securities Industry and Financial Markets Association (SIFMA), the Institute of International Bankers (IIB), the International Credit Brokers Association (ICBA), the Investment Company Institute (ICI), the Financial Services Roundtable (FSR), the Clearinghouse Association (CHA), the American Bankers Association (ABA), the International Swaps and Derivatives Association (ISDA) and the Alternative Investment Management Association (AIMA). In the UK, these are British Bankers Association (BBA), the British department of the above mentioned AIMA, the British Private Equity and Venture Capital Association (BVCA) and the Association for Financial Markets in Europe (AFME).

1

Website Institutional Investors Alpha

(http://www.institutionalinvestorsalpha.com/profile/3287866/4689/Hedge-Fund-100-Firm-Profiles.html, visited on 29-5-2014)

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21 The preferences of these private actors will be determined in different ways. Firstly, the websites of the private actors are analysed. The ‘search’-function is used to find statements right after the first announcement of the rules after the adoption of the rules. Next to that, the website of the Financial Times is used to find media statements of the actors in which their preferences are revealed. I use the Financial Times because it is the most influential medium when it comes to financial regulation. Finally, consultation rounds by the Government, the Parliament and different agencies and Congressional and Parliamentary Hearings at which private actors were present are analysed to subtract their preferences.

1.4.3 Measuring the role of institutions

In the theoretical framework, it is explained that different institutional dimensions can have influence on the outcome of a decision making process. The four institutional dimensions that are analysed in this thesis are privileged groups, the involvement of other groups, the number of veto players and the role of independent regulatory agencies.

As mentioned earlier, when institutions privilege certain groups that form the core bases of support for incumbent governments, it is likely that the preferences or ideas of these groups are influential (Garret and Lange, 1995: 632). In order to examine if certain groups were privileged in the decision-making process of the Volcker and Vickers rule, we will therefore firstly analyse if the governments of the US and the UK are dependent on the support of a certain group (that is affected by the Volcker and Vickers rule). Subsequently, it is examined if this group is favoured in the decision-making process. Finally, it is examined to what extent other groups are involved that may act as a counterweight for the privileged group.

Next to privileged groups and the involvement of other groups, the amount of veto players is important. Veto players are actors whose agreement is required for a change of the status quo. In the first phase of the development of the rules – the phase between the announcement and the adoption of the rules – members of Congress/Parliament are veto-players, since their votes are

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22 necessary to adopt the rule. In both rules, it is examined to what extent these veto players were able to exert power. In the phase after the adoption, the responsible regulatory agencies were veto players. It is examined what their positions on the rule were, to what extent they had to collaborate and how these factors influenced the development of the rule. By doing this, we also analyse the last dimension.

1.5 Structure

After this first chapter, in the next chapter theoretical framework will be further deepened by giving an overview of the relevant academic literature. Subsequently, the third chapter will give a brief overview the background of the recent financial crisis and the regulatory responses to that crisis. It is described how the reform debate and in particular the two ‘splitting’ proposals came to emerge and what the ideational background was. The bare facts of the Volcker and Vickers rules are also discussed in this chapter. In chapter four and five, the actual analysis of the case studies will be described. Chapter four will describe the analysis of the development of the Volcker rule in the U.S., and chapter five examine the development of the Vickers rule in the U.K. Finally, this thesis will be ended with a conclusion in Chapter 6.

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2. Literature review

In this chapter, an extensive review of the relevant literature is given in order to obtain an in-depth understanding of the existing knowledge on the three relevant variables in this thesis: ideas, interests and institutions. This existing knowledge contribute to the rest of the thesis in two ways. Firstly, it makes sure that we are aware of the underling mechanisms of the variables, whereby results of the empirical research can be better understood. Next to that, it makes sure that it will be noticed when found results that are not in line with the results of previous research. In this chapter, firstly relevant literature on the influence of ideas is described. Subsequently, literature on the influence of financial institutions is discusses, after which literature on the role of institutions is described.

2.1 The influence of ideas

In this section, firstly the nature of ideas and how they relate to policy making and policy change is described. Subsequently, it is explained how ideas have changed in the past and may change in the future. Finally, it is described how to measure the influence of ideas on the process of policy change.

