Hostname: page-component-cd9895bd7-jn8rn Total loading time: 0 Render date: 2024-12-22T16:49:35.624Z Has data issue: false hasContentIssue false
  • English
  • Français

An institutional perspective on governance, power, and politics of financial risk

Published online by Cambridge University Press:  06 June 2017

W. Travis Selmier II
Get access Rights & Permissions [Opens in a new window]

Abstract

Avoidance of risk and increasing returns are the two main motivators in finance. Returns are better understood and perhaps more easily regulated than financial risk, which is a complex and slippery concept. Financial risk may be best conceived of as a complementary good, but the nature of this good varies as the size of the investment position scales up. That is, the effects of financial risk may be conceived of as a private good for a small financial actor, but becomes a club good, then a common pool, and occasionally a public good as the impact of the investment position's financial risk spreads to affect more of society. Examining banking history shows us that banks and bankers have offset risk while retaining returns through structuring financial products and investment vehicles as club goods, thereby enabling financial actors to jointly benefit from ownership while harming those outside the club walls. Not surprisingly, this capacity to push risk outside club walls has grown commensurate with the political influence of banks and bankers. Laying out governance strategies and concepts, I suggest that in some circumstances pervasive club good structures in finance may be employed to gather regulation-enhancing information, to better understand the networked nature of financial risk and to craft self-governance structures.

Type
Research Article
Information
Business and Politics , Volume 19 , Special Issue 2: Property Rights, Financial Risk, and the Politics of a Networked Global Financial System , June 2017 , pp. 215 - 240
Copyright
Copyright © V.K. Aggarwal 2017 and published under exclusive license to Cambridge University Press 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Abolafia, Michael F. and Kilduff, Martin. 1988. “Enacting Market Crisis: The Social Construction of a Speculative Bubble.” Administrative Science Quarterly 33(2): 177–93.Google Scholar
Acharya, Viral, Mehran, Hamid, and Sundaram, Rangarajan K.. 2016. “Cash Holdings and Bank Compensation.” Economic Policy Review 22(1): 77–83.Google Scholar
Admati, Anat and Hellwig, Martin. 2013. The Bankers' New Clothes: What's Wrong with Banking and What to Do about It. Princeton, NJ: Princeton University Press.Google Scholar
Alessandri, Piergiorgio and Haldane, Andrew G.. 2009. “Banking on the State.” Bank of England working paper.Google Scholar
Allen, Franklin and Babus, Ana. 2009. “Networks in Finance.” In The network challenge: strategy, profit, and risk in an interlinked world, edited by Kleindorfer, Paul R. and Wind, Yoram. Upper Saddle River, NJ: Wharton School.Google Scholar
Allen, Franklin and Santomero, Anthony M.. 1997. The Theory of Financial Intermediation. Journal of Banking and Finance 21: 1461–1486.CrossRefGoogle Scholar
Aliber, Ron Z. and Kindleberger, Charles P.. 2015. Manias, panics and crashes: a history of financial crises, seventh edition. New York: Palgrave Macmillan.Google Scholar
Bagehot, Walter. 1873. Lombard Street: A Description of the Money Market. London: Henry S. King and Co. Google Scholar
Barth, James. R., Caprio, Gerard Jr., and Levine, Ross. 2005. Rethinking Bank Regulation: Till Angels Govern. Cambridge, U.K.: Cambridge University Press.Google Scholar
Bell, Stephen and Hindmoor, Andrew. 2015. “Masters of the universe but slaves of the market: Bankers and the great financial meltdown.” The British Journal of Politics and International Relations 17(1), 1–22.Google Scholar
Bhidé, Amar. 2009. “An Accident Waiting to Happen.” Critical Review 21(2–3): 211–247.Google Scholar
Boot, Arnaud W. A. 2000. “Relationship Banking: What Do We Know?” Journal of Financial Intermediation 9:7–25.Google Scholar
Boot, Arnaud W. A., Greenbaum, Stuart I, and Thakor, Anjan. 1993. “Reputation and Discretion in Financial Contracting.” American Economic Review 83: 1165–83.Google Scholar
