Theoretical Framework
3.4 Research Hypotheses
國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
to realize.
Figure 3.4 The effects of exogenous factors on bank regulation
3.4 Research Hypotheses
From the above theoretical framework, I propose six main hypotheses to be tested in the following empirical chapters.
Hypothesis 1: If a country is more powerful, or less interdependent with the world, and its executive body can be easily checked by domestic political institution, its level of bank regulation will be low.
Although the definition of “power” remains controversial in the existing literature, it either refers to a country’s economic strength, financial abundance, comprehensive national power or interdependent relationship with the world. Quantitative analysis allows us to include all these factors in the econometric model. Should the concept of power is important, we should find at least one of those fours dimension that are negatively correlate with the level of bank regulation. However, since some of the
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
members in the Basel Committee on Banking Supervision are powerful agenda setters, we should control for this factor, which makes non-BCBS members more sensitive to international pressures.
For the level of balance of check in the domestic political system, I adopt Milner’s typology, which consider the executive body of Westminster system is the most unchecked, followed by Presidential system and then multiparty system. In addition to governmental system, I argue that the electoral rule for the legislative body is also important regarding political candidates’ awareness of smaller special interest groups.
If the degree of awareness is higher, the degree of checking power toward the executive body will be even higher. Therefore, if an electoral district is smaller or uses proportional representation system to select its member of congress, the configuration of government can better proxy the actual distribution of comprehensive public opinion.
In such situation, political process prevent the occurrence of winner-take-all and the number of candidates representing smaller special interest groups will be more (Myerson 1993). Therefore, banker’s interests are udually better reflected under such electoral system. I use the voting system (plural voting system and proportional representation system) and the mean district magnitude to represent such phenomenon.
To sum up, if a non-BCBS country is economically strong, financially abundant, comprehensively powerful, less interdependent with the world, a multiparty parliamentary political system, having smaller district size, or adopting proportional representation system, its national bank regulation is likely to be very low.
The second hypothesis specifies that
Hypothesis 2: If a country is weak, or more interdependent with the world,
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
and its executive body cannot be easily checked by domestic political institution, it is likely to fully comply with Basel Accord.
To be specific, if the government of a country is economically weak, financially poor, comprehensively weak, more interdependent with the world, a Westminster or presidential political system, or controlling both executive and legislative branches, its level of national bank regulation is likely to be very high.
The third hypothesis specifies that
Hypothesis 3: If a country is economically strong, or isolated, and its executive body cannot be easily checked by domestic political institution, it is likely to have more leeway to decide its own level of bank regulation
To be specific, if a country is economically strong, financially abundant, comprehensively powerful, less interdependent with the world, a Westminster or presidential political system, or controlling both executive and legislative branches, its national bank regulation would be changed more easily. The distribution of regulations among these types of countries would be disperse.
The fourth hypothesis specify that
Hypothesis 4: if a country is weak, or more interdependent with the world, and its executive body can be easily checked by domestic political institution, the equilibrium level of bank regulation is likely to create equal international and domestic political pressures that minimize the aggregate pressures
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
To be specific, if a country is economically weak, financially poor, comprehensively weak, more interdependent with the world, a multiparty parliamentary political system, not in control of both executive and legislative branches, its national bank regulation would locate in the middle. In such political structure, the government needs to weigh between both pressures. Eventually it will finds that keeping both pressures as close as possible makes the optimal choice.
The fifth hypothesis specify that
Hypothesis 5. Given the sensitivity to both pressures, financial crisis will force a government to raise its original level of national bank regulation.
To be specific, regardless of the sensitivity of international or domestic pressures, the occurrence of financial crisis will change related parties’ preferences of national bank regulation. It will incentivize the government to initiate a more prudential bank regulation.
The last hypothesis specify that
Hypothesis 6. During the election year, the bank regulation will be lower, or at least the upcoming election will make the improvement of prudential bank regulation very hard to realize
To be specific, regardless of the sensitivity of international or domestic pressures, if a country is going to hold a nation-wide election, either executive, legislative bodies, or
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
both, the government can be incentivized to initiate less prudential bank regulation or at least it will not comply further to the Basel Accords right before the elections.
‧
國立 政 治 大 學