全球執行巴塞爾協定之情況：以政治壓力理論解釋各國的國際銀行監管制度 - 政大學術集成

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(1)國立政治大學亞太研究英語博士學位學程學位論文 National Chengchi University International Doctoral Program in Asia-Pacific Studies (IDAS) Ph.D. Dissertation. 指導教授：童振源博士 Advisor: Dr. Chen-yuan Tung. 立. 政治大. ‧ 國. 學 ‧. Global Implementation of Basel Accord: A Theory of Political Pressures for Global Bank Regulation. n. al. er. io. sit. y. Nat. 全球執行巴塞爾協定之情況：以政治壓力理論解釋各國的國際銀行監管制度. Ch. engchi. i n U. v. 研究生：陳宗巖 Student: Ian Tsung-yen Chen. 中華民國一〇四年一月 January 2015.

(2) Contents Contents......................................................................................................................ii List of Figures, Tables, and Appendices ................................................................... iv Abbreviations ............................................................................................................ vi Acknowledgement ................................................................................................... viii Abstract ...................................................................................................................... x Chapter 1 Introduction ............................................................................................. 1 1.1 Global Banking Regulation and Research Questions................................................ 1 1.2 Introduction of Theoretical Framework .................................................................... 7 1.3 Methodology ........................................................................................................... 11 1.4 Plan of the Dissertation ........................................................................................... 16 . 立. 政治大. ‧. ‧ 國. 學. Chapter 2 Literature Review: Basel Accord and Politics ...................................... 17 2.1 Global Power Distribution ...................................................................................... 18 2.2 Domestic Political System ...................................................................................... 25 2.3 Ideational Factor...................................................................................................... 33 2.4 A Liberal Proposal .................................................................................................. 35 . n. al. er. io. sit. y. Nat. Chapter 3 Theoretical Framework ......................................................................... 38 3.1 Expected Political Cost and Political Pressure ........................................................ 39 3.2 The Model and Equilibrium .................................................................................... 46 3.3 Exogenous Shock of Financial Crises ..................................................................... 51 3.4 Research Hypotheses............................................................................................... 54 . Ch. i n U. v. Chapter 4 Global Bank Regulation: A Quantitative Analysis ................................ 59 4.1 Quantitative Method: Data and Operationalization................................................. 59 4.2 Panel Data Analysis, 1975-2005 ............................................................................. 65 4.3 Cross-national Data Analysis .................................................................................. 70 4.4 Discussion and Conclusion ..................................................................................... 78 . engchi. Chapter 5 Case Study: Taiwan’s Bank Regulation ................................................ 81 5.1 Brief History of Taiwan’s Banking System ............................................................ 81 5.2 International Pressures ............................................................................................ 88 5.3 Domestic Pressures ................................................................................................. 94 5.4 Changes of Taiwan’s Bank Regulations ............................................................... 100 5.5 Discussion and Conclusion ................................................................................... 122 Chapter 6 Case Study: China’s Bank Regulation ................................................ 130 6.1 Brief History of China’s Bank Regulation ........................................................... 130 6.2 International Pressures.......................................................................................... 136 6.3 Domestic Pressures............................................................................................... 144 6.4 Changes of China’s Bank Regulations ................................................................. 151 ii.

(3) 6.5. Discussion and Conclusion................................................................................... 175 . Chapter 7 Conclusion ........................................................................................... 182 7.1 Main Findings ....................................................................................................... 182 7.2 Limitations of the Study ........................................................................................ 186 7.3 Contribution and Implications ............................................................................... 189 Appendix ................................................................................................................. 193 References .............................................................................................................. 199 . 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. iii. i n U. v.

(4) List of Figures, Tables, and Appendices. FIGURES Global distribution of bank regulation in 2005 (low 0-3 high)........................... 2 Four main research questions.............................................................................. 7 Relationship of the studies of bank regulation .................................................. 18 Country only sensitive to either international or domestic pressures ............... 48 Country insensitive to both international and domestic pressures .................... 49 Country sensitive to both international and domestic pressures ....................... 51 The effects of exogenous factors on bank regulation ....................................... 54 Regional variations on compliance with Basel 2 .............................................. 77 Number of Taiwan’s overseas banks and exposure to global market ............... 92 Number of POBs, bank performance and CAR .............................................. 100 Amendment of the Banking Act in 1985 ........................................................ 124 Amendment of the Banking Act in 1989 ........................................................ 126 Amendment of the Banking Act in 2000 and 2008......................................... 128 China’s non-performing loan ratios, 1989-2012 ............................................. 134 China’s total trade and outward FDI, 1982-2012............................................ 139 China’s trade, OFDI and banks’ overseas branches ........................................ 141 China’s regulatory quality and control of corruption ...................................... 149 Bank regulation in China’s credit plan era ...................................................... 177 China’s 8% CAR into law in 2004 .................................................................. 179 China’s further compliance with Basel 2 & 3 ................................................. 180 . 立. 政治大. ‧. ‧ 國. 學. n. al. er. io. sit. y. Nat. 1.1 1.2 2.1 3.1 3.2 3.3 3.4 4.1 5.1 5.2 5.3 5.4 5.5 6.1 6.2 6.3 6.4 6.5 6.6 6.7. Ch. engchi. i n U. v. TABLES 4.1 4.2. Summary Statistics for Panel Data, 1975-2005 ................................................ 66 Compliance with Basel Accord, 1975-2005 ..................................................... 67 iv.

(5) Compliance with Basel Accord in the Asia-Pacific, 1975-2005 ....................... 69 Summary statistics for cross-national data ....................................................... 71 Cross-national analysis for compliance with Basel 2 ....................................... 73 Cross-national analyses for compliance with Basel 2’s three pillars ................ 75 Distribution of Taiwan’s financial institutions and percentage of assets .......... 83 Loan to deposit ratio of financial institutions in Taiwan .................................. 84 Taiwan’s domestic banks’ statistics................................................................... 91 Taiwan’s governmental and financial structure, 1992-2014 ............................. 96 Number of Taiwan’s banks and their average performance .............................. 98 Number of banks with CAR below 8% .......................................................... 114 Proportion of total assets by types of China’s financial institutions ............... 135 Global rankings regarding total assets of China’s Big Four ........................... 136 Number of China’s overseas banks, trades and OFDI .................................... 140 China’s IMF outstanding credits, 1981-1992.................................................. 143 Party affiliation of the Chairmen of top five commercial banks..................... 151 Credit supply (RMB100 million), CAR, and NPLs ........................................ 156 Chinese banks’ CAR, NPLs, Trade/GDP, and OFDI/GDP, 1993-2004 .......... 161 Number of banks with CAR exceeding 8% .................................................... 170 China’s average trade/GDP and OFDI/GDP by periods ................................. 176 . 立. ‧ 國. y. ‧. Nat. al. sit. APPENDICES. er. io. Questionnaire for interviews with officials...................................................... 193 Questionnaire for interviews with bankers and experts ................................... 194 The country list for panel analysis ................................................................... 195 The variable list for panel analysis .................................................................. 196 The country list for cross-national analysis ..................................................... 197 The variable list for cross-national analysis..................................................... 198 . n. 1 2 3 4 5 6. 政治大. 學. 4.3 4.4 4.5 4.6 5.1 5.2 5.3 5.4 5.5 5.6 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 6.9. Ch. engchi. v. i n U. v.

