Why does the United Kingdom (UK) have inconsistent preferences on financial regulation? The case of banking and capital markets

Abstract

AbstractWhat explains national preferences concerning international and regional financial regulation? This article focusses on one of the main financial jurisdictions worldwide, the United Kingdom (UK). It is puzzling that since the crisis this jurisdiction has pursued stringent harmonised regulation in certain areas (banking), but not others (capital markets). We explain this in terms of how the demands of powerful economic interests are mediated by the political process and regulatory institutions. In banking, there was strong political pressure to restore financial stability, and regulatory institutions were significantly strengthened. This enabled UK regulators to resist industry lobbying and pursue more stringent harmonised rules at the international and European Union levels (“trading up”). In the case of capital markets, by contrast, UK regulators lacked political support for tougher regulation and were institutionally much weaker. As a result, the industry was far more effective in shaping UK preferences aimed at protecting the sector’s competitiveness (“trading down”).