The Politics of Financial Regulatory Reform:
          	   Partisanship and the Privatization of Risk







                         		Jonathan Westrup
                          		Boston University



                            	westrup@bu.edu

                          
                           


                                         EUSA 2005 

                          Keywords: Financial regulation, privatization of risk

                                First Draft: Comments welcome











Britain and Germany, two of the European Union's largest economies, have made 
a radical change to their financial regulatory institutions over the past eight years. Both 
states have created a new single financial regulator, replacing the functional separation of 
responsibility between banking, securities and insurance regulators. However, the paper 
argues that the change was more fundamental than just a functional redesign of 
regulatory responsibilities but involved the replacement of a corporatist regime 
characterized by a high level of self-regulation, to one controlled by a new, powerful state 
actor and a regime that is clearly accountable to the government and parliament. Given 
the critical role that a financial regulator plays in a modern political economy, these new 
regimes can be regarded as indicating a significant change in the relationship between the 
two states and their financial markets. The purpose of this paper is to investigate why 
such a significant change has occurred in two diverse political economies. 
The paper argues that arguments used to explain previous changes in regulatory 
regimes such as American regulatory hegemony, Europeanization, the pursuit of 
economic efficiency, and ideas and epistemic communities, cannot adequately explain the 
shift from a corporatist to a state regulatory regime. Instead it is argued that the new 
regime is best explained by the changed political incentives of state actors following the 
privatization of risk and the introduction of funded private pensions. By the privatization 
of risk is meant the decision by governments to encourage the private as opposed to state 
provision of long-term pensions savings that are funded in the financial markets as 
opposed to PAYGO commitments from one generational cohort of workers to another. 
The paper argues that government actors, as recognized by Polyani in a previous era, 
have incentives to insulate individuals from economic risk and in this situation to create 
state regulatory actors to pursue this objective (Polanyi 1944).
 	The paper uses a "coalitions theory", initially espoused by Gourevitch and later 
by Frieden, Rogowski and others, which explains institutional change by tracing the 
evolving preferences of the relevant state and private actors and the changing coalitions 
that they form (Gourevitch 1986, Rogowski 1990, Frieden 1991). In terms of financial 
regulation this was an approach that Moran pursued in his study of the evolution from a 
self-regulatory to a corporatist regime in Britain in the eighties, and Luetz in her study of 
change in German financial regulation in the early nineties (Moran 1991, Luetz 1998). 
However, where the paper differs from previous coalition theory constructs is an explicit 
examination of the preferences of elected politicians as a specific state actor. The paper 
argues that the separation of elected politicians' preferences from those of other state 
actors is warranted because the changes in savings markets triggered by the privatization 
of risk has made electoral incentive relevant, where previously there was little incentive 
for political actors to become involved in a policy area that could be described as classic 
"low politics". 
It examines therefore the preferences of three distinct state actors; elected 
politicians, the officials at the Treasury/Finance ministry, and central bankers.  In terms 
of private sector actors, the paper examines banks, investment banks, pension funds and 
insurance companies by tracing the preferences of the trade groups that formally 
represent them. The paper argues that the shift to the new state regime was explained by a 
new coalition between elected politicians and Treasury/Finance officials and this new 
coalition led to the consequent exclusion of central banks which had been centrally 
involved in the design of the previous corporatist regimes. 
The paper therefore perceives financial regulatory regimes as politically 
contested; a phenomenon recognized by Zysman when he argued, "financial institutions 
are political institutions"(Zysman 1983). In this regard, it perceives changes in the 
regulatory regime as having institutional "winners and losers" with central bankers 
identified as the losers. The evolution of the new regulatory regime provides support for 
Thelen's argument that all political institutions depend upon political support for their 
continued existence (Thelen 2004). In this case, the privatization of risk has led to 
specific electoral incentives for politicians, thereby ending the cohesion of the state actors 