Brewer, Elijah and Jagtiani, Julapa. 2013. “How Much Did Banks Pay to Become Too-Big-To-Fail and to Become Systemically Important?” Journal of Financial Services Research 43(1): 1–35.Google Scholar
Broz, J. Lawrence. 1997. The International Origins of the Federal Reserve System. Ithaca, NY: Cornell University Press.Google Scholar
Buchinsky, Moshe and Polak, Ben. 1993. “The Emergence of a National Capital Market in England.” Journal of Economic History 53(1): 1–24.Google Scholar
Büthe, Tim. 2010. “Global Private Politics: A Research Agenda.” Business and Politics 12(3). DOI: 10.2202/1469-3569.1345.CrossRefGoogle Scholar
Capie, Forrest, Fischer, Stanley, Goodhart, Charles and Schnadt, Norbert. 1994. The Future of Central Banking: The Tercentenary Symposium of the Bank of England. Cambridge, U.K.: Cambridge University Press.Google Scholar
Cassis, Yasmin. 1985. “Bankers in English Society in the Late Nineteenth Century.” The Economic History Review, new series 38(2): 210–29.CrossRefGoogle Scholar
Chapman, Stanley D. 1984. The Rise of Merchant Banking. London: George Allen and Unwin.Google Scholar
Chiu, Iris H. Y. 2016. “Regulating Financial Benchmarks by ‘Proprietisation’: A Critical Discussion.” Capital Markets Law Journal 11(2): 191–227.CrossRefGoogle Scholar
Cleveland, Harold van B., and Huertas, Thomas F.. 1985. Citibank, 1812–1970. Cambridge, MA: Harvard University Press.Google Scholar
Cohen, Benjamin J. 1998. The Geography of Money. Ithaca, NY: Cornell University Press.Google Scholar
Congleton, Roger D. 2012. “On the political economy and limits of crisis insurance: The case of the 2008–11 bailouts.” Public Choice 150: 399–423.Google Scholar
Cukierman, Alex. 2013. “Monetary Policy and Institutions Before, During, and After the Global Financial Crisis.” Journal of Financial Stability 9: 373–384.Google Scholar
Culpepper, Pepper D. and Reinke, Raphael. 2014. “Structural Power and Bank Bailouts in the United Kingdom and the United States.” Politics and Society 42(4): 427–454.Google Scholar
Dorfman, Joseph. 1951. A Note on the Interpenetration of Anglo-American Finance, 1837–1841. Journal of Economic History 11(2): 140–47.Google Scholar
Dowd, Kevin. 1994. “Competitive Banking, Bankers' Clubs, and Bank Regulation.” Journal of Money, Credit and Banking 26(2): 289–308.Google Scholar
Eichengreen, Barry. 1996. Globalizing Capital. Princeton, NJ: Princeton University Press.Google Scholar
Einzig, Paul. 1935. World Finance Since 1914, London: Kegan Paul, Trench, Trübner, & Co. Google Scholar
Ferguson, Niall. 1999. The House of Rothschild: The World's Banker, 1849–1999. New York: Viking.Google Scholar
Fichtner, Jan, Heemskerk, Eelke M., and Garcia-Bernardo, Javier. 2017. “Hidden Power of the Big Three? Passive Index Funds, Re-concentration of Corporate Ownership, and New Financial Risk.” Business and Politics 19(2): 298–326.CrossRefGoogle Scholar
Frank, Andre G. 1998. ReORIENT: Global Economy in the Asian Age. Berkeley, CA: University of California Press.Google Scholar
Fratianni, Michele and Spinelli, Franco. 2006. “Did Genoa and Venice Kick a Financial Revolution in the Quattrocento?” Oesterreichische National Bank Working Paper 112.Google Scholar
Gallarotti, Giulio P. 1995. The Anatomy of an International Monetary Regime: The Classical Gold Standard 1880–1914. New York and Oxford: Oxford University Press.Google Scholar
Goodhart, Charles A. E. 1987. “Why Do Banks Need a Central Bank?” Oxford Economic Papers 39.Google Scholar
Goodhart, Charles A. E. 2010. “How Should We Regulate the Financial Sector?” The Future of Finance: The LSE Report. London School of Economics and Political Science.Google Scholar
Greenbaum, Stuart I. and Thakor, Anjan V.. 1995. Contemporary Financial Intermediation. New York: Dryden Press.Google Scholar
Gorton, Gary and Mullineaux, Donald J.. 1987. “The Joint Production of Confidence: Endogenous Regulation and Nineteenth-Century Commercial Bank Clearinghouses.” Journal of Money. Credit, and Banking 19(4): 457–68.CrossRefGoogle Scholar
