The financial industry is commonly described as one of the most influential in politics. The numbers certainly support this impression. In terms of lobbying expenditures in the United States, the banking sector
outspent even the health care sector. Few industries have comparable resources available and have been able to establish such a strong institutional presence. In many countries, top bankers and high-ranking public officials meet frequently; revolving doors between the two worlds are common; and the technical complexity of financial regulation makes consultation with the industry at all levels of decision-making a necessity. Accordingly, commentators in the media and academia warn about conflicts of interest and undue influence.
The financial sector certainly lobbies actively, employs skilled and well-connected people, and has created very effective organizations such as
the Institute of International Finance. But it would be a mistake to overestimate the importance of lobbying activities. Despite their fervor, these strategies are neither the most important source of influence for the banking industry, nor are they always successful at defending the industry’s positions. What is more, a study of the banking crisis reveals that collective political action of the industry was in fact lacking in the process of crisis management. This article details these three aspects—the real influence, the failures and the shortcomings—and concludes by looking at the future of bank lobbying.
The Political Success of Finance
Finance is important for the economy. Politicians are concerned about growth, credit and funding for nonfinancial firms. Even without a cent spent on lobbying, public officials will have incentives to support the financial industry and help it develop. Their role in the economy confers on the industry a political advantage often referred to as “structural power.”
As Napoleon Bonaparte famously remarked, “When government depends upon bankers for money, they and not the leaders of government control the situation.” In order to understand the political influence of the banking sector, one needs to understand the role it plays in the economy.
One of the great successes for the sector was the rise of finance during the 1990s and 2000s. Seen as crucial economic innovation and a decentralized source of funding, capital markets developed at rapid speed and with an increasing scope of populations affected by them. This trend, labeled “financialization,” affected issues as unrelated as housing, pensions, industrial development and infrastructure. Despite financial crises in various parts of the world—including Scandinavia, Mexico, Southeast Asia and Russia—most of the developed countries put financial development at the center of their growth strategies. Conventional wisdom in the United States in the late 1990s and 2000s held that what was good for Wall Street was good for America. The City of London acted as the powerhouse of the British economy. Even Germany, an industrial economy with traditionally restrictive financial regulation, believed the development of the financial sector in Frankfurt would soon outweigh the importance of the automobile sector.
This public predisposition in favor of finance did not just result from the political activities of the sector. It was the combined effect of a public search for private funding, a paradigm shift in the field of economics, the political demands of nonfinancial firms, and the self-reinforcing effects of early successes. One also needs to remember that financial markets were considered a more democratic and just way of distributing resources. Contrary to banks, which controlled access to credit by potentially building on insider networks and conservative criteria, capital markets were more open to new entrants and innovative ventures. A lot of financial liberalization was therefore undertaken by governments on the center-left, in order to democratize finance and push back against the bankers, imagined as wealthy old men with top-hats and cigars. Philip Augur’s best-selling book about financial liberalization in the U.K. in the 1980s and 1990s is tellingly entitled, “
The Death of Gentlemanly Capitalism.”
This general evolution may not be the result of targeted lobbying, but it certainly led to an ever-growing and more sophisticated political representation of the financial sector. The universe of associations, firms and stakeholders regrouped under the label financial lobby is in fact very diverse. Not only are there different subsectors (banks, mutual funds, hedge funds and venture capital) and entities (stock markets, institutional investors, brokers and accountants), there are also fundamental divisions between retail banking, investment activities and insurance, for example. One would be hard-pressed to find an overarching coalition of financial actors. According to countries and stakes, the industry organizes into a variety of stable associations, fluid coalitions and ad hoc advocacy. On most issues, part of the industry will strongly disagree with another part. Traditional banks had much to criticize in the liberalization of finance; stock market owners did not look approvingly on the establishment of alternative trading platforms; mutual funds defend more-restrictive regulation, which hedge funds despise. Speaking of a “banking lobby” is thus misleading: As a stable group of large financial institutions, it does not exist; in a more narrow sense, the organizations defending conventional retail banking are actually quite weak and have been losing out against more influential actors such as large investment companies.
Yet, there are moments where it appears legitimate to speak of a banking lobby.
In the context of derivatives regulation by the Commodity Futures Trading Commission in the late 1990s, a group of leading bankers urged the U.S. Treasury to stop the proposal. Likewise, in the context of the recent financial crisis, governments in most countries gathered the leading representatives of the industry, something the U.S. government famously did on Sept. 12, 2008, to prevent the failure of the investment bank Lehman Brothers. The messages communicated by such prominent figures in the industry undoubtedly carry a lot of weight. But they may not correspond to the stances held at the same time by other players in the financial industry, in particular smaller firms or savings banks. And if you think that savings banks do not have political clout comparable to large investment banks, look at Spain, Germany and the
recent discussions about a European banking union.
