Banking on states? The divergent trajectories of European finance after the crisis

Banking on States tackles one of the most critical issues of our time, the governance of financial capitalism. The literature on globalization contends that the liberalization of finance has homogenized the behavior of state and market actors. Some even assume that states have become irrelevant actors. By contrast, my research shows that states have been proactive in shaping the evolution of finance after 2008.

The French state has promoted a universal trajectory of finance by allowing both market and traditional finance to grow in the heart of its five largest domestic universal banks. French banks have increased their competitiveness both in global and domestic markets, but the growth of these few massive universal banks may have costly consequences for captive retail customers and taxpayers who remain, in the end, responsible for bailing them out. The German state has reinforced the incumbent position of local public banks in its domestic retail markets, while permitting its largest commercial bank, Deutsche Bank, to grow on a global scale. The trajectory of finance supported by the German state has thus been a bifurcated trajectory of finance. Due to Deutsche Bank's predicament, the future of German marketized banking appears gloomy, but traditional relationship banking has been bolstered to the satisfaction of most German SMEs. The British state has forced its commercial banks into shrinking quite dramatically while maintaining the infrastructures to attract foreign financial institutions, thereby promoting an off-shore trajectory of finance. The British model of finance is structurally imbalanced: the country has become even more dependent on foreign financial institutions and lacks the traditional relationship banking skills that may help it re-invigorate the non-financial sectors of its economy. Because it may lead to the exile of foreign capital, Brexit puts another strain on the sustainability of the British model.

States – not markets – are mainly responsible for these divergent European trajectories of finance. Banking on States analyses 12 financial policies and cases of policy enforcement – unlike previous studies that focus on a single policy or regulatory issue. It shows that states have used the policy leeway extensively to promote different trajectories of finance. Financial actors are commonly assumed to be structurally powerful because they can easily escape policies passed at the national level. This may be true for the regulation of market activities operated on a global scale: if a country puts stricter bans on derivative trading, a bank headquartered there may decide to operate this business abroad. But other policies are more difficult to escape because they regulate activities that are not easily relocated, such as retail banking. Today, retail banking and market banking are closely intertwined in the business model of global universal banks. Regulating retail banking affects global universal banks in their entirety and thus contributes to shaping the financial industry in which those banks play a dominant role.

After several decades of globalization and European integration, states have retained divergent priorities towards finance. Why? While the encompassing institutions that characterized post-war traditional models of capitalism have been disrupted, other more limited and softer institutions remain. These institutions systematically determine how actors' preferences are shaped and which actors occupy key position in policymaking processes, which lead to predictable, typical, policy outcomes. In France, the key position in decision-making processes is occupied by a close nexus of socially homogeneous elites composed of state officials and banks' top managers. French policymakers have to a large extent abided by banks' preferences. Yet there is a reciprocal character to this relationship: in important cases, banks also complied with state's preferences. In Germany, influential local governments have systematically opposed policies that may have been detrimental to "their" local public banks. On the other side, the urge to promote one German champion on the global financial scene has led federal state top officials to abide by the preferences of Deutsche bank whenever the interests of local banks were not at stake. Finally, in the UK, adversarial mechanisms of interaction within and between domestic bankers and state officials and regulators have enabled policy entrepreneurs to exploit political leverage to the detriment of British banks.

For this research, I have conducted comparisons of 12 financial regulation policies and cases of regulation enforcement in France, Germany and the UK since 2008. I have based my analysis on data collected during more than 100 interviews with a variety of prominent market and public actors, as well as on private and publicly available documentation released by administrative and business organizations.

The committee of the dissertation on which the book builds was composed of Paul Pierson (Co-Chair), Jonah Levy (Co-Chair), Steve Vogel, John Zysman and Neil Fligstein.