Hakenes, Hendrik and Schnabel, Isabel. 2014. “Bank Bonuses and Bailouts.” Journal of Money, Credit, and Banking 46(1) Supplement: 259–288.Google Scholar
Hayes, Samuel L. III and Hubbard, Philip M.. 1990. Investment Banking: A Tale of Three Cities. Cambridge, MA: Harvard Business Press.Google Scholar
Helleiner, Eric. 2002. The Making of National Money: Territorial Currencies in Historical Perspective. Ithaca, NY: Cornell University Press.CrossRefGoogle Scholar
Hidy, Ralph W. 1941. “The Organization and Functions of Anglo-American Merchant Bankers, 1815–1860.” Journal of Economic History 1: 53–66.Google Scholar
Hoag, Christopher. 2006. “The Atlantic Telegraph Cable and Capital Market Information Flows.” Journal of Economic History 66(2): 342–53.Google Scholar
Holton, Glyn A. 2004. “Defining Risk.” Financial Analysts Journal 60(6): 19–25.Google Scholar
Hou, David and Skeie, David. 2014. “LIBOR: Origins, Economics, Crisis, Scandal, and Reform.” Federal Reserve Bank of New York Staff Reports, no. 667.Google Scholar
Houben, Aerdt. 2013. “Aligning Macro- and Microprudential Supervision.” In Financial Supervision in the 21st Century edited by Kellermann, A. J.. Springer-Verlag Berlin Heidelberg: 201–20.Google Scholar
Hu, Xiaolian. 2009. On the Roots of the Current Financial Crisis. Interdepartmental Group of Twenty-four Research Papers. http://173.254.126.101/~gtwofouo/wp-content/uploads/2014/03/Hu-1.pdf (accessed 4 January 2015).Google Scholar
Hughes, Joseph P. and Mester, Loretta J.. 1993. “A Quality and Risk-Adjusted Cost Function for Banks: Evidence on the ‘Too-Big-To-Fail’ Doctrine.” Journal of Productivity Analysis 4: 293–315.Google Scholar
Jevons, W. Stanley. 1876. Money and the Mechanism of Exchange. Seventeenth Edition. London: Kegan. Paul, Trench, Trübner, & Co., Ltd., downloaded from the web, The Making Of The Modern World, 7 October 2014. Imprint of 1907.Google Scholar
Kennedy, Paul. 1987. The Rise and Fall of the Great Powers: Economic Change and Military Conflict from 1500 to 2000. New York: Random House.Google Scholar
Killick, John R. 1974. “Bolton Ogden & Co.: A Case Study in Anglo-American Trade, 1790–1850.” Business History Review 48(4): 501–19.Google Scholar
Knight, Frank H. 1921. Risk, Uncertainty, and Profit. Boston, MA: Hart, Schaffner & Marx; Houghton Mifflin. Available online from Library of Economics and Liberty, http://www.econlib.org/library/Knight/knRUP10.html (accessed 19 July 2012).Google Scholar
Knight, Frank H. 1924. “Some Fallacies in the Interpretation of Social Cost.” Quarterly Journal of Economics 38: 582–602.Google Scholar
May, Robert M., Levin, Simon A., and Sugihara, George. 2008. “Complex systems: Ecology for bankers.” Nature 451: 893–895.Google Scholar
McNutt, Paul. 1999. “Public Goods and Club Goods.” Encyclopedia of Law and Economics. http://encyclo.findlaw.com/0750book.pdf (accessed 4 July 2012).Google Scholar
Mishkin, Fredrik S. 2006. “How Big a Problem is Too Big to Fail? A Review of Gary Stern and Ron Feldman's Too Big to Fail: The Hazards of Bank Bailouts.” Journal of Economic Literature XLIV: 988–1004.Google Scholar
Moen, Jon Roger and Tallman, Ellis William. 1999. “Why Didn't the United States Establish a Central Bank until after the Panic of 1907?” Federal Reserve Bank of Atlanta Working Paper 99–16.Google Scholar
Morrison, Alan D. and Wilhelm, William J. Jr. 2004. “Partnership Firms, Reputation, and Human Capital.” American Economic Review 94(5): 1682–92.Google Scholar
Morrison, Alan D. and Wilhelm, William J. Jr. 2008. “The Demise of Investment-Banking Partnerships: Theory and Evidence.” Journal of Finance 63(1): 311–50.CrossRefGoogle Scholar
Nair, Malavika. 2016. “Caste as self-regulatory club: evidence from a private banking system in nineteenth century India.” Journal of Institutional Economics 12(3): 677–698.Google Scholar
Oatley, Thomas and Nabors, Robert. 1998. “Redistributive Cooperation: Market Failure, Wealth Transfers, and the Basle Accord.” International Organization 52(1): 35–54.Google Scholar
Oatley, Thomas, Winecoff, W. Kindred, Pennock, Andrew, and Danzman, Sarah Bauerle. 2013. “The Political Economy of Global Finance: A Network Model.” Perspectives on Politics 11(1): 133–153.Google Scholar
