Christopher Gandrud

Information and Financial Crisis Policymaking

The degree to which governments intervene to contain financial crises varies considerably. We aim to understand why policymakers choose the level of intervention they do to contain financial shocks. In particular, we want to understand why policymakers may choose policies that create outcomes they do not want. We focus on a defining feature of financial crisis policymaking that has been largely unaddressed in the literature on policy responses to crises: policymakers lack good information about the health of their banking systems. So, they rely on their bureaucrats and other actors for necessary information. However, information providers may have different policy preferences. To understand the interactions between these actors and the implications for policy choice, we advance a signalling game of financial crisis containment. We use comparative statics and a case study of the recent Irish crisis to demonstrate how information asymmetries can have a significant impact on bailout choices.

When all is said and done: updating "Elections, special interests, and financial crisis"

How do elections affect the costliness of financial crises to taxpayers? Previous research contends that more electorally competitive countries choose policies that are less costly to taxpayers. In this paper, we update Keefer’s seminal 2007 article published in International Organization with revised data. The original article found that more electorally competitive countries had lower fiscal costs from responding to crises. The commonly used IMF/World Bank data set Keefer employed has since been extensively corrected and expanded. We update the original analysis with the newest version of this data set. After doing so, we find no evidence for an association between electoral competitiveness and the fiscal costs of responding to financial crises both within the original sample and outside of it. Our update highlights a broader methodological lesson: that the costs of responding to financial crises can take many years to be settled. Future research should explicitly address and model this delayed cost resolution.

Does Banking Union Worsen the EU's Democratic Deficit? The Need for Greater Supervisory Data Transparency

Does banking union exacerbate the European Unions democratic deficit? Using Scharpfs ‘input’ and ‘output’ legitimacy concepts, it is argued in this article that its design does worsen the democratic deficit. There are good reasons to limit ‘input legitimacy’ for politically independent institutions. ‘Output legitimacy’ is then even more relevant. Transparency is a key part of ‘output legitimacy’. It enables actors to judge whether the regulator is acting in the publics interest and can improve their outputs. This article focuses on the banking data that the supervisors collect. Data available to the European public is evaluated and compared to Americas banking union. European practices are not comparable in terms of availability or detail. An original survey of relevant officials is conducted, which results in the finding that only 11 of 28 Member States release any information on the banks they supervise. Both EU and national supervisors should provide publicly available, timely and consistent individual bank data.

Statistical agencies and responses to financial crises: Eurostat, bad banks, and the ESM

Abstract This article demonstrates the important role that the European statistical agency – Eurostat – plays in shaping tools for responding to banking crises. From 2009, Eurostat used its position as the interpreter of member state budget statistical rules to implement increasingly stringent rules for how financial crisis responses would affect public budgets. Rather than mere technical details, these rules affected crisis responses. Elected politicians, and especially those under bailout programmes, have strong incentives to minimise the direct budgetary effects of aiding failing financial institutions. By establishing and enforcing new rules about which crisis responses directly hit member state budgets and which did not, Eurostat created incentives to choose certain policies. The article explores this process by examining the creation of bad banks and the European Stability Mechanism. It makes an original contribution to both the study of the European banking union and the general role that statistical agencies can play in shaping crisis responses.

Competing risks and deposit insurance governance convergence

Why do policies often seem to converge across countries at the same time? This question has been studied extensively in the diffusion literature. However, past research has not examined complex choice environments, especially where there are many alternatives. This article fills this gap in the literature. I show how Fine and Gray’s Competing Risks Event History Analysis can be used to tease apart the causes of policy convergence. I apply the method to an examination of the reasons why, from the mid-1990s to 2007, many countries created independent deposit insurers. I find an interaction between international recommendations and regional peers’ choices, particularly in the European Union. However, convergence appears to slow under the particular conditions of a banking crisis, regardless of how well independence is promoted. Possibly due to electoral incentives, democracies seem to have been more likely to create independent insurers. Ultimately, I demonstrate how competing risks analysis can help enable future research on policy choices, complementing methods previously applied in political economy.