involved in designing the previously corporatist regimes. This separation of state actors 
allows for an explicit exploration of the role that partisan politics has played in the 
creation of the new regulatory regimes and allows for an explanation as to why it was 
center-left parties that made the change in both states. The paper argues that for center-
left parties, there was a clear electoral strategy in reaching out to potential voters affected 
by the changes in savings markets by offering policies that protected the consumer 
interest in financial markets. It also offered an appeal to traditional left support as it also 
asserted the state's role in its relationship with financial markets. 
The paper looks therefore to an endogenous explanation of regulatory change as 
opposed to the exogenous explanations contained in much of the literature looking at 
financial regulation. Moran looked primarily to "Americanization", where the "agenda of 
regulatory change in Britain was an agenda set by American events and American 
influences" as an explanation where British state and private actors had little choice but 
to acquiesce if London was to remain a competitive financial center (Moran 1991: 132).  
Such an argument is closely related to Strange's notion of American "structural power" 
in financial markets (Strange 1996). Vogel in his study of regulatory change again argued 
that state actors were primarily motivated by exogenous pressures to reform the 
governance of British financial markets (Vogel 1996). Luetz in her study of German 
securities' reform in the late eighties and early nineties again points to the influence of 
the American Securities and Exchange Commission as a catalyst in persuading key state 
actors of the need to create a securities' regulator (Luetz 1998). For Laurence, it was the 
"exit" threat of increasingly mobile investment capital that was important, a different 
variant of the American structural power argument, given that the vast majority of global 
capital was American in origin (Laurence 2001). A more quantitative approach is that of 
Simmons who sees the US as a dominant "regulatory innovator" that through strategic 
interactions with other state and private actors has triggered international regulatory 
harmonization (Simmons 2001).
	This paper argues that the hypotheses put forward are of obvious importance in 
explaining why corporatist regulatory regimes were created but cannot explain the shift to 
the state regimes observed in the two cases and that we must look at partisan politics and 
changing incentives of political actors in order to understand the change in regime. There 
are obvious parallels with some of the arguments of Cioffi and Hoepner and Gourevitch 
and Shinn in their analysis of changes in corporate governance regimes. They also point 
to the increased incentives for center-left parties and union actors to promote change in 
corporate governance regimes and to develop "transparency coalitions" alongside those 
of owners (Cioffi and Hoepner 2004) (Gourevitch and Shinn 2005).  
  	The paper can also be seen as a counterweight to the increasing attention paid to 
private institutions in determining the rules of the financial regulatory game, and a 
reminder that the institutions of the state are flexible enough to remain central to the 
evolution of financial regulation.
	The two states chosen for selection as cases can be justified in terms of a "most 
different" argument in terms of both their political and economic institutions (Mill 1843). 
Britain is in Lijphart's classic typology, a majoritarian state with relatively few veto 
points (Lijphart 1999). In terms of its economic system, it is classified as a state where 
equity based financing of firms has played the decisive role (Zysman 1983). Germany, by 
contrast, is characterized as a consensual state, with its federal political structure ensuring 
many political veto points (Lijphart 1999). In terms of its economic system, it is 
traditionally characterized as a bank based financial system (Zysman 1983). In terms of 
political economy, the two states are generally considered to be the classic examples of 
the two ideal types, with Britain as a liberal market economy and Germany as a 
coordinated market economy (Hall and Soskice 2001). 
The paper proceeds as follows. First, it describes the evolution of the previous 
regulatory regimes in the two states. Second, it examines why existing hypotheses 
struggle to explain the perceived shift from corporatist to state regimes. Third, it 
describes the privatization of risk and the pension reforms in both states before 
explaining its implications for financial regulation. Fourth, it argues why the privatization 
of risk has offered center-left parties an electoral opportunity to appeal to voters that are 
also financial consumers. Fifth, it proceeds with a description of the changing preferences 
of the state and private actors in both states. Finally, it draws implications from a 
comparison of the cases before considering some conclusions.