(6) Abbreviations. Agricultural Bank of China Asian Financial Crisis Asset Management Corporation Basel Committee on Banking Supervision Bank for International Settlements Bank of China Bank of Communications Capital Adequacy Ratio China Banking Regulatory Commission China Construction Bank Communist Party Central Financial Work Commission Composite Index of National Capability Cathay Trust and Investment Corporation Democratic Progressive Party Financial Supervisory Commission (Taiwan) Financial Sector Assessment Program Financial Sector Stability Assessment Foreign Direct Investment Group of Seven Group of Ten Group of Twenty Government-owned Bank Industrial and Commercial Bank of China International Monetary Fund Kuomintang / Chinese Nationalist Party Multinational Corporation Non-performing Loan Overseas Chinese Trust & Investment Corporation (Taiwan). 立. 政治大. ‧. ‧ 國. 學. n. al. er. io. sit. y. Nat. ABC AFC AMC BCBS BIS BOC BOCOM CAR CBRC CCB CFWC CINC CTIC DPP FSC FSAP FSSA FDI G7 G10 G20 GOB ICBC IMF KMT MNC NPL OCTIC. Ch. engchi. vi. i n U. v.

(7) Organization for Economic Co-operation and Development Outward Foreign Direct Investment People’s Bank of China Private-owned Bank Renminbi Return on Assets Return on Equity State-owned Enterprise World Trade Organization. 立. 政治大. 學 ‧. ‧ 國 io. sit. y. Nat. n. al. er. OECD OFDI PBC POB RMB ROA ROE SOE WTO. Ch. engchi. vii. i n U. v.

(8) Acknowledgement When I decided to return Taiwan for my Ph.D. degree, many people doubted my choice, especially when they are aware that I just received my M.A. degree from Stanford University. This seemed to be a bold choice seen back then. But after I finished this. 政治大. dissertation, I prove to myself that pursuing a Ph.D. degree can be a rewarding journey in at least two aspects.. 立. First the foremost, I had got myself acquainted with many knowledgeable scholars. ‧ 國. 學. that have particular focuses and experiences in political economy issues in East Asia, the region of my research interest. They not only trained me with top-notched social. ‧. science research skills but also setting good examples for becoming well-respected scholars. I am too lucky to have Dr. Chen-yuan Tung to guide me through the whole. y. Nat. sit. writing process for this dissertation. He share his knowledge and personal network with. al. er. io. me without any reservation and supervise the whole process in a very efficient and. n. approachable way. The original idea of this project and its subsequent revisions came. Ch. i n U. v. from numerous debates and discussions with him; most interviews made possible in. engchi. this project cannot be done without his helps. I would like to convey my heartfelt gratitude and sincere appreciation for his supports everywhere. My appreciation also goes to Alan Hao Yang from Institute of International Relations at National Chengchi University. Although he did not serve as a member in my dissertation committee, he has always been a wonderful mentor and friend during my academic journey in Taiwan. His regional knowledge, creativity and logical thinking have bailed me out of many bottlenecks encountered the writing process. Evan Berman, Titus Chen, Eric M.P. Chiou, Chyungly Lee, Cheng-yi Lin, Jih-wen Lin, Fu-kuo Liu, Hwei-Luan Poong, Chung-min Tsai, Chen-shen Yen and my committee members are established scholars that have kept supporting me in various ways during the 4.5 years for the degree. A million thanks to their continuous supports. Moreover, studying in Taiwan provides me with advantages of geographical viii.

(9) proximity for paying many visits in several East Asian countries for fieldworks with relative ease. During those trips I am lucky enough to know many colleagues sharing similar research interests and bankers with practical experiences. I seized every chances to ask questions, conduct interviews, discuss my dissertation with them and learn their feedbacks. Inputs from those friends and scholars helped raise the dissertation to another standards. I especially thank scholars at Institute of Finance and Banking of Chinese Academy of Social Science for their inputs that make China’s story in this dissertation a more complete picture. Another advantage of studying in Taiwan is the access to funding opportunities that supports predoctoral scholar to conduct quality research and share in the international conferences. I hereby thank financial supports from National Science Council, now Ministry of Science and Technology, Ministry of. 政治大 Taiwan Brain Trust, Academia Sinica, Japan Foundation, Rockefeller Foundation, 立 Southeast Asian Studies Regional Exchange Program in Philippines, National. Foreign Affairs, Mainland Affairs Council, International Institute for Strategic Studies,. ‧ 國. 學. Chengchi University, National Chung Hsing University and Kyoto University in Japan. Finally I am indebted to my beloved families who support me in every little things. ‧. beyond academic stuffs. My daughter Jamie was born in the middle of this project. Her joining in the family started a new journey for me and provided me strength to. y. Nat. sit. overcome each obstacle. Their comforts, smiles and vigor help me pass through. al. er. io. frustration and self-suspicion nights after nights. This dissertation project will not be. v. n. possible without their close and continuous supports, which allow me to keep pursuing an academic life in the future.. Ch. engchi. ix. i n U.

(10) Abstract This dissertation seeks to answer the question of why some countries comply with high level of Basel Accords while others ignore this global governance regime by adopting a rational theory of international political economy. Such approach highlights the. 治政大costs. The theoretical model interaction between international and domestic political 立 shows that if a country is more economically powerful (weak) or less (more) important of a government’s public policy preference, which is a result of the. ‧ 國. 學. economically interdependent on global markets, and has a weaker (stronger) executive branch that is unable (able) to shield itself from domestic political factors, it is more. ‧. likely to realize lower (higher) level of Basel Accords. If a country is powerful or less economically interdependent on global markets, and has a strong executive branch, it. y. Nat. sit. has more leeway to decide the level of bank regulation. If a country is weak or more. al. er. io. economically interdependent on global markets, and has a weak executive branch, an. n. equilibrium level of bank regulation will cause equal international and domestic. Ch. i n U. v. political costs that minimize the aggregate pressure. Hypotheses are tested and. engchi. supported by time-series-cross-section data covering 91 countries from 1973 to 2005, cross-national survey data covering more than 150 countries, and in-depth qualitative case studies of China's and Taiwan's changes of bank regulations since 1980.. x.

(11) Chapter 1. Introduction. 政治大 This dissertation searches 立 for explanations of national variation of bank regulations. ‧ 國. 學. using the perspective from international political economy. Therefore this research is attributing a financial public policy outcomes to its underlying political factors. In this. ‧. introductory chapter I will first introduce the current development of global bank. sit. y. Nat. regulations and the relevant core questions. It is followed by the introduction of. n. al. er. io. theoretical framework and methodology adopted for the answers. In the end I discuss the organization of the dissertation.. Ch. engchi. i n U. v. 1.1 Global Banking Regulation and Research Questions. The core question in this research project is what political factors account for the national variations of bank regulations, or the level of compliance with Basel Accords.1 In figure 1.1, global distribution of the compliance level of national bank regulations. 1. The global bank regulation discussed in this dissertation is Basel Accord; therefore I use them. interchangeably. Unless specified as Basel 1, II, or III, Basel Accord mentioned in this dissertation represents the global regulatory framework devised and promoted by the Basel Committee on Banking Supervision in a broader sense. 1.

