The Political Economy of Bank Regulation in Developing Countries Risk and Reputation (by Oxford University Press)
The book have mainly provided a wealth of empirical evidence on the political economy dynamics that lead regulators in peripheral developing countries to converge on, and diverge from, international standards. Our case studies provide compelling evidence of the powerful reputational, competitive, and functional incentives generated by financial globalization that lead regulators to adopt international standards, even when they are ill suited to their local context. A striking finding from our case studies is that politicians and regulators were the main drivers of convergence. In the countries where implementation was most ambitious, politicians played a vital role, championing the expansion of financial services and integration into global finance as an important component of their country’s development strategy. In some cases, regulators advocated convergence on prudential grounds, concerned about the increasing risks posed by internationally active banks. But we also found evidence of strong reputational incentives to implement the latest international standards, which are considered the ‘gold standard’ in international policy circles. We explain how our findings speak to wider debates in the literature, including over the agency of actors from peripheral developing countries in the global economy; relationships between firms, politicians, and the state in developing countries; the importance of policy ideas, particularly the role of the financial sector in economic development; and the inner workings of bureaucracies in developing countries. We highlight areas for future research, including fine-grained analysis of political dynamics within government institutions in developing countries, and the trade-offs associated with independent regulatory institutions.
The book have mainly provided a wealth of empirical evidence on the political economy dynamics that lead regulators in peripheral developing countries to converge on, and diverge from, international standards.
Our case studies provide compelling evidence of the powerful reputational, competitive, and functional incentives generated by financial globalization that lead regulators to adopt international standards, even when they are ill suited to their local context. A striking finding from our case studies is that politicians and regulators were the main drivers of convergence. In the countries where implementation was most ambitious, politicians played a vital role, championing the expansion of financial services and integration into global finance as an important component of their country’s development strategy. In some cases, regulators advocated convergence on prudential grounds, concerned about the increasing risks posed by internationally active banks. But we also found evidence of strong reputational incentives to implement the latest international standards, which are considered the ‘gold standard’ in international policy circles.
We explain how our findings speak to wider debates in the literature, including over the agency of actors from peripheral developing countries in the global economy; relationships between firms, politicians, and the state in developing countries; the importance of policy ideas, particularly the role of the financial sector in economic development; and the inner workings of bureaucracies in developing countries. We highlight areas for future research, including fine-grained analysis of political dynamics within government institutions in developing countries, and the trade-offs associated with independent regulatory institutions.
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248 The Political Economy of Bank Regulation
framework is in place for the more sophisticated components of Basel standards,
the implementation of these components is much more limited to date.
The political economy of Basel implementation in Bolivia
What explains Bolivia’s embrace of Basel II and III standards in the context of
its developmental state and domestically oriented banking sector? This section
argues that the Bolivian case is an instance of regulator-driven Basel adoption.
It shows that financial regulators played a key role in this process, while the
do mes tic al ly oriented government provided support merely for instrumental
reasons. Market actors were ambivalent at most. Outward-oriented and involved
in transnational technocratic networks, Bolivian regulators have championed the
in corp or ation of Basel II and III into the FSL. In particular, financial regulators’
direct involvement in drafting the law paved the way for the adoption of the more
advanced components of Basel standards. The gap between formal Basel adoption
and implementation can in turn be attributed to a combination of regulatory
capacity constraints and a lack of demand both from the banking sector and
the government.
However, rather than merely copying Basel provisions off the shelf, the FSL
represents an innovative approach that seeks to combine prudential regulation on
the one hand and state interventionism on the other, in order to foster productive
development and financial inclusion. The combination of these two goals under
the umbrella of development-oriented financial regulation is clearly not a priority
for the Basel Committee, but it may serve as a model for the adoption of banking
standards in other low- and lower-middle-income countries. However, this section
also shows that regulatory practice in the wake of the promulgation of the
FSL has produced unintended consequences for financial inclusion. It argues that
this phenomenon is a consequence of the tension between technocrats and politicians
in policy implementation, even though it is not directly related to the Basel
standards themselves.
In the decades before Morales’ Movement for Socialism came to power,
Bolivia’s governing elite shared a neoliberal outlook on economic governance,
privatizing state-owned companies and seeking to generate a market-friendly
regulatory environment. Several of the major banks were owned by the families
that also controlled large shares of Bolivia’s agribusiness, and the role of the banking
sector in general was to provide financial services for the dominant domestic
private commodities producers. The governing elite was thus not outward-orient ed
in terms of its ambitions to establish Bolivia as a regional financial centre, but it
tended to follow the policy recipes written in Washington, London, and Brussels
at the time.
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