The Evolution of the Corporatist Regimes: 
Britain
The evolution of the financial regulatory systems reflects the different institutional 
endowments of the two states' contrasting political and economic systems. As Moran 
describes, British financial regulation, with the exception of insurance, was originally 
what he terms a club-based system (Moran 1991). This was characterized by little if any 
statutory regulation of either the banking or the securities industries but instead a system 
organized by self-regulatory groups. There was no statutory role for the Bank of England 
as the formal regulator of the banking system until the 1979 Banking Act. Securities 
regulation was effectively determined by the self-regulatory code of the Stock Exchange 
until the passing of the 1986 Financial Services Act. The passing of the second piece of 
legislation established what Moran has termed as a meso-corporatist regulatory regime 
with the statutorily empowered Securities and Investment Board (SIB) overseeing a range 
of Self Regulatory Organizations (SROs) that were created from previously existing self-
regulatory groups. 
In terms of why club regulation was ultimately replaced, Moran, Vogel and 
Laurence all point to essentially exogenous explanations of change with differing variants 
of "Americanization" perceived as key. The central actors in promoting change were 
those of the state and not the market, with the Department of Trade and Industry (the 
Treasury took responsibility for securities regulation in 1991), and the Bank of England 
ending their support for Stock Exchange self-regulation due to the need to ensure the 
continued competitiveness of the City of London so that firms with access to capital 
could compete with the increased threat of the power of well- capitalized US financial 
institutions. In terms of the role of the state, the 1986 legislation was a decisive step away 
from self-regulation to a regulatory system that loosely resembled the US regime with the 
SEC and the Federal Reserve overseeing self-regulatory organizations. The new British 
regime was also clearly corporatist because significant regulatory powers were left in the 
hands of the self-regulatory bodies or practitioner bodies.
If state actors were largely motivated by desires to ensure the competitiveness of 
the City amid increased competition, none of the accounts point to private market actors 
as having played a decisive role. Initially, domestic institutions in the securities markets 
were clearly primarily interested in protecting their domestic franchise from foreign 
competition and opposed any change in the regulatory status quo. However, it is also 
clear that private financial actors were not a monolithic bloc with the larger merchant 
banks, in particular, desirous of change so as to allow them to play on a larger financial 
stage (Vogel 1996).
The Unraveling of Corporatism
	 The new regulatory regime was controversial almost immediately. Two major 
scandals came to light in terms of pensions, both of which were deeply embarrassing to 
the government and the SIB/SRO regime. The financial collapse of the Maxwell media 
empire following the death of Robert Maxwell in 1991, brought to light evidence that the 
pension assets of the Mirror group were being used to provide financial collateral for 
other parts of the family business and that the relevant SROs had neither detected the 
fraud or had sufficient powers to prevent it. However, it was evidence of pension 
misselling that caused even greater political embarrassment for the Conservative 
government. The Thatcher government had introduced private pensions in 1988 that used 
fiscal incentives to encourage some 7 million people to opt out of both SERPS (State 
Earnings Retirement Pension Scheme) and occupational schemes to take up a personal 
pension in their place (Institute of Fiscal Studies 2000). However, evidence quickly came 
to light that many people were persuaded to opt out of schemes against their best 
interests, thereby provoking a major pensions' mis-selling scandal that proved to be 
highly politically controversial. Again, the regulatory regime had neither flagged the 
problem nor had the SROs proved to be effective in quickly punishing the relevant 
institutions or pointing the figure at senior figures within the miscreant firms. 
	The regulatory failures were not only related to pensions and the securities 
industries. Two major banking failures in the first half of the nineties brought the 
supervisory role of the Bank of England under major review. The BCCI failure in 1991 
was a high profile supervisory embarrassment, bringing into doubt the Bank's ability to 
oversee institutions with major overseas operations. However, it paled into insignificance 
as compared to the collapse in February 1995 of Barings, one of the most venerated 
names in the City of London, following the failure to observe a derivatives trader's 
massive losses (Gapper and Denton 1996). The failure prompted both a independent 
inquiry and a House of Commons Select Committee inquiry into the Bank's supervisory 
role, both of which were very critical.
Creation of the FSA
The New Labour government, some two weeks after winning the General Election in 
May 1997, announced the creation of a single regulatory authority. While the new 
regulator initially retained the name of the previous statutory regulator, the SIB, it was 
markedly different in terms of its powers. First, the self-regulatory organizations, the 
SROs were disbanded and their functions were merged into the statutory body. Second, 
the supervisory functions of the Bank of England for the entire banking system were 
transferred to the new entity. Some few months later, the organization was renamed the 
Financial Services Authority (FSA). Given these new powers, the creation of the FSA 
marked a dramatic shift in the relationship between the British state and financial markets 
by sweeping away all vestiges of the self-regulatory regime, stripping the traditional 
conduit between the City and the government of its oversight function and creating what 
can described as a new regulatory paradigm. 
Germany 
The German financial regulatory regime was quite different to that of Britain for two 
reasons. First, the tradition of corporatism was much more deeply embedded, reflecting 
the consensual nature of the political system. Second, and more fundamentally, it 
reflected the limited role of capital markets in the German economy and a financial 
system that was clearly bank based. 
The role of the state in banking regulation has had a relatively long history, dating 
back to the banking failures of the thirties, but in a modern context was formalized with 
the creation of the Bundesaufsichtamt fur das Kreditwesen (BaKred) in 1961 (Muller 
2002). However, given the limited role of formal regulation at this time, the legislation 
did not formally differentiate the role between the BaKred and the newly created 
Bundesbank, but an informal agreement was arrived at where the BaKred determined 
regulatory policy and the Bundesbank, using its federal structure, carried out the actual 
mechanics of site supervision.  
A defining comparative element of the German regulatory system was the lack of 
a federal securities regulator prior to the creation of the Bundesaufsichtamt fur den 
Wertpapierhandel (BaWe) in 1994. Luetz describes how the "Frankfurt coalition", made 
up of both state and private financial actors, had lobbied for securities reform since the 
late eighties as the private banks, in particular, were concerned that their competitive 
position was undermined by the lack of formal regulation, damaging Finanzplatz 
Deutschland and risking access to global capital markets (Luetz 1998). The key members 
of the Frankfurt coalition, as described by Luetz, were the Bundesbank, the Finance 
ministry and the private bankers' trade association, the Bundesverband Deutscher Banken 
(BdB). As in Britain in its securities reform, the key state actors, the Finance ministry and 
the Bundesbank were in agreement on the need for securities regulation. Karl Otto Pohl, 
President of the Bundesbank made a strong statement in 1989, committing the central 
bank to reform. The key difference with Britain was the importance of private sector 
actors in advocating for new regulatory institutions. 
The period between the creation of BaWe in 1994 and the decision to merge the 
regulators in 2001 was not marked by the high-level financial failures as in Britain. 
However as is discussed later, there was an important shift in German savings markets as 
the shift out of cash deposits into risk assets gathered momentum following the 
privatization of Deutsche Telekom and the dramatic rise in equity markets in the late 
nineties.
Creation of BaFin
In Germany, the SPD/Green government announced the creation of a single financial 
regulator, BaFin in January 2001. This new institution merged the three existing 
regulators, BaKred the banking regulator, BaWe the securities regulator, and BaV, the 
insurance regulator. The announcement followed what Schuler describes as "a heated 
public debate" that went on for almost two years reflecting the federal, consensual nature 
of the polity before Hans Eichel, the Finance minister announced his decision (Schuler 
2004: 12). The minister used similar terminology to that of Gordon Brown as he claimed 
that the new regulator would be both more efficient for Finanzplatz Deutschland and that 
it would serve the interests of financial consumers. 