Many scholars have tried to understand how ideas influence policy making. But before examining the effect that ideas may have on policy making, ideas have to be conceptualized first. Campbell (1998: 384) starts his conceptualisation by looking at two characteristics of ideas. Firstly, ideas can be present on the background or on the foreground of political debates. ‘Background ideas’ are widely accepted and unquestioned; they are underlying in political debates and sometimes taken-for-granted. Ideas in the foreground of debates are explicitly articulated by policy-makers and are often contested. Secondly, ideas can be cognitive or normative. Cognitive ideas are descriptions that specify causal relationships, whereas at the normative level ideas consist of norms and values. On the basis of this conceptualization it is possible to distinguish four types of ideas. These four types are shown in table 2.

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Table 2: Types of ideas and their effects on policy making

Source: Campbell (1998: 385)

The first type of ideas is programs. These kinds of ideas are often technical and can prescribe a precise course of policy action, thereby helping actors to find concrete solutions to their policy problems. Since these ideas are on the foreground, they can often be found in policy notes, position papers and congressional debates (Campbell, 1998: 386). An example of a study that showed the effect of ideas as programs, is the study of McNamara (1998) about the evolution of the European Monetary System, the precursor of European Monetary Union. She argues that monetarism – with its anti-inflationary emphasis and Germany’s practical success – provided European policy makers concrete ideas about their internal market. According to McNamara, it is not possible to explain the development of the European Monetary System without taking these ideas into consideration.

Secondly, ideas can form a paradigm. Paradigms are not as precise and concrete as programmatic ideas, but deal with underlying theoretical and ontological assumptions about how the world works and thereby determine the policy discourse. Because of this, paradigms constrain the range of solutions that policy makers perceive as useful for solving problems. Paradigms consist of underlying assumptions in the background of policy debates that are not explicitly articulated. These kinds of ideas are often revealed in curricula of universities, theoretical texts and publications in the

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25 most important academic journals (Campbell, 1998: 389). Numerous scholars argue that, since the 70s, neoliberal ideas are the dominant paradigm in economic policy (Canterbery and Burckhardt 1983; Goldstein, 1993; Earl, 1983; Krugman, 1995; Heilbroner, 1995; de Grauwe, 2009; Berger, 2009). They have demonstrated this by looking at the theories as taught at respected universities and published in the most important academic journals. Neoclassical economics is associated closest with the most prestigious universities and journals and therefore accepted by policy makers as guidance, which makes this paradigm influential.

Next to that, ideas can be public sentiments. These kinds of ideas constrain the range of solutions that are considered by the public as politically acceptable and legitimate. Where paradigms constrain the range of solutions that policy makers perceive as acceptable, public sentiments constrain the range of solutions that the public sees as politically legitimate. Public sentiments consist of norms and values that cover a wide range of issues. Because they cover such a wide range of issues, some ideas as public sentiments may contradict each other. Public sentiments are therefore not necessarily coherent. This type of ideas can be found in for example opinion polls (Campbell, 1998: 392). An example of influence that public sentiments can have on policy making is given by Page and Shapiro (1992), who have examined the policy preferences of Americans from 1930 to 1990 and showed that policy preferences of Americans have influenced policies numerous times.

Finally, ideas can serve as frames; they can provide actors with symbols and concepts with which they can frame solutions to policy problems. Frames are used to ‘sell’ policy decisions to the bigger public, and therefore typically appear in public statements of policy makers, campaign speeches and press releases. Frequently framers select symbols and concepts that reflect the norms and values in public sentiments (Campbell, 1998: 394). Historians have shown that (some of the) most important tax reforms in the US were only passed after policy makers framed them in ways that made them acceptable for the broader public (Leff, 1984; Stanley, 1993).

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26 An important addition to these four kinds of ideas is the fact that they are connected with each other. The probability that a programmatic idea will be adopted and thus affects policy making, depends on the extent to which it fits in existing paradigms, conforms to prevailing public sentiments, and is framed in appropriate ways (Campbell, 1998: 399). For example, when public sentiments change, it is unlikely that old programmatic ideas still can be applied without new frames. If it is not possible to use new frames, a change in public sentiments may undermine the existing paradigm and facilitate the emergence of another.

