Global Banking as a Complex Political Economy

 

I am presently completing a book manuscript with the working title of Global Banking as a Complex Political Economy. I estimate the book as 85% complete: all five of the empirical chapters have been drafted and presented at conferences. All that remains prior to submission is the addition of some sensitivity analyses to the empirical chapters, updating of the text, and modest revision of the introductory, theory, and conclusion chapters. I hope to submit the manuscript in during the 2018-19 academic year.

The book is motivated by two puzzles and a problem. The problem is that IPE has had a fuzzy conceptualization of the global financial system, which has led the field to treat global finance as “some anonymous, distant, abstract force ‘out there’,” in the words of Eric Helleiner. This left IPE with few ways to analyze interdependencies in global finance in the post-crisis era, which leaves us at a disadvantage as we seek to understand how financial instability originates and spreads, or how global finance capital influences (and is influenced by) national politics. Though we often allude to the power of global finance capital, or the increasing sensitivity of national economies to events generated outside their borders, or the pressures faced by individual firms in a hyper-globalized market, we have fewer ways to empirically explore this political economy with precision. The book improves upon our understanding of global banking by examining the global structure, domestic regulatory politics, and firm-level behaviors in a holistic framework.

This book proposes a theory of the political economy of global banking that draws from complex networks and systems science as well as new applications of existing political economy frameworks. I argue that the most salient fact about global banking is the thickening structure of interdependence, which is unequally organized around the United States. This confers quantifiable structural power to the U.S., and conditions the opportunities and risks experienced by other national governments and the private sectors, neither of whose actions can be fully understood outside of this structural context. I first model the international banking system using modern descriptive and inferential network methods, that have been recently extended into intertemporal contexts and allow for the examination of weighted network ties. The inferential methods I use come from the tradition of exponential random graph models (ERGM).

I use inferential models to establish that global banking can be usefully conceptualized as a network that is “complex,” meaning that the structure of the network has had an endogenous impact on its development and evolution. I show that these systemic processes are much more powerful in the development and evolution of the banking network than the kinds of variables that contemporary IPE normally emphasizes, such as (monadic) domestic political institutions or (dyadic) similarities between countries. In particular, I show that this system is more hierarchical than many would (seemingly) expect, that this hierarchy has not diminished over time, that the hierarchy of the system increased in its organization around the United States after the subprime crisis, and I articulate the prominent nodes — those most likely to have a variety of forms of power and influence — within this structure.

I use this framework to explore two puzzles: that national governments do not set domestic capital regulations policy as established political economy theory would expect, nor do financial firms’ investment profiles react as expected by theory to statutory restrictions on their behaviors (i.e., prudential regulations or capital account restrictions). I locate these puzzles by summarizing the extant literature and demonstrating that neither the central tendency nor the dispersion in the behaviors of governments and firms matches the expectation: there is no race to the bottom, no climb to the top, nor any systematic convergence. To do this I leverage comprehensive balance sheet data on tens of thousands of financial firms around the world, and the combine supplement surveys of national governments’ regulatory policies with original data collection. I use a variety of statistical models to show that firms and governments differentiate themselves in ways that correlate with internal attributes, political and economic contexts, and, most importantly, their positions within the global network structure. This is in line with the political economy extension of the “preferred habitat” theoretical framework (see Winecoff (2017)). As such, a major contribution of the book is empirical: I show what the financial system looks like from the level of the firm up to macro global networked structures.

Lastly, I demonstrate the enduring importance of the structural power of the United States within the global banking network with a case study of the Federal Reserve’s international lending during the subprime financial crisis. In aggregate the Fed lent more to foreign firms than to domestic ones, and also opened up currency exchange mechanisms with foreign central banks who needed dollar liquidity, but not all were given access to the Fed’s programs. I argue that the Fed targeted its lending to those economies that were most critical to the structure of the global financial system, in order to maintain the structural integrity of global finance, because the U.S. is so greatly advantaged by its position at the core of this structure. I use the crisis to explore the applicability of four important theories in political economy at a key moment in history: the redistributive cooperation mechanism of Lawrence Broz and Thomas Oatley inspired by public choice accounts of regulatory capture, the argument by Daniel McDowell that the Fed lent internationally in pursuit of its domestic mandate, the “hegemonic stability” public goods approach made famous by Charles Kindleberger, and my argument that the Fed used its structural power to stabilize the global financial system in order to prolong and expand its structural influence. I find limited support for each of these, but the argument that the Federal Reserve lent internationally to stabilize American prominence at the core of the global banking network, and thus maintain US structural power in finance, receives by far the strongest support.

This book will make several contributions to the field of IPE. First, it provides a link between modern methods from complex network and systems science and core ideas in IPE such as complex interdependence and structural power. Second, it attacks the “levels of analysis problem” directly, by drawing from the most comprehensive data available to examine system structure, domestic policymaking, and firm-level economic behaviors within a holistic framework that is intended to have general application for the field. Third, it presents the most comprehensive examination of the political economy of global banking to date, and provides a theoretically-driven case study of policymakers’ responses to the subprime crisis to illustrate the utility of the approach.