T02P05 - Understanding Causal Mechanisms that Make Financial Systems More (in)Stable

Topic : Comparative Public Policy

Panel Chair : Caner Bakir - cbakir@ku.edu.tr

Panel Second Chair : Jun Jie Woo - jjwoo@ntu.edu.sg

Panel Third Chair : Mehmet Kerem Coban - coban.kerem@gmail.com

Objectives and Scientific Relevance of the panel

Call for papers

Session 1 Session 1: Causal Mechanisms and Financial (in)Stability

Discussants

Mehmet Kerem Coban - coban.kerem@gmail.com - LKYSPP, NUS - Singapore

JJ Woo - jjwoo84@gmail.com - Nanyang Technological University, Singapore and John F. Kennedy School of Government, Harvard University, USA - Singapore

Bubble and crash, Chinese style: campaign-style governance and China’s stock market crisis 2014-2015

Chen Li - lichen@cuhk.edu.hk - Faculty of Social Science and Center for China Studies - Hong Kong, (China)

China’s market-oriented reforms have been carried out under a Leninist system of bureaucratic control. Unconventional forms of institutional adaptation, hybridization and innovation have featured prominently in the Chinese model of economic governance and public administration. The state-led development of stock market and its regulatory system has been a key element of China’s economic reforms. However, the complex interface of regulation and control between the Chinese party-state bureaucracy and the rapidly evolving financial market still belong to the least-understood components of China’s political economy. This article uses a model of campaign-style governance to characterize and analyze how the institutional legacy of the Chinese Communist Party (CCP)'s Leninist control and policy styles have shaped the policy instruments, mixes, processes and effects of China’s stock market regulation. It focuses on examining the case of how the Chinese authorities managed the major stock market bubble and crash between 2014 and 2015, which have generated profound and ongoing impact on China’s financial stability and reforms.

 

Co-Creation in the Governance of Financial Sector: The case of Monetary Authority of Singapore

Olga Mikheeva - olga.mikheeva@ttu.ee - Ragnar Nurkse School of Innovation and Governance / Tallinn University of Technology - Estonia

Piret Tõnurist - piret.tonurist@ttu.ee - Tallinn University of Technology - Estonia

Financial systems are characterized by inherent fragility, as was advocated by Minsky, while the ever increasing pace of technological advancement re-enforces the multitude of possibilities for financial innovations, most recently epitomized in FinTech. Hence, public sector needs to continuously keep up with the developments within a financial system in order to be an effective regulator and to either restrain or support new innovations.

 

Historically, and also owing to the abovementioned dynamics, the development of modern financial governance, financial policy and its organization have been in essence a public-private partnership. Regulatory choices shape the speed and variety of transactions, types of business models and the pace of technology-driven transformations. Increasing sophistication of financial instruments combined with a lagging behind common understanding of technological aspects of financial innovations tended to cause casino-like financial dealings and their ultimate devastating effects culminating in the recent Global Financial Crisis. Understanding technical side of finance is key not only to commercial risk assessment, but to the question of financial stability and financial governance. This is of especial relevance to supervising and regulatory authorities and to the matter of information asymmetry between regulators and innovators (corporate sector). Moreover, scholars and practitioners emphasize the conflict between existing rigid top-down bureaucracies and modern private financial organizations. In this regard, the link between financial innovation and the issue of regulation becomes clearer, while the need for regulators to have a hands-on technical knowledge of financial innovation – more apparent.

 

Traditionally financial governance has been perceived and studied as an outwardly closed system. Yet, increasing sophistication of technology facilitates the emergence of new organizational forms of collaboration between the state and corporate actors. We look at how co-creation has been effectively applied by the Monetary Authority of Singapore (MAS) in such policy domains as financial regulation and supervision as well as in policies related to promotion of the financial sector. The most recent policy initiatives include FinTech and Innovation Group, featuring a FinTech Lab, established within MAS last year, and a ‘regulatory sandbox’ following a similar experience of the UK. Thus, one of the main rationales for launching collaborative facility (FinTech Lab) is to leverage on private sector technological competence in order to better address risks and legal aspects of financial industry, which would both facilitate the promotion of financial sector (developmental goals) and feedback into policy-making (regulatory and supervisory goals).