In the political economy ideas often are seen as very important as well. Several political economists see ideas as the crucial drivers of policy, and a change in ideas as the crucial driver of transformations (Blyth 2002; Widmaier et al. 2007). They point in particular to ideas that form a paradigm. However, a paradigm can develop itself into ideas as programs, public sentiments and frames, whereby a full set of similar ideas is formed. In economic history, we have seen this kind of a set of influential ideas multiple times. In the 1950s and 1960, a set of ideas that is best described as ‘embedded liberalism’ was dominant. In this system, international regimes tried to combine the goals of international liberalization with those of domestic stability (Best, 2003: 365). While this system was very prosperous for many years, in the 1970s there were sharply lower rates of economic growth. Politicians were faced with the challenge to create jobs, despite disappointing growth. Next to that, technological developments increased globalization (Hall, 2009: 94-95).

These two developments led to a significant change in ideas. Gradually, another paradigm became dominant: the neoliberal paradigm. By reducing the barriers for international trade and capital flows, economic growth was enabled. More and more people were convinced that financial markets were the catalyst of economic growth. Based on academic advice, regulators assumed that these markets were self-stabilizing and used only market based regulatory tools (de Grauwe, 2009: 83-84). The idea that markets are efficient and regulation will distort this efficiency are dominant (de Grauwe, 2009; Berger, 2009).

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27 The recent financial crisis has proved that neoliberal ideas of efficient markets are incomplete at best. It is interesting to see whether this crisis will result in a shift in ideas. Levi-Faur (2011: 3-5) is convinced that neoliberal ideas will become less dominant and that markets will be regulated more. Baker (2013: 417) agrees with him, but emphasizes that the change is a gradual process and will take a couple of years. According to him, ideas started to change right after the start of the crisis , but this did not automatically translate into a radical change in regulatory practice because of a variety of countervailing political and institutional variables (Baker, 2013: 422). De Grauwe (2009: 84) argues that a shift in ideas will be very unlikely, because economists and policy makers are comfortable with their old ideas and will continue doing that. Also Turner (2011) thinks that a shift in ideas will be unlikely. He confirms that some changes in regulations have been made, but he argues that the financial system is still the same and is still based on neoliberal values.

Finally, it is important to examine how the influence of ideas can be measured and demonstrated. In many studies, the existence of an idea, norm, or culture is confused with proof that it exerts a causal impact on political life (Berman, 2001: 241). This is not always the case: the fact that an idea exists does not mean that it exerts direct influence on the policies that are being made. In general, ideas can influence decision-making in two ways. Firstly, ideas can give form to political actors' motivations, interests, and preferences and therefore influence the outcomes of the decisions of these actors. Secondly, ideas can influence political behaviour even if the actors have not internalized these ideas or do not believe in them. In such cases ideational variables work indirectly; they influence the translation of interests into outcomes by shaping the incentive structures associated with different courses of action (Berman, 2001: 241-242). When examining the influence of ideas, both ideas of (political) actors as well as ideas dominant in ‘the broader environment’ should therefore be considered.

When considering these ideas, two measurement problems are very common. Chwieroth (2007: 5) calls this the ‘how much’ and ‘how to’ problem, meaning that is difficult to know precisely

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28 how much influence ideas actually have and how to measure this actual influence. Both Chwieroth (2007) and Berman (2001) discuss some possible solutions to these problems. Firstly, Berman (2001: 243) argues that researches should establish clearly and in advance what they expect to find if ideas indeed influence policy-outcomes; ideational variables should be clearly connected to decisions or behaviour, and those decisions or behaviour must also represent a relatively small set of the possible outcomes. Secondly, a comparative analysis - in which different but comparable cases are analysed – may be useful, because it may help to find the most important factors that shape political outcomes. Next to that, this method is useful for eliminating variables from the pool of potential causes (Berman, 2001: 234). Finally, the method of process-tracing may be useful. When conducting this method, a researcher digs in to the details of the policy making process. The focuses of this method lies on what actors say, write and codify to justify or promote their actions (Chwieroth, 2007: 8).

2.2 The interests of private actors

In this section, firstly it is described how financial institutions managed serve their interests prior to the crisis, and what the pros and cons of this influence of financial institutions are. Subsequently, it is examined if – according to existing academic literature – influence of financial institutions was more limited after the financial crisis.

