Research questions and hypotheses
The central research question of this project is
Under what institutional conditions does the EU manifest capacity to foster convergence in banking supervision?
By answering this question, this research project is expected to provide valuable insights as to whether the current (supranational) EU governance system in banking supervision promotes convergence in supervision in the single market for banking services and, in doing so, contributes to financial stability in the EU as a whole.
Three main hypotheses
Three main hypotheses are tested empirically through an examination of developments over the nine (+) years of the EBA’s operation and the six (+) years of the SSM’s operation:
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Hypotheses 1
The control of the EBA and the ECB over NCAs promotes convergence albeit to different degrees (command and control hypothesis).
The first hypothesis will be tested by applying a Principal-Agent analytical framework, which has been applied by a number of scholars to explain the operation of a number of EU institutions (notably the Commission and the European Central Bank with regard to monetary policy. The proposed project will build on a previous study by the PI (Gren, Howarth and Quaglia (2015) which provides an early stage assessment of the convergence pressures likely created specifically by the SSM by applying a Principal-Agent lens to an analysis of the legal texts of the SSM regulation and the ECB’s SSM framework regulation.
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Hypothesis 2
Softer’ convergence through networks of banking supervisors is reinforced through the creation of both the ESFS and the SSM (collaboration and cooperation hypothesis).
The second hypothesis will be tested by applying a ‘transnational policy networks’ analytical framework (Slaughter 2004) which has been employed to explain change (or lack thereof) in a range of policy areas internationally. This approach focuses on the role of expert (normally non-elected) policy makers from national and international bodies which can shape policy independently from national government preferences especially given the complexity of policy areas. The network promotes particular policy ideas because of commonly shared perceptions of effective policy rather than to serve the interests of its members. Tsingou (2010) examines global financial governance as increasingly influenced by a ‘transnational policy community of expert actors’ (similarly, see Young 2011 on the BCBS). Some authors (Tsingou 2013) assign veto powers to this financial transnational network in that it sets the ‘ideational’ limits for acceptable regulation. This proposed research project will contribute to this body of literature by examining and better understanding the role of the EU-focused transnational policy network of bank supervisors that has been developing since the early 1970s. There is overlap between the ‘transnational policy networks’ approach and that of ‘epistemic communities’ that will also inform the testing of this research project’s second hypothesis. This approach explains policy change in terms of the formation and influence of an ‘epistemic community’ — a network of governmental or non-governmental, scientific or non-scientific policy making experts from different countries and institutions with authoritative and policy-relevant expertise, which share the same worldview (values, beliefs and approaches) — see Haas (1992) and Davis Cross (2013) for recent developments in this analytical approach. The significance and impact of the ‘epistemic community’ rests in large part on the degree of internal cohesion and professionalism of its expert members. The growing number of epistemic communities of experts in different policy areas reflects the increasing complexity of the functioning of the modern state in the international system and to the need of creating a level playing field in an ever-widening range of issues considered on the international and global agenda. Eichengreen (2011) considered the international Basel Committee on Banking Supervision (BCBS) to be an archetypal example of an epistemic community. Of particular relevance to this research project, Gandrud (2013) applies a quantitative diffusion analysis to understand the impact of ideas on shifts in financial supervisory frameworks, finding empirically for the importance of the role of specific groups in pushing supervisory governance frameworks.
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Hypothesis 3
The EBA and the ECB make strategic use of regulatory and supervisory ideas to promote convergence in bank supervision (promotion and persuasion hypothesis).
The third hypothesis will be tested by applying a strategic constructivist analysis that combines rationalist and constructivist approaches by focusing on the strategic use of ideas by actors — here, the EBA, the ECB and NCAs.
This proposed research project is rooted in a political science analysis that focuses on the relationship between institutions (the EBA, the ECB and NCAs) and the development of transnational policy networks involving individual experts on banking supervision issues and of their ideas about appropriate supervision. At the same time, this project relies upon an analysis of EU legal documentation, its transposition into national law and its implementation (legal studies); and an analysis of the actual operation of bank supervision and views about appropriate bank supervision (involving both legal studies and financial economics). The study of bank supervision is, to date, dominated by legal scholars and financial economists (see section 2.3 above). Very few political scientists have studied the subject of banking supervision. The applicant PI, David Howarth, recently co-directed a research and publication project on the move to supranational bank supervision in Banking Union (BU) — with papers published in the journal West European Politics (2016), almost certainly the very first political science journal special edition ever dedicated to the topic of bank supervision. However, political science can bring a range of finely-tuned analytical frameworks and methodologies to bear to examine the operation of banking supervision and, specifically in the context of this research project, the operation of supranational and national banking supervision in a context where a degree of convergence is expected in order to diminish financial instability (in the context of cross-border banking and European financial market integration) and to reduce political tensions (arising from variations in the treatment of national banks by NCAs). The proposed research project applies three approaches that have rarely been used in the context of examining the design of bank supervision. Principal-Agent analysis (drawn from rational choice institutionalism) can be used to explain the relations between both majoritarian and non-majoritarian (not democratically elected) bodies and two non-majoritarian bodies. The application of Principal-Agent analysis to examine relations between non-majoritarian bodies in the EU context is rare. Its application to an analysis of bank supervision has been limited to a small number of financial economic analyses of the relations between banks themselves (or their shareholders) and bank supervisors. With the exception of work undertaken by the applicant PI and one of his former PhD students (Gren, Howarth and Quaglia 2015; Gren 2017, 2018), the application of Principal-Agent theory to ECB-NCA and EBA-NCA relations is unique. The application of a constructivist analysis to bank supervision and, specifically, a transnational policy network approach is less unusual — with work notably on the Basel Committee’s work as an ‘epistemic community’ (Eichengreen 2011) or a transnational policy network of bank supervisors and their work on agreeing capital requirements guidelines for banks, as in Tsingou 2013; Young 2011) — but is still limited to a half dozen academic studies. Because this constructivist analysis must consider the spread of specialised and highly technical ideas about banking regulation and supervision, an understanding of these ideas about supervision (drawing from financial economics) is necessary. Banking law experts will gain an insight into the implementation of existing ESFS and SSM legal provisions that shape relations between the EBA / ECB and NCAs and the supervisory practice of NCAs. Banking law experts should also find this research of use in understanding the ongoing distinctiveness of national legal frameworks and practice insofar as these shape distinct supervisory practice. Financial economists will gain insight into the operation of institutional factors which they have incorporated into their multivariate regressions and other quantitative analyses in order to examine banking supervisory practice. They will also gain exposure to ideational factors which are more difficult to measure and to slot into quantitative analyses. However, diffusion analysis — which applies quantitative methods to explain the movement of ideas — can contribute to an understanding of convergence in supervisory practice.