The gradual transformation? The incremental dynamics of macroprudential regulation

Abstract

This article focuses on the transformatory potential of macroprudential ideas following the financial crash of 2008, examining how they are being mediated by existing institutional contexts and how and why the task of building a new body of technical macroprudential knowledge is proceeding slowly. It is argued that the movement toward a form of macroprudential regulation has a distinctly incremental dynamic that means any macroprudential transformation will be a gradual process that is likely to span a decade or more. Using Peter Hall's framework of three orders of policy change across substantive and temporal dimensions, the article argues that the macroprudential ideational shift can be compared to third order change. In this sense, it was intellectually radical and took place rapidly in a period of around six months. However, intellectual radicalism does not automatically translate into a radical change in regulatory practice, because of a variety of countervailing political, institutional, and informational variables. In this respect, the task of developing first and second order macroprudential policy is proving to be a much more politically contested process. Furthermore, macroprudential policy is being developed by cautious technocrats who rely on the gradual accumulation of data and evidence to justify policy. The result is a distinctly incremental dynamic to macroprudential policy development that displays many of the features of a process that historical institutionalists refer to as "layering."

Assessing disproportionality: indexes of policy responses to the 2007–2008 banking crisis

“…However, scholars have tended to focus on variations in microprudential (Zimmermann 2013;Fenger and Quaglia 2016), macroprudential regulation (Baker 2013), 1 or fiscal policy (Grossman and Woll 2014), without providing a comprehensive overview of the extent of disproportionality associated with the different measures governments utilize to respond to the crisis. Furthermore, different explanatory frameworks have taken different types of policy response as the dependent variable.…”

Varieties of Economic Crisis, Varieties of Ideational Change: How and Why Financial Regulation and Macroeconomic Policy Differ

“…Ultimately, because first order policy settings and second policy instruments have implications for the day to day investment strategies and market operations of a variety of market actors, and the turf and standing of wider institutional and legislative actors, political contestation has been far more focused on appropriate first order policy settings and second order institutional policy arrangements, than on third order change. The result is a far more contested, contingent and even controversial sphere of first and second order macroprudential policy development, which of course may dilute macroprudential policy content, in substantive terms and stymie any potential paradigm shift (Baker, 2013b).…”

“…It is now widely acknowledged by academics and policy makers that a macroprudential ideational shift emerged from the financial crash of 2008 (Borio, 2009, Baker, 2013a, Persaud, 2010, Haldane, 2009, Datz, 2013, Goodhart, 2014, Hanson, Kyap and Stein, 2011 denying that individually rational self-interested investment strategies are likely to produce financial stability and equilibrium, identifying finance's inherent procyclical tendencies, the propensity for herd behaviour amongst investors and the destabilising effects of financial complexity (Borio, 2009, Baker, 2013b. The macroprudential ideational shift through its assumptions about the behaviour and properties of financial markets, justifies a regulator intervening with countercyclical policy measures to restrain and direct market activities on a system wide basis.…”

Macroprudential regimes and the politics of social purpose

“…It also emphasised macro-financial instability over equilibrium, while critiquing many of the assumptions of the efficient market approach and private risk management modelling techniques such as value at risk (VaR). In this sense, the macroprudential turn has represented a degree of crisis-induced intellectual change (Baker, 2013a(Baker, , 2013bDatz, 2013;Engelen et al, 2011;Erturk, Froud, Leaver, Moran, & Williams, 2011). However, there is a growing sense that the 'macroprudential turn', despite some degree of intellectual rupture with the last three decades, is increasingly constrained and minimal in its ambition, providing 'perfect cover' for a limited reform agenda overlooking distributional concerns and the case for stronger controls on markets (Helleiner, 2014, p. 128).…”