Democracy and Macroprudential Banking Regulation

• In Event: Banking and Finance Regulations

Abstract

Do democracies implement more banking regulations than authoritarian states? Existing studies examine the relationship between democracy, financial development, and banking crises, but we lack an understanding of how political regimes influence banking regulations. Through examining the increased global focus on macroprudential policy, which preemptively restricts credit expansion to decrease the risk and magnitude of banking crises, I argue that democratic governance limits regulatory implementation. Because the difficulty of retrospective evaluation of macroprudential policies exacerbates the short-termism of democratic decision-making, and the heterogeneous distributional effects of regulation increase the transaction costs of veto bargaining, democratic countries tend to resist reform and maintain status quo regulatory systems. Empirically, the analysis of a panel dataset of macroprudential policies in 126 countries from 1990-2020 and case studies of the United States, China, and Hungary indicate robust empirical support for the democratic disadvantage of macroprudential regulations. The theory advances the growing debate about whether authoritarian or democratic governments best address contemporary global issues such as financial crises, contagious disease outbreaks, or climate change.

Author

• Kenya Amano, Harvard University