(12) varies widely, albeit regional clustering seems to exist (Barth, Caprio and Levine 2006:75-177). If banking standards set out in the Basel Accord are remedies for series of banking crisis and are efficient methods for stabile profitability as some suggests, why such practices cannot easily reach global harmonization? If every country constructs a stable financial system, they becomes more capable of shielding from others’ reckless banking system. But the current situation falls short of that ideal situation. Since the choice of national bank regulation is a public policy process, it nevertheless involves political bargaining among various parties. From the agenda. 政治大 interferes the due process. The developments from Basel 1 to Basel 3 and their global 立 setting stage until the implementation end, politics remains a critical factor that often. dissemination cannot be immune from such reality.. ‧ 國. 學 ‧. Figure 1.1 Global distribution of bank regulation in 2005 (low 0-3 high). n. er. io. sit. y. Nat. al. Ch. engchi. i n U. v. Note: 1.. The distribution map is produced by the author using data from Abiad, Detragiache and Tressel (2010:20-22).. 2.. In 2005, no country in the dataset was rated “0”. Starting from 1970s the discordance and opaqueness of national banking crises directly and indirectly led to series of financial crises beginning in Latin American 2.

(13) countries in the 1970s and 1980s, Asian Financial Crisis (AFC) in late 1990s, subprime mortgage crisis in the United States in late 2000s, to banking crises in several European countries until now. Since then, countries started to aware of such high risk under a discordant global financial system and called for setting up principles of international financial regulations, which should be adopted by all governments around the world. This would allow every banks compete with each other under a more complete accounting standards and more reasonable level of risk-bearing. As a consequence, businesses and individuals can control more transparent information and a safer environment for investment.. 立. 政治大. Probably the most important international organization that shoulder such. ‧ 國. 學. responsibility is the Basel Committee on Banking Supervision (BCBS) under Bank for. ‧. International Settlement (BIS). It was formerly the Basel Committee on Banking. sit. y. Nat. Regulations and Supervisory Practices established by Presidents of the Group of Ten. io. er. (G10) in 1975 after the bankruptcies of Bankhaus Herstatt in West Germany and Franklin National Bank in the United States that caused international liquidity crisis.. al. n. v i n Since then the mission of BCBSCwas to initiate best practices h e n g c h i U to regulate banks around the world. The limit of capital adequacy ratio (CAR), which is the ratio of capital to risk, was the most relevant standard to promote.. Unlike other international organizations that have teeth, BCBS was simply an international forum that allowed chief bank regulators in several powerful countries to discuss financial issues. In the mid-1990s, the role of G10 had gradually been replaced by Group of Seven (G7), which was more institutionalized than G10. G7 was a summit for advanced industrial countries, which concern the development and stability of global financial market, which hosts a large of amount of their financial resources. 3.

(14) Discussion of banking supervision became their annual focus, especially they were also hit by financial crisis in other places. The leader of G7 began to set out and goal and mission for banking supervision, and then bring it to the BCBS to more in-depth discussions of corresponding global bank regulations. Plans developed by G7, nevertheless, had received objections from non-G7 countries, especially developing countries that needed more flexible financial policy to boost economic growth.. The first important plan brought up and passed by BCBS was Basel Capital Accord,. 政治大 8% by the end of 1992 and the risk in the formula included only credit risk. For example, 立 or Basel 1, in July 1988. It stipulated that banks in each country should reach CAR of. if a bank’s risk-weighted assets amounts to US$100 million, it has to keep at least US$8. ‧ 國. 學. million capital, which is the equity in the bank’s balance sheet. Such strict regulation. ‧. confronted objections from the bankers and developing countries. They criticize the. sit. y. Nat. method of risk calculation, such as that bonds issued by Organization for Economic Co-. io. er. operation and Development (OECD) countries were considered risk-free while the risk of developing countries’ bonds were weighted 100%. Therefore banks in developing. al. n. v i n C h at the expense ofUinvestments. countries required more ready capital engchi. However, the Basel 1 was not globally mandatory; therefore the dissemination and implementation relied on the goodwill of national governments. It simply failed such expectation, which is evident in its incompetence to avoid the 1997 AFC. To overcome such problem, BCBS had started to revise the standards brought out in 1988. In order to improve the effectiveness, other kinds of risks, such as market risks, and other important regulatory dimensions were included in the revised version of Basel Accord. In June 1999, A New Capital Adequacy Framework was published that, in the first time, discussed the necessity of the three pillars for sustaining a sound financial system. It 4.

(15) later received a series of discussion and revision, and in the end was first formerly released as the first draft of Basel 2 in June, 2004. The three main pillars mechanism was the key. The first pillar manages the asset-weighted risk, which is the continuation of Basel 1’s credit risks, as well as adding market risks and operational risks into the formula for calculating banking risks. However, the calculation of risks are left for each bank’s internal risk management model. The second pillar is the supervision of national regulators on each banks’ risk-weighting model, to see if the model satisfy the international standards. Internal Capital Adequacy Assessment Process was established. 政治大 properly deal with banks in financial troubles. In other words, Basel 2 expects stronger 立 to deal with this pillar. In addition, the regulatory agency should possess the power to. legal authority held by the regulatory agency. The third pillar pertained to the. ‧ 國. 學. information disclosure requirement, which allow accessible and transparent banking. ‧. information in the financial market. It seeks to bring in private sectors, such as private. sit. y. Nat. rating agencies, in monitoring banks’ behaviors, which seems effective beyond the. io. er. public authority. Barth, Caprio and Levine (2006) found that market discipline seemed to work better than the other two pillars.. n. al. Ch. engchi. i n U. v. Although Basel 2 responded to several criticisms, such as pillar two, the world suspected the pertinence of risk models that are allowed to be chosen by banks themselves. Governments’ supervision capability was also questionable. Such suspicion had become even more legit after the world witnessed the fraudulent accounting practices and financial manipulation done by Enron. Public doubts on corporates’ self-governance remained high. Furthermore, Basel 2 has failed to stop series of financial crises in western countries since 2007, which was partly caused by the malfunction of governments and financial facilities.. 5.

(16) After several financial institutions went bankruptcies due to high-leverage ratio financial adventures, low level of public governance and emergency crisis management was exposed. Enhancing Basel 2 was voiced. In July 2009, BCBS initiated plan for improvement, expecting to raise CAR, and even higher for investment banks. Such scheme received supports from leaders participating the summit of the Group of Twenty (G20) in November 2010. The plan became the Basel 3. In addition to more conservative and prudential bank regulations, Basel 3 also set out three stages. First, each country has to harmonize international banks under its jurisdiction into Basel 3. 政治大 ensure the compliance of domestic related regulations with Basel 3. Third, each country 立. through timely domestic political and legislative process. Second, each country has to. has to ensure that the result after implementation satisfy Basel 3’s expectation. Aside. ‧ 國. 學. from raising the standards, BCBS became aware of the performance of domestic. ‧. implementation. Such problem is particularly pressing for countries simply do not have. sit. y. Nat. enough administrative capacity to manage complex domestic banking system. Even. io. er. though a country implement Basel 3, it remains a question whether problems of cronyism or corruption can be remedied. Therefore the actual international. n. al. C hserious challenges.U n i harmonization of Basel 3 confronts engchi. v. A brief review of the development of Basel Accords allows us to conclude that political factors clearly play a major role in domestic bank regulation. Therefore the main question posed in this research is what international political economy factors account for the variation of the harmonization of national bank regulation? Countries confronting different political circumstances can have different preferences for bank regulations. If this is true, then we should ask what decides the government’s preference of bank regulation. It seems that each country’s preference is shaped by the appeal from the initiator of Basel standards, BCBS members, and domestic banking sectors. If such 6.