Explaining variation and change in supervisory confidentiality in the European Union

Abstract Some European Union member states’ financial regulators choose to make some of the data they routinely collect on individual banks publicly available. Others treat this data as confidential. What explains this difference? This paper considers the possible effects of crises, path-dependent legal institutions, and the design of deposit insurance schemes. At the national level, the paper focuses on contrasting German and Dutch cases. After the recent economic crisis, the Dutch released more data while the German authorities maintained strict confidentiality rules. The design of deposit insurance schemes provides a key reason why the level of secrecy varies, with the Dutch move from an ex post to an ex ante scheme where the government served as the ultimate backstop leading to questions about the accounts of individual banks while the German system favoured continued secrecy. The paper also describes the level of transparency at the EU level. Multilevel legal restrictions and bureaucratic capacity tilt EU banking union practices towards member states that treat financial supervisory data as confidential.

Interpreting fiscal accounting rules in the European Union

ABSTRACT In the European Union, the creation of public debt statistics starts with member state governments’ reports. The EU’s statistical agency – Eurostat – then revises. How do these actors’ incentives shape reported numbers? Governments have incentives to take a more favourable view of often ambiguous accounting rules than Eurostat. Lower debt improves governments’ performance with domestic and external audiences. Eurostat is tasked with monitoring budgets for ‘excessive’ debts. We expect governments to present debt figures that Eurostat then revises upwards. This is more likely when governments have high debts, especially when in the eurozone, and prior to elections. Financial crises heighten the number of policies needing interpretation and both actors have more incentives to shape the numbers. We examine these propositions using Eurostat’s debt revisions. We find debts are revised upwards more for eurozone countries with higher debt levels and years with unscheduled elections. Financial stress strengthens these effects.

Preventing German bank failures: Federalism and decisions to save troubled banks

Letting a bank fail is a government decision. Governments have several tools to forestall bank failures, such as regulatory forbearance, liquidity support, and recapitalization. We examine government decisions to support troubled banks. We begin with the simple assumption that governments are more likely to prevent failures of systemically important institutions. Our contribution is the examination of how federalism can affect decisions to classify banks as systemically important. Whether a bank is viewed by politicians as ‘systemically important’ varies based on how its failure would affect supporters of the government supervising and responsible for closing it. Because of this, how a federation is designed has a strong influence on which banks are given public assistance. In federations where the top level of government is solely responsible for banks, ceteris paribus there will be fewer systemically important institutions and so more banks will be allowed to fail. In federations where lower levels are responsible, there will be relatively more systemically important institutions and governments will allow fewer failures. We use this approach to understand considerable recent government support for failing banks in the German federation. Our findings are not only of interest to those working on German banking, but also those wanting to understand lobbying to create and likely outcomes in the new European Banking Union, as well as other federations.

Bad Banks as a Response to Crises: When Do Governments Use Them, and Why Does Their Governance Differ?

Many countries have used public asset management companies (AMCs, or “bad banks”) as part of strategies to restore their banking systems after crises. This includes the United States in the late 1980s, countries in East Asia and Latin America in the 1990s, and countries in Europe and Africa more recently. AMC structures, however, vary widely. Using a newly created global dataset of public bad banks, we begin to explore how domestic political institutions, international institutions, and international capital may be behind policymakers’ (a) decisions to create AMCs in response to crises as well as (b) design choices, particularly in terms of AMCs’ level of centralisation. We find evidence that countries with low levels of foreign ownership of the banking system and many highly polarised veto players are more likely to create AMCs. IMF conditionality is also associated with the creation of AMCs. We furthermore find evidence for a more nuanced relationship between democracy and AMC creation than what has been discussed in previous research. Our evidence suggests that countries with high levels of democracy, rather than being less likely to create AMCs at all are actually more likely to create decentralised AMCs.

The Measurement of Real-Time Perceptions of Financial Stress: Implications for Political Science

Responding to financial market disruptions is a defining challenge for policymakers and a central topic of political research. Yet established measures of financial conditions have significant shortcomings. Annual binary crisis variables limit our ability to explore non-linear relationships and the political effects of rapidly changing conditions. Continuous indicators have their own flaws in operationalization and reproducability. We create a continuous measure of real-time perceived stress using a kernel principal component analysis (KPCA) of Economist monthly country reports. We demonstrate the usefulness of our measure by showing that it more accurately captures the effect of financial market stress levels on electoral volatility. We also show how KPCA can be used to efficiently summarize large quantities of texts into cross-sectional time-series variables.