Failures of Bank Lobbying
Understanding the multitude of interests present in financial lobbying helps to explain why many initiatives defended by the industry actually fail, in spite of all of its resources. Some of this is due to countervailing pressures within finance itself. But increasingly, we see other reasons for failure as well: a decrease in the legitimacy of unfettered innovation and unregulated markets, a growing concern with conflicts of interests in public regulation and the rise of nonfinancial lobbying on the same issues.
The financial crisis called into question the legitimacy of the industry and its various political demands. Even politicians who used to prominently display their ties to the industry became more careful about the effects of these connections on their public image. To cite just one example,
New York’s Sen. Charles E. Schumer, who had traditionally raised a substantial amount of his and his party’s funding from Wall Street, became a defender of the Dodd-Frank Act and
insisted on the weakening of his ties with the industry.
Moral considerations became a political stake in areas previously considered as purely technical. Hedge fund activities and certain forms of derivative trading
were decried as “speculation,” and foreign investors were labeled “locusts.” These images greatly affected the political discourse, which in turn left a mark on financial regulation and on responses to the crisis. Many of the initiatives undertaken during and after the financial crisis can be considered a failure of financial lobbying. Even in the context of strong opposition from the concerned financial sectors, policy proposals in Europe and the United States successfully paved the way for more government intervention, tighter standards and higher contributions paid by the financial industry.
The collapse of Lehman Brothers counts as one of the most prominent lobbying failures. Not only had the investment bank tried its utmost to obtain government support, including attempts to use the family ties between Lehman executive George Walker IV and U.S. President George W. Bush, who are in fact second cousins. Fearing the consequences of a Lehman collapse, all the other financial institutions gathered in the Sept. 12, 2008, crisis meeting also insisted that the government should support their ailing competitor. The precise reasons why the U.S. government failed to do so are still disputed, but lobbying pressure from the industry was certainly not lacking.
Similar stories can be told about almost any regulatory proposal in the aftermath of the crisis. Many supranational initiatives in the European Union took leading industry representatives by surprise. They could no longer rely on privileged connections to their respective governments, but had to attend large informational meetings on European regulation. Initially hoping that some of these proposals could be prevented or that the industry could carve out an exception for their sectors, industry representatives soon realized that even the pressure mounted by the U.K. government against European regulation did little to stop the momentum.
What is more, financial regulation became a politicized issue and drew the attention of other stakeholders, including nongovernmental organizations such as
Finance Watch in Europe or
Americans for Financial Reform in the U.S. The rise of consumer protection and the establishment of a U.S. Consumer Financial Protection Bureau can certainly be considered a victory for these stakeholders. Financial lobbies increasingly have to face a quite diverse set of actors, both within and beyond finance, in a context where the moral standing of finance is uncertain. Their structural power continues to be great, but this does not imply that all of their concerns will necessarily be taken into account. Acknowledging the loss in moral legitimacy, the financial lobby therefore tries to engineer broad-based alliances with other actors and focuses much of its effort on the implementation of policy rather than the policy agenda or proposal stage. Both of these are indicators of a “normalization” of influence. In many ways, the financial lobby is a lobby like any other.
If this may be hard to fathom given the superior resources of the financial services industry, think about the analogy sometimes made between lobbying and gambling. Campaign contributions and other political funding are like the chips one needs to buy in order to enter a casino. They are necessary in order to be able to play, and they can assure that you can spend time and play more than other less fortunate gamblers. However, possessing them does not affect the outcome of the individual games you play. Although you can play longer, and therefore have more chances to win, you also have many chances to lose. Overall, a lucky short-term player may have better payoff for his investment than a regular in the casino.
Absence of Collective Action
Finally, given their structural power, political action by banks may in fact produce public benefits. The general public tends to view the ties between banks and regulators with suspicion, fearing biases and undue influence. As the recent banking crisis shows, however, collective efforts to stabilize the banking sector by both the government and the financial industry can in fact produce solutions that are less onerous to the taxpayer than purely public bailout schemes. Negotiating public-private bank rescues requires collective action on the part of the banking industry and active collaboration with the government—that is, a lobby-like approach.
Governments were aware of the possible benefits of private sector solutions during the crisis of 2008. In many countries, public authorities encouraged the financial sector to chip in to find a private solution for a failing competitor, as had been successfully experimented in response to
the failure of Long-Term Capital Management (LCTM) in the United States in 1998. In response to the recent crisis, several governments negotiated with their banking industries to establish joint rescue schemes. In France and Austria, liquidity was provided through a public-private arrangement, which grouped collateral of private banks backed by a public guarantee in order to issue securities that helped to keep domestic banks afloat: the Societe de financement de l’economie francaise (SFEF) and the Oesterreichische Clearingbank AG (OeCAG). In Denmark, the Danish banking industry established the Danish Contingency Association for the support of distressed banks, which gathered fees for a collective guarantee and acted as an intermediary to the government for deposit guarantees and recapitalization, leading to extensive burden-sharing between the government and the financial industry. In all three cases, the willingness of the financial sector to engage collectively in order to stabilize the economy in times of crisis arguably reduced the extent to which the governments needed to commit taxpayer money.