(17) suggestion is valid, we should further ask how the interaction of international and domestic factors affect a government’s choice of bank regulation. It seems obvious and intuitive to say that any national governments cannot avoid both pressures from international society and domestic sectors. But less clear is how they interact with each other. This confusion should be addressed. In the end, one should ask how does the financial crisis affect a government’s preference, which in turn influence the outcome of financial regulation? It seems that each time of financial crisis has prompted a new round of the reform to the previous Basel Accord. With these puzzles in mind, figure. 政治大. 1.2 below illustrates the mechanism connecting the four main research questions.. 立. ?. International Government preference. ?. ?. Banking Regulation. ‧. ? Domestic. 學. Financial crisis. ‧ 國. Figure 1.2 Four main research questions. sit. y. Nat. n. al. er. io. 1.2 Introduction of Theoretical Framework. Ch. engchi. i n U. v. Recognizing both external and internal political pressures, I seek to construct a theoretical framework capable of characterizing both factors at the same times. Different from a two level game analysis (Milner 1997, Putnam 1988), which assumes a sequential order of international negotiation in the first stage and domestic ratification in the second stage, I assume that national government, while considering the level of bank regulation at home, confronted with both pressures simultaneously. This is especially true when most countries do not participate the international negotiation for Basel Accords, which seems to be globally illegitimate and weak. Therefore, in fact, each national jurisdiction has much more leeway to adjust their domestic regulatory. 7.

(18) regime. They decide the level of compliance based on their calculation of gains and costs. A sequential analysis often used in the international political economy literature will , in effect, deviates from the reality in analyzing the political economy of national bank regulations.. To characterize the calculation of both international and domestic political interests, my approach is closer to Andy Moravcsik’s liberal theory of international politics, which explains a state’s foreign policies by examining its preference. 政治大 actors in international politics; state is a representative institution constantly subject to 立 (Moravcsik 1997). It assumes that individuals and private groups are the fundamental. capture and recapture, construction and reconstruction by coalitions of social actors;. ‧ 國. 學. the configuration of interdependent state preferences determines state behavior. The last. ‧. two assumptions allow us to deal with internal and external factors. Following his. sit. y. Nat. approach, I will assess a state’s external policy interdependence situation, which looks. io. er. at the externality of a state’s bank regulation to the others and how much political costs a country will suffer due to its strength. In addition, the theoretical framework will. al. n. v i n C hsensitive to the change identify important domestic groups of bank regulation, followed engchi U. by examining the relationship between a state’s political institution and its representativeness of the nation to see its sensitivity to the pressures exerted by related domestic groups.. In my theory, I assume that national bank regulation is decided by the executive body of the government, which sees political survival as the priority (Bueno de Mesquita 2003). The executive body is ruled by a group of politically-related people who strive to remain in power as long as possible. Different types of political regime survive in different ways. For example, a democratically elected government survive if 8.

(19) the ruling party win in the national election. In a one-party autocracy, a regime dominated by a small group of party elites survive if it gains sufficient political supports from other top-ranking party personnel. No matter what kinds of political regime, the bottom line in the theory is that all political regimes are rational in a sense that they seek to maximize the length of political survival. Therefore, decisions of public policy depend on the calculation of expected gains and costs pertaining to domestic politics. The optimal decision should maximize the gains or minimize the costs. Any rational executive bodies will try to minimize the aggregate political costs resulting from a. 政治大 expect higher political costs and vice versa. 立. certain level of bank regulations. They will sense higher political pressures if they. ‧ 國. 學. International pressure can result from potential costs generated at a given level of. ‧. bank regulation. A lax level of regulation at home would lead to relatively tighter. sit. y. Nat. regulation abroad, which will put foreign banks in a less competitive situation.. io. er. Therefore foreign country can use economic or financial statecraft to exert international pressure that seek to strengthen the regulation at home. Such foreign pressures can be. al. n. v i n C h banks that failed U embodied in raising costs for foreign to observe the Basel Accord. For engchi. example, U.S.’s enforced The Foreign Bank Supervision Enhancement Act in 1991 that asked foreign banks in countries that did not implement Basel 1 for additional capital requirements if they apply for foreign branches in America. Such international pressures will be extremely high if a country is highly dependent on global economic and financial markets or the markets of the host countries.. On the other hand, political pressure comes from the outcome of wealth redistribution by the change of bank regulation. The main concerned groups are the bankers and general public. The former seeks lax and more flexible regulation that 9.

(20) allows them for seeking more risk premium and financial innovation while saving more economic resources required for practicing complex financial regulations. For the latter, in theory, they should prefer a tighter, safer and more prudential bank regulation that guards their deposits in the bank. However, a serious collective action problem exists in the general public, which further magnifies the already strong lobbying force of the banks that are able to offer abundant financial resources to both ruling authority and politician. Therefore, if we only consider domestic political factors, a government will expect higher political and economic costs and lower chance of political survival if it. 政治大 higher perceived political pressures. 立. plans to raise the level of bank regulation. Higher political costs will thus translate into. ‧ 國. 學. However, different governmental structures will create different levels of. ‧. sensitivity to domestic political costs. A government with a strong executive branch is. sit. y. Nat. more capable of fending off pressures made by banking sectors while a weak executive. io. er. branch cannot. The interaction of these two forces can be modelled and is presented in greater detail in chapter three. In general, I argue that if a country is in a circumstances. al. n. v i n C h from international that makes it more capable of shielding pressures but not domestic engchi U pressures, it is more likely to observe low level of global bank regulations; if a country is capable of shielding itself from domestic pressures but not international pressures, it is more likely to observe high level of global bank regulations; if a country is capable of shielding itself from both pressures, it has more leeway to decide the level of bank regulations; if a country is incapable of shielding itself from both pressures, it will arrive at the bank regulation that leads to equal international and domestic political costs that minimize the aggregate pressure. In chapter 3, I will use a rational approach that lay out the theoretical framework and subsequent hypotheses in details.. 10.