It seems that there is a consensus on the fact that private actors have had excessive influence in financial regulation, due to various causes. Probably the most important cause are recent trends of financial globalisation, liberalisation and innovation. These trends resulted in financial markets that became operating increasingly transnational, with large capital mobility as one of the corresponding consequences (Tsingou,2003: 3-4). This was problematic for national governments or other public authorities, as most regulatory and supervisory provisions on financial markets were national. Research point out that the more the more transnational the activity in financial markets, the less it is likely it is to rely on traditional forms of regulation (Tsingou, 2003: 4). These recent trends in the financial system have therefore limited governments’ ability to make independent macro-economic

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29 decisions (Underhill and Zhang, 2006: 19). Because of this, national governments are more or less forced to rely on private actors when it comes to regulation.

The globalization and liberalisation of financial markets may be one of the most important causes of the power of private actors on financial markets, but it is not the only reason. Different scholars state that the private sector is also taking a leading policy role because of its expertise and knowledge (Tsingou, 2003; Matli and Büthe, 2005; Underhill and Zhang, 2008). Regulators are often behind industry practices with regards to technical knowledge and innovation. Instead of acquiring this by themselves through costly training and education, regulators chose to benefit from existing specialization from private actors when developing financial regulation (Matli and Büthe, 2005: 230). But even when these regulations are in place, private actors can still exert influence. For example, a lot of financial regulation focuses on levels of risk. Banks and other financial institutions build complex models to measure the risks in their organisation, in order to proof that they meet the set requirements. However, regulators do not know and do not understand these models. As a result, policies concerning the safety of the financial system are dominated by the application of models build those actors who stand to benefit from it most (Underhill and Zhang, 2008: 541). The fact that financial have very close relationships with regulatory agencies made it even easier for regulators to involve financial institutions in policy-making processes (Underhill and Zhang, 2008: 541).

Furthermore, as discussed in the section about the influence of ideas, a lot of governments had implicitly the idea that only neoliberal principles lead to long-term stability, efficiency, growth and development (Tsingou, 2003: 9). Having largely free financial markets, with some regulation originating from private actors, fits into these neoliberal principles. This may be a third reason for why private actors have a lot of influence on financial regulations. A final cause for the influence of private actors is the fact that these private actors have large (financial) resources which they can use to advocate for their interests (Tsingou, 2003: 9). As an addition to the above mentioned causes, Helleiner (1995: 334) states that finance has a reputation of being complicated and technical, and

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30 that it therefore attracts little attention. According to him, this authority shift from public to private authorities would probably nog have been possible in other policy-areas.

The influence of private actors on financial regulation does not necessarily need to be negative. In fact, it can result in more effective and legitimate regulation in various ways. Firstly, the legitimacy of policies can be increased by letting the ones who are affected by the regulator's decisions participate in order to consider their views (Mattli and Büthe, 2005: 226). In the case of financial regulation, financial institutions are affected and therefore it would be reasonable to ask for their opinions. Secondly, international or global cooperation of private actors can lead to regulation where that was not possible when only governments were involved, since no ‘world-government’ exists (Underhill and Zhang, 2008: 536). Next to that, the private sector has an advantage in its capacity as knowledge holder and can thus can be of great importance when it comes to technical issues (Tsingou, 2003: 8). Even if the government is training its employees into financial experts, they still lack the practical experience that private actors have. For regulation to be effective, it is important that this practical experience and technocratic knowledge of private actors is included.

However, excessive influence of private actors creates a number of problems of which a couple will be mentioned here. Firstly it is important to see that expertise is not an objective category; experts themselves may disagree with each other and sometimes it is hard to see who is an expert (Mügge, 2011: 57). This implies that when financial regulation is built upon the opinion of one kind of experts – the private actors – this will not necessarily result in the best regulation. Firstly because it is likely that private actors do not know anything about regulation, but more important because they represent the interests of their owners, members or funders (Mattli and Büthe, 2005: 232). A legitimate system of financial governance requires representative input that balances a range of public and private interests (Underhill and Zhang, 2008: 540), and this is not the case when private actors have excessive influence. Next to that, if governments lacks the expertise that would be required to provide effective financial regulation we might expect it to be also poorly positioned to

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31 exercise oversight and to correct private regulatory decisions when they are not in the public interest (Mattli and Büthe, 2005: 231). Associated with this is when financial regulation is primarily set by private actors that are not democratically accountable, they cannot be held responsibly by the public when the financial policies are against their interests (Underhill and Zhang, 2006: 540).