Moreover, public-private arrangements during crises encourage mutual oversight based on private sector knowledge that regulators cannot easily replace. Regulators’ lack of detailed financial knowledge prior to and during the financial crisis has been repeatedly criticized. In one of the most extreme cases, tape recordings of senior executives at the failed Anglo-Irish bank reveal that the bank
knowingly maneuvered the government into granting aid based on entirely imaginary numbers. While such strategies seem to have worked in bilateral business-government negotiations, they are harder to imagine in a collective setting. Market actors work under similar conditions and face comparable constraints. They are thus well-equipped to judge the situations of their competitors. In settings where collective arrangements imply costs to all participants, this oversight can help to limit heavy-handed approaches in time. To cite an example, all major French banks accepted recapitalization in 2008 in order to avoid stigmatizing distressed institutions. When the scheme was extended in 2009 for a second round of recapitalization, two banks left arguing that the initial objective of stabilizing the economy was no longer at stake. This decision signaled that recapitalization had become an issue for the private interests of some, no longer for the financial stability of the industry as a whole.
Put differently, close relations between the financial sector and public authorities can create positive outcomes. They allow for the circulation of technical information and inter-subjective assessments, create the bedrock for public-private arrangements during times of crisis and enable collective oversight that can rely on industry expertise. As a result, they may produce publically supported intervention that is both cheaper and shorter than intervention designed and carried out by public authorities only.
Of course, this is not a plea in favor of unrestrained bank lobbying. In fact, public-private relations are social relations. They can be dysfunctional and lead to rent-seeking, but they can also produce public benefits. Academic discussion has made very similar observations about social capital: It is at the base of criminal organizations such as the mafia, but also constitutive of civic arrangements that help to promote economic development and democracy. It is thus important to distinguish between relationships that only serve particular private interests and those that provide public benefits. Since public discussion has almost entirely focused on mechanisms of regulatory capture and conflicts of interest, it is useful to consider the alternative as well.
This raises one crucial question: What are the conditions for ensuring cooperation in the public interest without encouraging ties that only serve private benefits? As mentioned above, one key element is to structure public-private consultations as collective undertakings, not as bilateral relations. Financial institutions are necessarily concerned with their individual situation and will seek to advance their point of view in discussions with public officials. The goal of collective public-private interactions is not to make them think in terms of public interest, but merely to signal how much their individual interests are tied to the collective well-being of the sector.
In addition, it is necessary to encourage and formalize work relationships during tranquil periods in order to be able to rely on them in moments of crisis. The Danish Contingency Association was established by Danish banks in 2007, but had previously existed as a public guarantee fund initiated in 1994. When the Danish Contingency Association was put to the test with the failure of Roskilde Bank in 2008, it quickly became clear that the bank would deplete the capacity of the fund. But the existing structure of cooperation enabled the industry
to negotiate a rescue scheme with public authorities that would allow for the unwinding of Roskilde Bank and provide a response to the crisis of the entire industry. In Ireland, a handbook written for financial crisis management was simply left in the drawers when the economy unraveled in the fall of 2008. The bureaucratic guidelines were judged too complicated for the severity of the situation. The comparison indicates that modes of cooperation are more useful than precise instructions for future situations that are by definition uncertain.
Counterintuitively, one of the lessons from recent crisis management is that financial institutions in countries such as the United States, the United Kingdom, Germany, Ireland and Iceland have done too little to be considered politically involved. Had they engaged in more political activities, in particular collective ones, they might have contributed positively to the political rescue schemes during these difficult periods.
Outlook
It is difficult to know the plans of financial lobbyists. We know that they will accompany many of the legislative proposals currently under discussion and actively try to shape the implementation of those already agreed on. We can also be certain that they will carefully monitor all attempts to intervene in the management of their respective activities and push back against proposals that will curtail their autonomy.
Rather than being suspicious of their activities, it is important to analyze their inactivity when they do not find it necessary to mobilize. The political inaction of the financial sector is indicative of one of two things: either the proposal is of no real concern to their activities, which signals that the stakes in terms of profits or operations have been poorly understood by regulators; or the industry can obtain benefits from remaining silent and not contributing to a solution. Whenever their interests are at stake, we can expect the financial industry to mobilize, even if they will not always be successful.
Cornelia Woll is professor of political science at Sciences Po Paris, where she directs the Max Planck Sciences Po Center on Coping with Instability in Market Societies (MaxPo). Her work focuses on international and comparative political economy. She has recently published “The Power of Inaction: Bank Bailouts in Comparison” (Cornell University Press, 2014).
Photo: U.S. currency (photo by StockMonkeys.com).