 

We argue that new insights can be gained from looking at co-creation in financial governance where state’s partners are large and capable corporate organizations. The concept of policy co-creation brings in more loosely defined forms of organization thereby allowing for a greater emphasis on capabilities of actors, which, we argue, can be an effective way of analyzing financial policy design and implementation.

From Micro-Prudential Framework to Macro-Prudential Mechanisms: Analysis of the Banking Mechanisms in the Post 2011 Turkish Experience

Sinan Akgunay - sakgunay@gmail.com - Turkey

Caner Bakir - cbakir@ku.edu.tr - Koc University - Turkey

Many of the policy changes and financial regulations, which have been implemented during the aftermath of the 2008 GFC, have been identified and analysed within the literature political science, public policy and international political economy literature ignored causal mechanisms behind socio-economic outcomes. Despite the importance of the economic outcomes and structures of financial regulatory policies, we argue that these policy outcomes are actually a result of a set of contextual factors and behavioural actions that have taken place by the system actors. Thus this paper focuses on the transition from the micro prudential policies to the macro prudential framework in the Turkish experienceby offering the causal mechanismic explanation for what the period. In spite of the literature on causal mechanisms, prior studies emphasise the i) relationships or components within the mechanisms or systems of mechanisms leading to a causal process (Hedström and Swedberg 1998; Kuorikoski 2009) and the ii) interactions or influences of mechanisms in consideration of the contextual factors where they are embedded (Bakir 2017; Falleti and Lynch 2009). In this respect we offer a combination of these insights. We discuss that the policies in the Turkish experience were functioning through a form of a complex system of component mechanisms within a decomposable system as well as causal effects that arise from the interaction of these specific mechanisms with the context where they are embedded. We suggest that, approaching financial regulations from a mechanismic perspective, both sets a concrete picture of the system and also enables a comparative analysis of the initial design of the complex mechanism with the actual established mechanism.

Some of the theoretical and methodological weaknesses in the mechanisms research and what to do about them

Caner Bakir - cbakir@ku.edu.tr - Koc University - Turkey

This paper argues that there are theoretical and methodological weaknesses of causal mechanisms view which calls for integrated view of interactions among contextual and agency-level variables and transparent, rigours inductive research. In regard to theory, the first weakness is that it identifies mechanisms that operate at the actor level (e.g., individual and/or group level) but aggregates into larger scale outcomes, ignoring mechanisms that operate at the structural and institutional levels that inform this lower level of aggregation. Second, scholars using the mechanisms approach and institutional theory conflate and/or combine structures and institutions, failing to appreciate the analytical value of their interactions and influence on actor behaviour. Third, they conflate actors with institutions. Fourth, they omit complementarities, the various sets of structural and institutional influences that inform actions by reinforcing similar incentives. Fifth, context does not only constrain but also enables actor behaviour. Finally, mechanisms research has a mechanistic logic which assumes that causal mechanisms influence actions in the same direction. This view ignores the importance of contradictory complementarities reinforcing simultaneously opposing actor behaviour. In regard to methodology, the first weakness is that mechanismic researchers limit themselves to explain and/or explore why and how a certain outcome occurs, ignoring inductive methods that aim to generate theory from data. Second, although multiple causes are rightly understood occasionally in terms of context, agency and their interplay, weaknesses in data collection, presentation, and analysis in current mechanisms research allow for only limited progress towards qualitative rigour achieving a balance between data and its interpretation in explaining causal interactions among constructs informing actor behaviour that generate an aggregate outcome. The papers discusses how structure, institution and actor-based eclectic SIA framework and so-called Gioia Method take step forward addressing these problems. Empirical evidence comes from a comparative analysis of advanced financial systems in the run up to the global financial crisis.

 

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