Alternative Hypotheses
At this stage of the paper, it is appropriate to assess why existing hypotheses used to 
explain regulatory change struggle to explain the shift from corporatist to state regimes in 
the two cases. 
.
Americanization/Europeanization hypothesis

The term Americanization understands regulatory reform as an "American 
creation and a response to American circumstances", to use Moran's definition (Moran, 
2002: 266). Other variants use the term regulatory hegemony, and as a broad concept is 
perhaps the most widely used hypotheses as an exogenous explanation. The causal 
mechanisms in explaining change in this argument are, therefore, the increasing 
importance of American financial firms, both globally but particularly in Europe, which 
has forced European governments to adopt U.S. style regulatory regimes, if they wish 
their financial centers to be attractive to U.S. firms, and if they wish to allow their firms 
be able to participate in the American market. However, a quick comparison of the very 
diffuse US regulatory system, which has key roles for the Federal Reserve as overseer of 
the banking system, the SEC for the securities markets, state regulation of insurance 
companies, and a range of other regulatory agencies for other financial institutions, 
means that is little evidence of a regulatory impulse from Americanization (Government 
Accountability Office 2004) . Indeed, corporatism is still a defining feature of US 
financial regulation, as the continued, if controversial, self-regulatory roles of institutions 
such as the New York Stock Exchange prove. The removal of the Glass Steagal 
restrictions on different types of banking activities, has allowed for a greater degree of 
financial conglomeration, but there is little evidence that financial firms are advocating 
regulatory consolidation. In terms of state actors, the Federal Reserve chairman Alan 
Greenspan, has specifically ruled out the case for consolidation (GAO 2004). 
Europeanization, defined by Risse et al as emergence and development at the 
European level of distinct structures of governance (Cowles, Caporoso and Risse 2001) 
has also played no role to play in the shift from corporate to state regimes. Given the 
diverse designs of national regulatory structures, with major states in the European 
Union, such as France, Italy and Spain maintaining functional separation, both the 
Lamfallussy proposals, the Financial Services Action Plan and the European Parliament 
have shied away from proposing unanimity in regulatory design. However, there are 
interesting parallels with the German and British cases, when EU governments decided 
not to give the ECB a role in overseeing the supervision of banking despite very active 
lobbying for such a role (Padoa-Schioppa 2004). Instead they decided to create functional 
EU level regulators, with a banking regulator in London, securities in Paris, and 
insurance in Frankfurt, thereby retaining the right to merge them at a future date. (Davies 
2004). 

