Studying the development of integrated financial sectors

This chapter presents the theoretical framework of social learning. Given the changes financial sectors underwent in the decades before the crisis, it begins with a brief overview of how the research on financial sectors has developed in comparative and international political economy. It summarizes key insights, synthesizes the progress that has been made, and highlights remaining conceptual difficulties. The subsequent sections spell out the ontological foundations and the theoretical building blocks that inform the book’s analytic prism of social learning, which is the answer provided to the difficulties identified in the first part. The chapter closes with the causal chain that underlies the mechanism of social learning, which structures the subsequent empirical chapters.

The nature of crisis responses

The final chapter concludes by discussing the policy implications of the findings for the future management of the financial sector and banking crises. It highlights major developments in banking since the financial crisis and discusses the nature of the political responses to it. The insights from the previous chapters relate to the selective reconstruction of the crisis and its consequences for political reform, competitive concerns, competing policy aims, and a bias of contemporary capitalist democracies towards the promise of future growth. Given the limits of financial regulation and the expectation of future bank bailouts, the chapter encourages a broadening of the fora in which financial knowledge is constructed.

Financial crises and the limits of reforms

The introductory chapter presents the main themes of the book. It illustrates the recurrence of financial crises and discusses the contours and limits of the financial sector reforms implemented in response to the global financial crisis from 2007 to 2009. It spells out the specificities of banking and outlines the implications of the crisis for the future role of banks in so-called bank-based financial systems. The chapter spells out the empirical puzzle and discusses the shortcomings of existing theoretical approaches in accounting for it. The social learning approach and the methodology of the research on which the book builds are presented. The chapter summarizes the book’s main argument and closes with a short chapter outline.

Social learning in response to the crisis

This chapter explains the differing conclusions drawn from the financial crisis in France and Germany. The chapter provides original empirical data that shows that the banks’ lending behaviour during the crisis cannot account satisfactorily for the differing reform priorities identified in France and Germany. The second part of the chapter explores the pre-crisis developments that triggered the differing reactions. Simply put, while social learning was about the conditions and the availability of bank lending in France, in Germany it was related to the risks and the benefits associated with innovative market-based banking and financial sector concentration. The chapter confirms the respective narratives by systematically comparing and crosschecking the diverging dynamics in the two cases, building on extensive empirical data.

Consolidating the lessons learnt

This chapter deals with policy adoption and implementation, the final stage of the causal mechanism underlying social learning. In order to be successful, its insights need to be consolidated through political reforms. This increases trust in the newly found consensus because it adds a formalized component to it. At this stage, the insights of social learning interact more directly with the formal institutions in place, shaping the concrete policy output. Depending on how successful this final step is, the insights of social learning can be more or less consequential in shaping future financial developments. While the success of the French initiatives ended with the limits of state influence and the voluntary self-interested cooperation by market actors, the coalition in Germany profited from the institutional dispositions in place and even found EU-wide support as the measures fell under European legal competence.

Comparative lessons

This chapter takes stock of the previous chapters and discusses the findings. It summarizes the book’s main argument and examines the nature of social learning with respect to true learning, the institutional dispositions in place, the role of politics, and contingency. The validity of the argument is discussed using Bayesian updating, presenting additional evidence that confirms the findings in a comparative perspective and in the light of competing hypotheses. The relevance of the social learning framework is demonstrated by applying it to the British and the US-American crisis responses and to differing outcomes on bank structural reform. The chapter closes with a brief discussion of the theoretical merits of social learning for ideational scholarship in institutional analysis, public policy-making, and economic sociology.

Adjustments to financial globalization

This chapter gives an overview of the adjustments made in France and Germany since the onset of financial globalization. In brief terms, it sketches the emergence of modern finance and the changes financial globalization has brought about. The chapter synthesizes the main characteristics of the French and the German banking sectors and their development until the financial crisis. The chapter also discusses how both adjusted to financial innovation and increased competition, strengthening their financial markets. The chapter concludes with the implications these developments have had for banking and the funding of the economy in both countries, analysing a series of empirical indictors on bank lending, bank profitability, and market-based forms of funding.

The French and the German financial crisis

This chapter analyses how French and German banks were affected by the crisis and how the crisis unfolded in both countries. It compares the governments’ responses and reconstructs how the crisis was diagnosed. The chapter shows that surprisingly different dynamics developed in both countries, despite an initially rather similar situation. Whereas the financial crisis became a veritable crisis of bank intermediation in the way it was widely perceived in France, in Germany it was primarily considered as a crisis of Anglo-Saxon finance capitalism and the failure of individual banks’ business models that had drifted away from traditional bank lending. While the French concluded that alternatives to bank intermediation should be developed, the Germans focused on strengthening classic bank intermediation. The chapter traces the dynamics that brought about the differing reform agendas and spells out the coalitions that supported corresponding political reforms.

The Great Recession and international banking reforms

This chapter discusses the French and German participation in international banking reform in the aftermath of the Great Recession. It begins with a brief overview of the origins and the spread of the global financial crisis. It then spells out key elements of the G20 reform agenda on banking regulation and it discusses the implications of bank capital requirements as well as liquidity and leverage ratios for different types of bank activities. The chapter moves on to analyse how representatives from France and Germany participated in the negotiations on Basel III and its transposition in the EU by the CRR-CRDIV reform package, studying the priorities identified in both countries. In a next step, the French and the German priorities are compared to those of representatives from the United States and the United Kingdom, given their more strongly market-based financial systems.