(21) 1.3 Methodology. Although the debates of superiority of social science research methodology sometimes pit quantitative against qualitative method, I recognize that both approaches have their unique advantages that are all beneficial for identifying social phenomenon and seeking for truth. If we have a good theory that seeks to reach a simple law-like regulation that is capable of accounting for a worldwide phenomenon, then a large N quantitative research design becomes more ideal to verify the accuracy of the theory. Although. 政治大 assumptions and sophisticated techniques strange to the complex real world and 立. quantitative analysis is useful in this sense, it nevertheless involves many mathematical. interested people; therefore it is less ideal for stretching out the theory carefully.. ‧ 國. 學 ‧. Sartori (1970) once criticized social science research as being defined too much. sit. y. Nat. by techniques that are irrelevant to the methodology. If we pay too much attention to. io. er. the sophisticated techniques, understanding of phenomena would be sacrificed. Almond and Genco (1977) shared similar concerns that each observation would. al. n. v i n elusiveCand delicate characteristics; hengchi U. compose of numerous. therefore quantifying. abstract concept, such as the degree of democracy or bank regulation, would be misleading. Therefore, a research involving investigation with spatiotemporal constraints, such as case study, would remedy the drawback of over-reliance on the quantitative approach. Lijphart (1971) mentioned that case studies is useful for in-depth hypothesis-generating and can contribute to contribute to the refinement of a theory, which makes generalization possible. Once we develop a potential theory with sufficient knowledge on it, we should relax spatiotemporal constraints and compare cases with similar traits using appropriate methods (Przeworski and Teune 1970). Such way of knowledge accumulation is a bottom-up process in the hope of constructing 11.

(22) more general theoretical frameworks.. Recognizing the relevance and usefulness of both quantitative and qualitative approaches in theory building (Fearon and Laitin 2008, King, Keohane and Verba 1994, Mahoney and Goertz 2006, Tarrow 1995), I adopt a multi-method approach that includes a large N quantitative analysis to locate potential regularities between political factors and national bank regulations, as well as conducting two in-depth case studies of Taiwan’s and China’s experiences to check for series of causal mechanisms within. 政治大 corroborating, or falsifying, the exiting studies and the research in this dissertation. 立. the hypothesis. Combining both strategies will enhance the validity and reliability for. ‧ 國. 學. For the quantitative analysis, I use data collected by scholars and international. ‧. organizations, such as Asian Development Bank, Banks for International Settlements. sit. y. Nat. (BIS), International Monetary Fund (IMF), and World Bank. The dependent variable. io. er. deals with the national level of compliance with Basel Accords. A panel data tracing bank regulations in 91 countries from 1975 to 2005 is adopted in this research (Abiad,. al. n. v i n C hdataset collected by Detragiache and Tressel 2010). This an IMF-supported project was engchi U too simple in terms of dimensions included in the operationalization. To strengthen the. robustness of the empirical findings, I also include an in-depth cross-national survey data that cover more than 150 countries (Barth, Caprio and Levine 2013). I select the survey results released in 2007 for a cross-national analysis.2 Independent variables represent each political factors of interests. It will include index to proxy international power factor, economic interdependent relationship, domestic political regime, public performance, and other related variables that should be controlled. Ordinary least. 2. The reason for selecting 2007 data will be explained in chapter 4. 12.

(23) square (OLS) estimations using panel-corrected standard errors (PCSE) are adopted for panel data. OLS regression analyses are used for cross-national estimations.. In the qualitative part of this project, I conduct two case studies of Taiwan and China’s development of national bank regulations. Both case are selected due to approximate the diverse case method, which objective is achieving the maximum variance of dependent and independent variables (Seawright and Gerring 2008:300-01). The main independent variable in this research is the combination of a country’s. 政治大 institutions. Taiwan and China represents two very different cases but allow us to 立. economic power, global economic interdependence, and its domestic political. control for cultural factors. First China is internationally strong while Taiwan is weak.. ‧ 國. 學. Although Taiwan has strong economic performance, it nevertheless suffer from the. ‧. isolation from international affairs that mute Taiwan’s voices in the process of designing. sit. y. Nat. Basel Accords. Taiwan is also very dependent on international trade; therefore high. io. er. interdependent relationship make it even weaker to counter foreign pressures. Second, although China and Taiwan are highly interdependent on external economic. al. n. v i n C h to the world earlier relationship, Taiwan started to connect than China. Therefore, both engchi U. countries’ timing for compliance with global bank regulations should be different. Should the interdependency hypothesis is true, one would expect earlier compliance with the Basel Accord in Taiwan than in China. Third, China is ruled by an authoritarian communist regime while Taiwan is a full-fledge democracy. Thus Chinese government has a very strong and independent executive body, which can shield it from domestic pressures. Taiwan, on the contrary, should be more sensitive to domestic political factors. According to the model, China should have more leeway to select its desired regulation to serve the interest of the ruling regime while Taiwan has no other way but to observe the Basel Accords. 13.

(24) In each case, I will use within-case process-tracing technique for testing the effect of financial crises. I will focus on the change of perception and policies to bank regulations before and after several financial crises, such as local financial crises, 1997 AFC, and global financial crisis starting in 2007. This allows a test for exogenous factors. Both financial crises generated repercussion and alert to Asian countries. All these would make a relevant test about whether and how financial crises affect a government’s preference and its subsequent policy. In addition, within-case process-. 政治大 cases that only vary in both independent and dependent variable. It allows us to control 立. tracing can approximate “the most similar method”, which seeks to compare two similar. for all other factors. Taiwan’s case is even more illustrative because Taiwan has. ‧ 國. 學. transited into democracy in its first direct presidential election held in 1996. Comparing. ‧. domestic factors before and after democratization would be illustrative.. sit. y. Nat. io. er. Process-tracing method for analyzing the history and development of bank regulations in Taiwan and China is adopted. The quantitative part allows me to locate. al. n. v i n C ishless ideal for making correlations between variables but causal inference. Correlation engchi U inevitably misses the multiple interaction effects between the dependent and. independent variables. Using in-depth process-tracing technique, therefore, is helping for to locate more subtle interactions between my theory (George and Bennett 2005:205-32). To produce a high-quality process-tracing evidence, I will use content analysis and in-depth interviews to trace both cases dating back from 1980s when Basel Accord started to gain its momentum. Information for content analysis will come from publications of international financial institutions, which produce monitoring reports regarding bank regulations, and local information. The former comes mainly from publications of ADB, BIS, IMF and World Bank. Most of them involve the assessments, 14.

(25) descriptions and recommendations of each country’s financial sectors and its regulations, such as Financial Sector Stability Assessment (FSSAs), Reports on Observance of Standards and Codes and reports on Basel Accord implementation. The latter sources come mainly from governmental publications, such as reports by the central banks and bank regulation agencies, academic writings and local media press. They are useful for investigating official and public attitude and responses to the call for international harmonization of financial regulations.. 政治大 potential interviewees. In Taiwan’s case, interviewees included senior managers and 立 For the in-depth interview, I first adopt snowball sampling method to locate. the head of financial regulatory agency, senior and top-level managers in Taiwanese. ‧ 國. 學. banks, and scholars. In China’s case, official contact is not possible. Therefore, the. ‧. interviewees included senior managers in China’s private banks and scholars in. sit. y. Nat. financial institutions and regulations. To remedy the lack of interviews with officials, I. io. er. rely on many official remarks published in the media. Since China tightly controls its freedom of speech, results of interviews with officials should be no different from. al. n. v i n C hof 12 interviews U what’s printed in the press. A total involving 17 interviewees were engchi conducted. Most interviews last between 30 to 60 minutes while two interviews last for. two hours. During the interview, I use open-ended questions related to the hypothesis. I design open-ended questions because interviewees possess much more practical information that does not come to my mind before. To avoid missing important information, I allow the interviewees to freely speaking their views, as long as the remarks accord with the general idea in each question. Appendix 1 and 2 document all questions asked during the interviews.. 15.