Economic Efficiency Hypothesis
Financial institutions, and the products that they sold, began to become 
increasingly similar during the nineties. The rise in both the number of financial 
conglomerates, the bancassurance model, and a situation where banks, insurance 
companies and securities houses all sold each others' products, began to make the case 
for a division of regulators on functional grounds, appear increasingly anachronistic 
(Lumpkin 2002). For financial firms there was the attraction of reduced transaction costs 
in interacting with fewer regulators. For Treasury/Finance actors there was the appeal of 
a more efficient regulatory structure, improving the competitiveness of domestic financial 
centers while also allowing for a better appraisal of financial firms' total risk, thereby 
reducing the risk of regulatory failure (Davies 2004, Padoa Schioppa 2004). 
However, for central banks, such changes created two specific problems. First, 
such changes took them away from their areas of banking expertise, and exposed them to 
consumer regulatory issues which they traditionally had little experience. Second, it 
raised the issue of moral hazard in so far as the question as what financial institutions 
were to be covered by the central bank's traditional lender of last resort function 
(Goodhart 2002). These problems coincided with an important change in the relationship 
between governments and central banks, as the Bundesbank paradigm of monetary policy 
independence became increasingly the norm following the Maastricht Treaty, leaving the 
question as to the accountability of central banks' prudential responsibilities in an 
awkward position. A further question arose in states that signed up for European 
Monetary Union and thereby relinquishing responsibility for monetary policy to the 
European Central Bank, as to what exactly was the role and continued responsibilities of 
a central bank. Central banks were placed therefore in an awkward dilemma that proved 
to have important consequences for their regulatory roles. 
A financial efficiency hypothesis appears therefore to offer some strong 
arguments.  For state actors, there was a clear incentive in terms of improving the ability 
to assess the risk of financial institutions. For private financial actors, there was the 
attraction of lower transaction costs. Is it possible to argue that the pursuit of increased 
economic efficiencies could alone explain regulatory reform? There are three important 
arguments as to why such an argument is not sufficient to explain the regulatory change 
we have observed. 
First, it would be a fair assumption that states with the most integrated financial 
institutions would have the greatest incentive to merge their regulators. However, as 



Table 2:  Bank and Insurance Market Share of Financial Conglomerates

%  Banking
% Insurance
Total
Britain
57
12
69
Germany
10
75
85
France
67
30
97
Italy
37
21
58
Prast and van Lelyweld (2004)
Table 2 points out, this does not appear to be the case as neither Britain and Germany 
have comparably different level of integration as compared to France and Italy which 
have chosen not to integrate their regulatory structures. Second, the fact that the United 
States, the state with the largest financial services sector economy in the world has 
chosen not to merge its regulatory structures appears to indicate that other hypotheses are 
required. This assumption is supported when it is considered that three large EU member 
states; France, Italy and Spain have also chosen not to merge their regulators. Third, 
particularly in the British case, Treasury/Finance actors were not able to persuade right of 
center political actors when in power to agree to regulatory reform. Economic efficiency 
arguments therefore depend upon government actors to be persuaded upon their political 
advantage. 
However, where economic efficiency does play a role in explaining change was 
the added impetus the creation of the FSA gave to both German state and private actors 
interested in promoting regulatory change, an argument that without a single regulator, 
Finanzplatz Deutschland was again placed at a competitive disadvantage. 