As already mentioned in the start of this paragraph, most scholars agree that in the running up to the crisis, private actors have had excessive influence. This means that their influence had many negative consequences, like the consequences mentioned above. The recent financial crisis pointed out that the excessive influence of banks and financial institutions may not have served the interest of the society as a whole and should be more limited in the future. It is therefore interesting to examine if the influence of banks during and after the crisis is really more limited. Helleiner and Pagliari (2011: 15) state that the financial crisis and the massive bailouts of banks in the US and Europe put large pressures on policymakers in these countries to become directly involved in financial regulatory politics; the electorate no longer accepted the fact that authority on financial regulations was mostly in hands of private actors or independent regulatory agencies. Helleiner and Pagliari (2011: 194) argue that politicians therefore seized back much of the regulatory power they had delegated to these actors. Next to that, they suggest that private actors are much weaker and more divided after the financial crisis, making it harder for them to exert influence (Helleiner and Pagliari, 2011: 204). Helleiner and Pagliari (2011) thus clearly think that the influence of private actors is more limited since the financial crisis. Tsingou (2009: 2) does not agree with them. She argues that the influence of private actors is under stress, but not broken. According to her, this is also the explanation for why the bulk of reform proposals are very weak and more about adjusting and safeguarding the system rather than changing it. Tsingou (2009) clearly thinks that the influence of banks and other private actors on financial regulation remained intact. In conclusion, most scholars agree that in the running up to the crisis, financial institutions have had excessive influence on financial regulation. However,

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32 scholars do not agree to what extent financial institutions have had influence on financial regulation during and after the crisis. This thesis may provide clarity on this discrepancy.

2.3 The role of institutions

Next to ideas and private actors, also institutions can have an important role in a regulatory process; they can serve as a filter for certain preferences and ideas. However, the influence of institutions on financial regulation has not been described as extensively as the influence of private actors and ideas on financial regulation. Therefore, in this part, more general literature of the role of institutions is discussed.

The most straightforward institutional dimension is regime type; democratic regimes are more responsive when ideas or preferences change then authoritarian or dictatorial regimes, because it is easier for opponents to challenge policies in a democacy (Garret and Lange, 1995: 632). Because there is a democratic regime in both cases that are discussed in this thesis, this dimension will not be further discussed.

Secondly, when institutions privilege certain groups that form the core bases of support for incumbent governments, it is likely that the preferences or ideas of these groups are influential (Garret and Lange, 1995: 632). When no other interest groups are consulted about an upcoming policy change, it is even more likely that the preferences of the privileged groups are influential. Therefore, the existence of privileged groups and the involvement of other interest groups are important institutional dimensions as well. In addition, this will play out differently in a legislature than in regulatory agencies, which privilege different kinds of groups and give different sorts of access to constituencies. Parliaments are much more open to ‘public sentiment’ aspects of ideas.

A third institutional dimension that can have influence on regulatory change is the number of veto players in a political system. Tsebelis (2002: 36) defines veto players as “actors whose agreement is required for a change of the status quo”. He makes a distinction between veto players generated by institution, called institutional veto players, and veto players generated by the political

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33 game, called partisan veto players. When there are more veto players in a political system, more players have to agree with each other and therefore it becomes harder to change the status quo (Tsebelis, 2002: 42). The number of veto players in a political system therefore partly determines the ease in which regulation can change.

When examining the role of institutions on regulatory change, it is also important to consider independent regulatory agencies. These are important for two reasons. Firstly, when authority over certain policies rests in the hands of these independent regulatory agencies, it is less likely that a change in preferences or ideas in the public sphere will lead to a change in policy (Garret and Lange, 1995; 633). Next to that, the existence of authoritative regulatory agencies may lead to a reduction in coordination and control over certain policies which may influence the execution and effectiveness of these policies (Shapiro, 1997: 276).