Bank-State Capture and Blame Avoidance in the EU

• In Event: Dynamics of International Organizations

Abstract

The crisis in Europe’s banks in 2009-12 was associated with deep recession, job losses and austerity policies. People who expected banks to help provide prosperity and stability were furious with their governments, which they held accountable to the crisis. Governments were ousted and extreme parties across Europe gained public support. In response, member state governments launched the European Banking Union (EBU), including supranational banking supervision by the Single Supervisory Board (SSB). The literature on EBU has so far analyzed this delegation of supervision authority mostly as a rational solution to a European market failure, with inter-state allocation conflicts. However, we argue that delegation creates opportunities for governments to avoid blame for supervisory failures because they can better shift it to European Union (EU) actors.
Governments seek to avoid being blamed for contested policies. The growing literature on blame avoidance highlights that delegation of governance tasks to third parties, especially the EU and its supranational agencies, improves governments’ blame avoidance opportunities. This project aims to contribute to the blame avoidance literature by studying how EU member state governments seek to avoid blame for banking supervision failures, an issue area that has received little attention in this literature, in spite of its political and economic importance. Banking supervision is one of the most crucial regulatory functions of the modern state, as banking crises can have severe consequences for the domestic and global economy, and pose a major threat for policy-makers to retain political office.
Bank-state relations are characterized by interdependence, which might transform into a mutual-capture relationship. Voters are poorly placed to review the government’s conduct in such an opaque policy area, and can only judge the outputs of bank supervision. Eventually resorting to taxpayers’ money in order to fund costly bank bailouts, not to mention deep banking crises that result in assets, income and job losses, are normally followed by political turmoil. We hypothesize that following bank failures the public will attribute less blame to the party in government, the more authority the SSB has to supervise banks, especially under left-wing governments, and especially the more Eurosceptic the public is.
To test the causal effects of bank supervision failure on blame attribution across the varying presence of other information signals, subjects will participate in a conjoint survey experiment. 1,200 adult citizen-residents of Germany will be randomly sampled, aiming for a Minimum Detectable Effect of three percent. Germany is chosen for this experiment because it is the most reluctant large member state of EBU. German voters are generally regarded as highly risk-averse in banking, but a politically-important part of the German banking sector is made of banks that are chartered to prioritize financial stability over profits, and all banks are supervised by an independent federal authority – Bafin. It thus can be expected that German voters on average would be less likely to attribute blame to their government if a bank fails, compared with voters in other countries. Indeed, by its reluctance to join EBU the German government seems to have revealed its lack of interest in attributing blame to an EU authority. All this makes Germany a less likely case of blame attribution in banking, so if the experiment supports the hypotheses it is likely to do so in other member states too.
After completing a pre-experiment survey, each participant will be presented with different hypothetical profiles of two parties who are running for an upcoming hypothetical election to the federal legislature, and will be asked to decide which of them he/she supports more based on randomly assigned values of a given set of nine attributes: the party’s place in or out of government, its position on economic ideology, social values and European integration, and five attributes representing hypothetical developments occurring, or situations prevailing before the election, simulating the balance of banking supervision authority (between the federal authority and the EU authority), the burden of bank bailouts on taxpayers, deterioration of banking services for individuals, and the national and personal business cycles (to control for non-banking economic effects). This process will be repeated eight times. The Average Marginal Component Effect (AMCE) of each attribute on the support for the incumbent pro/anti-EU party will be estimated in regression analysis. Our hypothesis will be supported if voting for the incumbent party is likelier in the wake of a costly bank bailout when bank supervision authority rests with the SSB; especially for left-wing governments and especially for participants that self-identify (in the pre-experiment survey) as holding Eurosceptic positions.

Authors

• Yuval Hirshorn, Tel Aviv University

• Tal Sadeh, Tel Aviv University