The bankers’ paradox: the political economy of macroprudential regulation

Andrew Baker

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Macroprudential regulation, which has emerged as a new departure in financial regulation (albeit with a longer heritage), since the financial crash, is in a fluid, evolving and highly experimental phase. Understanding its future political economy requires engaging with macroprudential's constituent concepts and how they interrelate to one another. This paper argues that the emerging political economy of macroprudential regulation revolves around five paradoxes. The first three of these are paradoxes that characterise the financial system and are identified by the macroprudential perspective. In seeking to respond to these paradoxes, macroprudential policy, generates a further two distinctly institutional and political paradoxes. The last of these is a central bankers' paradox which relates to the source of independent central bank authority and the difficulty of building legitimacy and public support for macroprudential regulation. Functioning macroprudential regulation is about executing a technocratic control project that rests on a depoliticisation strategy, that in turn risks politicising central banks, exposing their claims to technical authority to critical scrutiny and potential political backlash. This is the ultimate central bankers’ paradox in the era of post-crash political economy. Central banks conducting macroprudential regulation need to be aware of this paradox and handle it with great care.

JEL-codes: E5 E6 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2015-04-29
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon, nep-pke and nep-pol
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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