(26) 1.4 Plan of the Dissertation. After the introduction of the dissertation in this chapter, I will review existing literature regarding the political economy of Basel Accord in chapter two. It will focus on both international power analyses and domestic political institutions. In chapter three, I will lay out the theoretical framework using formal models that illustrate how a rational government deals with both international and domestic pressures. Six main hypotheses will be discussed in this chapter. In chapter four, I will first discuss large N quantitative. 政治大 to 2005 and cross-national analyses. They locate correlations between political factors 立. research designs and present empirical analysis that investigates 91 countries from 1973. and national level of bank regulations. In chapter five, I will present empirical result of. ‧ 國. 學. a case study of Taiwan’s development of national bank regulation since 1980s relying. ‧. mostly on local information and data. Four major amendments of the Banking Act in. sit. y. Nat. 1985, 1989, 2000, and 2008 are the focuses. In chapter six, I will give a case study of. io. er. China’s national bank regulation since 1978 when it opened up its economy to the world. Both case studies aim at enhancing the validity of causal relationship less obvious in. al. n. v i n C hwill conclude the U the quantitative part. Chapter seven research finding with discussion engchi of its limitations, contribution and potential policy implications.. 16.

(27) Chapter 2. Literature Review: Basel Accord and Politics. 政治大 In general, past literature regarding 立 Basel Accords can be distinguished into two types.. ‧ 國. 學. The first type mainly investigates the relationship between bank regulation and economic or financial phenomena, such as economic growth, efficiency, profitability,. ‧. occurrence of financial crisis, and etc. Such research appears mostly in the literature of. sit. y. Nat. economics, finance or management science (Eijffinger and Donato 2011). 1 They. n. al. er. io. collect and analyze large N data to locate possible correlations, which is the second. i n U. v. arrow in figure 2.1. Another type of studies examines factors that lead to various level. Ch. engchi. of compliance with Basel Accord. Most of them emphasize international and domestic political factors and how they mean to the public policy process on the harmonization of national bank regulation into Basel Accords. This type of research focuses on the first arrow in figure 2.1. They are relatively few and rely on in-depth qualitative analysis, which produces small N case study results.. 1. The reference section in Eijffinger and Donato (2011), as well as leading journals in finance, offer. many high-quality research about the correlation between national bank regulation and economic and financial phenomena. 17.

(28) Figure 2.1 Relationship of the studies of bank regulation National Banking Regulation. Political Process & Public Policy. Econ. & finan. Phenomena. In this dissertation, I focus on the first arrow, which seeks to understand the political factors behind the variation of national bank regulation outcomes. The literature review here will thus put emphasis on this line of works. Most of these literature exists in the field of international political economy, comparative politics and. 政治大 The first emphasized the role 立of global power distribution; the second focused on the. global governance. These studies can be generalized into three major lines of arguments.. ‧ 國. 學. influences resulting from the interaction between domestic political institutions and interest groups; and the third looks at the ideational factor, which treats the. ‧. internalization of economic idea to be important to shape national preference. In the. sit. y. Nat. following I review and critique existing literature according to these three types. I will. al. n. section.. er. io. brief propose a solution to address the drawback of past research in the end of this. Ch. engchi. i n U. v. 2.1 Global Power Distribution. In the financial world, some studies consider financially stronger countries have greater power and bigger says in dictating global financial regulations, as well as being more capable of forcing weaker countries to harmonize their financial regulations with the level that satisfy the interests of dominant countries. What happens inside a country or its domestic institutions is less relevant. In other words, domestic situations in all countries are given, or irrelevance to the compliance level. National governments only. 18.

(29) respond according its power status in the world.. Beth Simmons (2001) characterized the world into “dominant financial centers” and “smaller financial centers”. In her theoretical framework, the responses of smaller financial centers to the dominant ones regarding harmonization of financial regulations are determined by the interactions of the degree of externalities confronted by dominant financial centers and the degree of incentives for smaller countries to emulate the regulations suggested by dominant financial centers. If the absence of harmonization of. 政治大 dominant powers while smaller financial centers have high incentives to emulate, then 立 financial regulations in smaller countries will generate significant externalities for. multilateral institutional arrangements will be sought and promoted to facilitate greater. ‧ 國. 學. global coordination. This can be seen as “harmonization by market forces”. But when. ‧. confronted with significant externalities while smaller financial centers have less. sit. y. Nat. incentive to follow suit, the dominant financial centers will exert political pressure to. io. er. coerce others using multilateral institutions that involve specific punishments. Harmonization by political pressures can be found. On the other hand, should the. al. n. v i n externalities are not significant,Cdominant financial centers h e n g c h i U would be less willing to. promote centralized global financial harmonization.. In his book All Politics Is Global, Drezner (2007) considers economic power as an important factor to the result of international regulatory regime. The power dimension he concerned are a country’s internal market size and its vulnerability to external shocks. He argued that the stronger the country is in terms of these two dimensions, the more likely for it to alter the incentives for weaker states’ responses to the global regulatory regimes. It showed that current international financial standards were discussed, bargained and agreed upon in the club intergovernmental organizations, 19.

(30) such as G7, OECD or BCBS. They are all dominated by western economic powers. Other countries have weak voice to the bargaining result but to choose whether to be harmonize or not. His argument corresponds with Kapstein (1989) who also used power analysis to explain Japan’s compliance with Basel 1 proposed by the United States and UK during the late 1980s. He argued that at that time Washington and London forced Tokyo to observe the standard by threatening entry ban on Japanese banks. Since both the United States and UK’s internal markets are huge, Japanese government was, at that time, incentivized to adjust its national bank regulation. Gadinis (2008) argued that the. 政治大 countries; therefore forced Washington to push for other countries’ acceptance of Basel 立. creation of Basel 1 resulted from the envisaged more intensive competition from other. 1.. ‧ 國. 學 ‧. Posner (2009) offered another explanations regarding the changing global power. sit. y. Nat. structure. Before 2002, financial regulations across the Atlantic were coordinated. io. er. mostly through bilateral platforms between the U.S. and each of its European counterparts. Such arrangement had favored a stronger position for the U.S. Financial. al. n. v i n C h conformed to American regulations in Europe had basically standards. After 2002, engchi U however, cross-Atlantic coordination of financial regulations has been conducted by. the U.S. Treasury and European Commission, which strengthen Europe’s bargaining power as a whole that can match America’s financial strength. As a consequence, America has become more willing to accommodate European regulations. Using a game-theoretic model to analyze global regulatory outcomes, Daniel Tarullo (2008) demonstrated that “great power are more likely to achieve regulatory coordination at their preferred level of standards”, especially when the divergence of interests among great power on the outcome is low. In investigating international financial regulation, he observed that the contradiction within great powers is low but is high between great 20.

