The domestic politics of financial regulation: Informal ratification games and the EU capital requirement negotiations

Abstract

This paper contributes to our understanding of post-crisis financial regulation by reasserting the centrality of domestic politics in defining government preferences and explaining regulatory outcomes. It draws on Robert Putnam's two-level game approach and Foreign Policy Analysis to develop a model of a three-level informal ratification game. This adds value to existing approaches by capturing the contested nature of government preferences and delineating the causal mechanisms through which domestic groups shape international negotiations. The model is used to explain the UK's pivotal role in the reform of bank capital requirements in the European Union (EU). It demonstrates that governments are able to take advantage of a narrowing domestic ‘win-set’ by marginalising the influence of industry and building political momentum for regulatory reform. In particular, the paper shows how UK negotiators were able to exploit the increased domestic costs of agreement and synergistic strategies between negotiations to successfully oppose the maximum harmonisation of capital rules across the EU.

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