Odlyzko, Andrew. 2000. “The History of Communications and Its Implications for the Internet.” http://papers.ssrn.com/sol3/papers.cfm?abstract_id=235284 (accessed 16 June 2013).Google Scholar
Ostrom, Elinor. 2010. “Beyond Markets and States: Polycentric Governance of Complex Economic Systems.” American Economic Review 100(3): 641–72.CrossRefGoogle Scholar
Ostrom, Elinor and Ostrom, Vincent. 1977. “Public Goods and Public Choices.” In Alternatives for Delivering Public Services: Toward Improved Performance, edited by Savas, E. S.. Boulder, CO: Westview Press.Google Scholar
Penikas, Henry. 2012. “An Optimal Incentive Contract Preventing Excessive Risk-Taking by a Bank Manager.” Higher School of Economics Research Paper No. WP BRP 03/FE/2012.Google Scholar
Polanyi, Karl. 1944. The Great Transformation: The Political and Economic Origins of Our Time. 2001 ed. Boston, MA: Beacon Press.Google Scholar
Quaglia, Lucia. 2017. “Regulatory Power, Post-crisis Transatlantic Disputes and the Network Structure of the Financial Industry.” Business and Politics 19(2): 241–266.Google Scholar
Rajan, Raghuram. G. 2006. Has Financial Development Made the World Riskier? European Financial Management 12(4): 499–533.Google Scholar
Rasler, Karen and Thompson, William R. 2000. “Global Wars and the Political Economy of Structural Change.” In Handbook of War Studies II., edited by Midlarsky, M.. Ann Arbor, MI: University of Michigan Press.Google Scholar
Reinhart, Carmen M. and Rogoff, Ken. 2009. This Time is Different: Eight Centuries of Financial Folly. Princeton, NJ: Princeton University Press.Google Scholar
Rothschild, Emma. 1976. “Banks: The Coming Crisis.” The New York Review of Books, 27 May 1976: 16–25.Google Scholar
Salter, Alexander. W. and Tarko, Vlad. 2017. “Polycentric Banking and Macroeconomic Stability.” Business and Politics 19(2): 365–395.Google Scholar
Sandler, Todd and Tschirhart, John. 1997. “Club Theory: Thirty Years Later.” Public Choice 93: 335–55.Google Scholar
Schwartz, Herman Mark. 2017. “Club Goods, Intellectual Property Rights, and Profitability in the Information Economy.” Business and Politics 19(2): 191–214.Google Scholar
Selmier, W. Travis II. 2013. “Members Only: The Decline of Partnerships and the Rise of Club Goods Structures in Investment Banking.” Working Paper W13–12. The Vincent and Elinor Ostrom Workshop in Political Theory and Policy Analysis. Available at https://www.researchgate.net/publication/257637034 (accessed 8 March 2017).Google Scholar
Selmier, W. Travis II. 2014. “Why Club Goods Proliferated in Investment Finance.” In Handbook of the International Political Economy of Monetary Relations, edited by Oatley, Thomas and Winecoff, W. Kindred. Cheltenham, U.K.; Edward Elgar Publishing.Google Scholar
Selmier, W. Travis II, Penikas, Henry, and Vasilyeva, Kseniya. 2014. “Financial Risk as a Good.” Procedia Computer Science 31: 115–123.Google Scholar
Tilly, Richard H. 1989. “Banking Institutions in Historical and Comparative Perspective: Germany, Great Britain and the United States in the Nineteenth and Early Twentieth Century.” Journal of Institutional and Theoretical Economics 145: 189–209.Google Scholar
Tsingou, Eleni. 2015. “Club governance and the making of global financial rules.” Review of International Political Economy 22(2): 225–256.Google Scholar
van Horne, J.C. 1985. “Of Financial Innovations and Excesses.” Journal of Finance 40(3): 620–631.Google Scholar
Watkins, G. P. 1922. “Knight's Risk, Uncertainty and Profit.” Quarterly Journal of Economics 36(4): 682–90.Google Scholar
Weimer, David L. and Vining, Aidan R. 2005. Policy Analysis: Concepts and Practice. 4th ed. Englewood Cliffs, NJ: Prentice Hall.Google Scholar
Wicker, Elmus. 2000. Banking Panics of the Gilded Age. New York: Cambridge University Press.Google Scholar
Winecoff, W. Kindred. 2015. “Structural power and the global financial crisis: a network analytical approach.” Business and Politics 17(3), 495–525.Google Scholar
Young, Kevin, Marple, Tim, and Heilman, James. 2017. “Beyond the Revolving Door: Advocacy Behavior and Social Distance to Financial Regulators.” Business and Politics 19(2): 327–364.Google Scholar