(31) powers and other international actors. In such scenario, a club standard will be set up to serve the great powers’ interests better but would harm other countries. Great powers can use formal or informal punishment to force the dissemination of their club standards. They used BCBS, which consists of 13 developed countries, to realize the global harmonization of 8% CAR.. These studies, in a nutshell, attributed the result of global bank regulation and the national level of compliance to the distribution of power. Other factors received less. 政治大 consequences of bank regulations are decided by global power distributions, dominant 立 attention. At least three features can be identified in those works. First, because the. financial powers are the first movers to set the standards. Other countries can choose. ‧ 國. 學. either to comply or not with various degrees of compliance results. If the powerful. ‧. insists on promoting global harmonization of its desired regulations, it has the power to. sit. y. Nat. realize. As the power distribution is constantly changing, global financial regulations. io. er. will vary in favor of the most dominant country for the time being. Second, these studies treated either U.S. or Europe as dominant financial centers while ignoring the role of. al. n. v i n smaller countries or financial C centers beyond western h e n g c h i U hemisphere. Such reality is. inevitable if we see the power distribution as the most important independent variable in understanding bank regulations. Third, power analysis seems more useful to explain the reason of why a certain global regulation is adopted but not useful in discerning its implementation in each country, especially when the domestic outcomes of regulation in each country are different.. Three features mentioned above, however, yield at least four problems. First, what constitutes the underlying dimensions of power is not yet understood. Drezner (2007) measured power according to a country’s internal economic and market size and 21.

(32) Simmons (2001) also emphasized the size of financial market, such as stock and credit markets. Are these dimensions able to approximate the financial attractiveness of a country,2 the size of political bargaining power as suggested by Posner (2009), or the combination of both? Or should we include hard power that is one of the cores of coercive power mentioned, but ignored, by Simmons (2001).3 In addition, a country with abundant financial resources might not be able to automatically transform resources into power unless the presence of effective bureaucratic system or a unified government. For example, Lohmann and O'Halloran (1994) found that although the. 政治大 under a divided government, the majority party in Congress has been incentivized to 立. United States Congress had delegated trade policymaking authority to the President,. block the President’s power to use that authority. Therefore, it is likely that policy-. ‧ 國. 學. making power of financial regulations in dominant financial centers cannot be. Nat. sit. y. ‧. measured by the possessed financial resources alone.. io. er. The second problem related to the ignorance of the roles for smaller or emerging countries. If the power matters much, we should observe a converging trend of major. al. n. v i n C h by the dominant financial regulations in ways desired countries. However, salient engchi U. divergent views and policy results can be found between dominant and weaker financial centers. As the U.S. has promoted the schemes of deposit insurance to lower the chances of bank runs, for example, Singapore has held out against the insurance mechanism in order to fend off the moral hazard problem that encourage Singaporean banks to engage. 2. Financial attractiveness here refers to what extent are a country’s financial resources attractive to the. others. For example, U.S. is financially attractive in a sense that foreign companies are willing to be listed in U.S. stock markets for polling funds. 3. Simmons mentioned that dominant power might exert its coercive political pressure to realize. harmonization of financial regulations in smaller financial centers. Therefore, tools for coercive actions might be needed in facilitating compliance. 22.

(33) in high-risk financial activities (Davies and Green 2008).4 Smaller countries do not always conform to the requests coming from dominant financial centers. Therefore, we need to understand the factors that cause such differences.. Third, if the financial power distribution is important, we need to include the roles played by emerging countries, such as the BRIC, rather than emphasizing on the investigation of western countries’ perspectives and policies of financial regulations (Helleiner and Pagliari 2011). Armijo and Katada (2014) found that more emerging. 政治大 They become more economically and financially powerful to use financial statecraft to 立. economies around the world are included in global economic discussion, such as G20.. intervene in the bargaining process of global bank regulation in major International. ‧ 國. 學. governmental organizations. Even though Posner (2009) noticed the importance of. ‧. institutional changes due to the changing nature of global power distribution, his. sit. y. Nat. analysis did not go beyond cross-Atlantic regions. Any theories of financial regulations. io. financial powers and their western counterparts.. n. al. Ch. engchi. er. seeing power as the cause should be able to explicate the interaction between emerging. i n U. v. Fourth, power analysis sheds light on why countries embrace 8% CAR of Basel 1 but cannot explain the actual variation of CAR in different countries. Furthermore, most Asian countries attained 8% CAR after the 1997 Asian financial crisis. Controlling the. 4. Singapore might be considered a financially weak country by many. However, compared with major. industrialized countries, it is still relatively weak in terms of the volume of its domestic or crossnational financial activities. For example, in 2010, the total volume of stock traded in U.S. is about 108 times more than in Singapore; net foreign direct investment in the U.S. is 45 times higher than in Singapore; private capital flow in the U.S. is eight times higher than in Singapore. Such imbalanced structure might make Singapore more sensitive to financial regulations requested by great powers like America. 23.

(34) exogenous shock, the influence of great powers might be more problematic. The role of financial crisis should be included to understand its influence on the factor of power. In sum, to make the factor of “power” a more relevant case, further research needs to clarify the underlying dimensions of power, explain the diverging policy choices among dominant and smaller countries, and go beyond western countries. A more valid proposal cannot ignore the role played by the financial crisis.. To deal with these problems, I proposed that a country’s level of economic. 政治大 the existing literature. Keohane and Nye (1977) concluded that an asymmetric 立 interdependence is possible another source of power, which received less attentions in. relationship allows the less dependent actor to generate more effective influence on the. ‧ 國. 學. other. The nature of asymmetrical interdependence highlights the source of power. Even. ‧. though, they also recognized the importance of realist concept of power and considered. sit. y. Nat. that the effect of power usually falls somewhere between those two types of power. io. er. (Keohane and Nye 1987:731). Judging a country’s interdependence status, one can investigate its balance of payments, which included information regarding external. al. n. v i n C indicators Possible trade volume, h e n g carehtotal i U. economic relationship.. foreign direct. investment (FDI), and foreign debts (Chen 2014). Since Basel Accords were nonmandatory global financial standards, each country can choose whether to implement or the degree of implementation according to its preferences. Therefore, the level of interdependent can be a good indicator for understanding a country’s level of implementation of Basel Accords. If it is highly interdependent with the world, even though it possesses enormous GDP, it would need to implement globally agreed standards to reduce costs while doing businesses with countries that had accepted global standards. As a result, one should pay attention to both a country’s aggregate economic power and its economic interdependence situation. 24.

(35) 2.2 Domestic Political System. Contrast to the power distribution analysis, in the following I review literature pertaining to domestic political factors. Literature regarding regulations, special interest group and political systems will be briefly examined and will be followed by their links to bank regulations. Critiques will be offered in the end of this section.. 政治大 between domestic politics and national regulations. Stigler (1971) argued that a state 立. Existing literature has developed economic model to tease out the relationship. has coercion power that would change the subsequent wealth redistribution after a. ‧ 國. 學. regulation has been introduced. Corresponding to Olsonian collective action hypothesis,. ‧. he found evidence to support his argument that special interest groups, which are often. sit. y. Nat. composed of firms with small number and large size, possess greater resources and are. io. er. better incentivized for desired regulations, which are more profitably to those groups at the expenses of others. This indicates that national regulations reflects the needs of. al. n. v i n C h Consumers, which interest groups formed by producers. constitute of mass public, are engchi U too weak to influence the regulatory results. Such phenomenon resembles. Addressing the problem of ignoring political pressure from the public, Peltzman (1976) also factors in political supports from the voters that can decide the political survival of the ruling authority. In his setting, regulators seek to remain in power and therefore has to evaluate the optimal balance between wealth and votes that realize political survival. The former usually comes from special interest groups through campaign contribution or indirect political support and the votes come from the society. Following the same vein, Becker (1983) introduced a more sophisticated economic 25.

