The Politics of Financial Regulatory Agency Replacement

Abstract

As the global financial crisis has shown, regulatory agencies can at times spectacularly fail to fulfil their regulatory mandates. Yet, the conditions under which governments respond to regulatory failures by terminating and replacing their regulatory agencies have so far remained largely unclear. This paper offers an explanation for the significant variation in governments' propensities to dismantle and replace their banking regulatory agencies. Failures to ensure financial stability or international competitiveness make it electorally profitable for governments to replace their incumbent banking regulators. However, governments' incentives to respond to regulatory failures by replacing their regulatory agencies are significantly conditioned by the extent of private or public ownership in the domestic banking sector. The analysis of an original data set of 65 banking regulatory agencies in 29 OECD countries between 1975 and 2010 supports these theoretical predictions.