(36) model that produce hypotheses of political pressures and regulatory results. He argued that if an interest group is more efficient at producing political pressure by using time, energy and money, it can successfully generate more subsidy to its favor. Such group often feature in its small size. Such line of literature indicate that to analyze domestic politics of bank regulation, one should first understand the feature of special interest groups and the public behind such regulatory regime. Frieden (1991) argued that the resulting distributional implications will force divergent domestic sectors to lobby for their own desired policies regarding the regulations of international capital mobility. To. 政治大 imperatives to investigate the underlying distribution of interests among different 立. understand financial policies or regulations in a world of global finance, it becomes. sectors. He extended such line of argument in accounting for the choices of exchange. ‧. ‧ 國. 學. rate policies.. sit. y. Nat. Through the lens of these models, a group of banks is the most important and. io. er. powerful interest group in the regulatory process. The size of bank is typically large and the number of bank is not big, which in Stigler, Peltzman and Becker’s model can. al. n. v i n C hto defend their interests. generate powerful political pressure Since banks are financial engchi U intermediaries, the last thing they lack is abundant money. Banks are likely to raise. funds more easily and less costly than other group for political pressures. In addition, retired bankers often join the regulatory agency in the government for their professional knowledge of arcane financial issues. Dinç (2005) found that government-owned banks (GOBs) finance much more money to public projects than the private banks. Such finding indicates that governments are more likely to secure funds is the relationship between it and the banks are closer, which creates high-level interdependent relationship. Huang, Shen and Lin (2011) echoed this arguing by providing Taiwan’s evidences that banks with higher political connections costs less in acquiring funds. The 26.

(37) share structure of banks also relates to the easiness for banks to cooperate with governmental policies. If a country’s financial system is dominated by GOBs, banks are more likely to follow public policies. Sapienza (2004) found that GOBs’ lending behaviors are related to the electoral results. In the areas where banks are affiliated with dominant political parties, the interest rates are lower to serve the party’s political goal. On the other hand, private-owned banks (POBs) are less likely and harder to be directed at political parties’ interests.. 政治大 supervisors often align themselves with bankers because politicians need financial 立 Admati and Hellwig (2013:193-207) commented that politicians, regulators, and. resources, which is probably one of the most important factors for elections, from the. ‧ 國. 學. banks and the banking sector need politician to act against tight bank regulation, which. ‧. they consider would harm their profitability. In addition, financial regulators are often. sit. y. Nat. retired bankers from the industry and are more likely to act in favor to where he came. io. er. from (Admati and Hellwig 2013:204-05, Braun and Raddatz 2009, Johnson and Kwak 2011). In this situation, regulatory capture is very likely to occur. Since the expected. n. al. wealth to chief executive. v i n C h and managers Uof banks officers engchi. depends on banks’. profitability and to achieve this, investments of high risk are encouraged. Profitability and risk cannot attain at the same time. Therefore, banks are incentivized to take risk for higher profits (Shiller 2012, Singer 2007:13-19). As a consequence, any bank regulations that restrained the level of risk taken will be lobbying against by the banks. Consequently banks are very likely to realize regulatory capture in their favor (Kwak 2014).. In addition to absolute level of bank regulations, banks also concern the relative laxity of bank regulation compared with other countries. This involves the concern of 27.

(38) national banks’ global competitiveness. Financial firms are seeking to maximize their global competitiveness relative to banks from other countries. In Basel 1, Japan’s subsequent compliance can be attributed to pressures from the United States, which banking sectors lobbying hard against Japan’s relatively lax bank regulation (Gadinis 2008, Kapstein 1989, Singer 2004). In fact, not only domestic banks consider competitiveness important, national governments also value global competitiveness of banks in its jurisdiction for better economic performance. Thiemann (2014) argued that the reason why off-balance sheet securitization activities of banks remained mostly. 政治大 Therefore a leeway has been created for this innovative but risky financial products. 立. unregulated is because national governments’ concerns for losing competitiveness.. Bankers successfully capture weak financial regulation that serves its interest.. ‧ 國. 學 ‧. On the other hands, the larger and more diffused consumers of bank regulations,. sit. y. Nat. in Peltzman’s word, are general public. Since the potential costs generated from the. io. er. bank regulations are vague and the financial business is extremely complex, it would be very hard for the public to cooperate to lobbying a bank regulation that redistributes. al. n. v i n C their wealth to them, or at least protect As aU consequence, regulations asked h e interests. i h ngc. by the banking sector seldom alert the public, which make banker’s regulatory capture more easily to realize. However, if the bank regulations fail to constraint banks’ risk adventure in a reasonable and controllable way, their deposits in the banks can be jeopardized due to bad investments, the occurrence of financial crisis or economic bad time. Should this happens and the banks confronts solvency or liquidity troubles, it is taxpayers’ money to pay the bill through governmental bailouts or bank insurance funds (Admati and Hellwig 2013).. However, the public often makes investment in financial firms and are incentivized 28.

(39) to embrace financial system that encourage higher returns. In economic good time, the public with certain amount of financial investment can be encouraged to stand side by side with the banks in lobbying for more competitive regulations. But in the economic bad time, especially when they are aware that lax regulations lead to financial crisis and cause losses, the public can be more likely mobilized for higher level of bank regulation. In a nutshell, although bank regulation can be a game between bankers (money) and the general public (votes), the nature of such regime inevitably makes national bank regulation to reflect better to the interests of large, concentrated, efficient, and. 政治大 However, the issue of exogenous shock or time can raise public’s influence. Financial 立 resourceful banks rather than small, diffused, and relatively poor public individuals.. crisis is likely to arouse public awareness for a safer, less risky, national financial. ‧ 國. 學. system. In addition, several research found out that governmental regulators are not. ‧. likely to let the failed banks collapse when the national election is upcoming (Brown. sit. y. Nat. and Dinç 2005, Liu and Ngo 2014). This also means that during non-election year, when. io. er. politicians care less about campaign contribution but more about public performance, the interests of general public are more likely taken into consideration in the regulatory. n. al. agencies.. Ch. engchi. i n U. v. Clearly, the domestic bank regulations can be treated as a tug of war between stronger and informative bankers, and weaker and more ignorant public. However, how does the interaction of these two forces interact with different kinds of political systems remains unclear. Milner (1997) considered a close relationship between international cooperation and domestic political institutions. In her game-theoretic setting, a national government first discusses and negotiates with foreign governments on a certain international coordination scheme. After this process, the government takes the negotiation results back home and is subject to the checking mechanism exerted by 29.