Ideas/Epistemic Communities Hypothesis
The role of ideas and epistemic communities in explaining change in economic 
institutions has become increasingly popular over the past few years (Haas 1992, Hall 
1993, McNamara 1998, Schmidt 2002, King 2005). McNamara has laid out a useful 
three-stage ideational model that explains how ideas and the epistemic communities that 
promulgate them can be significant in explaining change based on policy failure, 
paradigm innovation and policy emulation (McNamara 1998). In the case of Britain, 
there was a clear case of policy failure in the corporatist regulatory regime. However, for 
the state and private sector actors interested in promoting change during the mid-nineties, 
there was no obvious regulatory paradigm to turn to when considering reform of their 
regulatory structures. The only OECD states that had chosen to consolidate their 
regulatory structures into a single regulator were the three Scandinavian countries, 
Norway in 1986, Denmark in 1988 and Sweden in 1991, and as Taylor describes, they 
were different from virtually all other OECD states in so far as their respective Central 
Banks had never had responsibility for banking supervision (Taylor 1997). As described, 
the US, the regulatory regime that had provided the paradigm for the previous iteration of 
regulatory change, had not changed its very functional separation of regulators. 
In terms of the epistemic communities, neither of the two key academic reports 
suggested a single regulator, but rather a "Twin Peaks" model where the prudential and 
the conduct of business activities of regulation were to be housed in separate regulatory 
institutions (Taylor 1996, Goodhart 1996).  However, there is no evidence that British 
Treasury actors actively considered the adoption of the Twin Peaks model when deciding 
upon the new regulatory architecture. Britain decided therefore, in McNamara's terms, to 
create a new regulatory paradigm.
For Germany, the use of McNamara's model does offer some interesting 
applications. While the previous regulatory regime did not failed in a dramatic sense, the 
creation of the FSA and the apparent success of its new paradigm, did offer German 
actors interested in promoting a new regime a template that could be used as an example 
when promoting regulatory change. Policy emulation was therefore potentially significant 
in explaining the creation of BaFin. However, as with the economic efficiency argument, 
there is considerable doubt as to whether a CDU/FDP government had been elected in 
1998, BaFin would have been created even with the existence of the FSA model.

Privatization of Risk
At this stage it is important to expand upon the term privatization of risk and to 
tease out why it is important in explaining the changed political incentives of center-left 
parties. There are important differences between Britain and Germany in the degree to 
which the privatization of risk has occurred, with change happening earlier and more 
radically in Britain. In terms of the British case, the Conservative government of 
Margaret Thatcher had changed the pension system in 1988 by giving fiscal incentives to 
encourage individuals to shift out of the both SERPS (State Earnings Retirement Pension 
Scheme) and occupational schemes into private funded schemes where both the level of 
savings and the degree of investment risk passed to the individual. Such schemes proved 
to be very popular with some 7 million people taking advantage of the incentives (IFS 
2002). However, this was only one component of other changes in the pension system. 
Parallel to the change in the state system, was the decision by increasing number of firms 
in the nineties to alter their pension systems from one of defined benefit to defined 
contribution schemes (Pension Commission 2004: 85). Again, this shift meant that 
instead of the firm guaranteeing an employee a pension of a certain percentage of salary, 
the decision on both the level of pension savings and the type of investment risk was 
transferred to the individual. The Pension Commission estimated that almost one in five 
firms changed their schemes between 1995 and 2000 (Pension Commission 2004: 85). 
For the government and firms, the incentive was clearly to reduce costs as demographic 
changes made pensions an increasingly large future liability (Pierson and Myles 2001). 
For the individual, there was a very explicit exposure to the volatility of financial markets 
in terms of determining the ultimate size of their pension savings.
The major changes to the German pension system were not enacted until 2001 
with the introduction of what became known as the Riester reforms. The fundamental 
nature of these reforms was the introduction for the first time of a defined contribution 
occupational scheme where employees receive fiscal incentives to participate and where 
the funds have to be invested in the financial markets. These funded schemes leave the 
decision to the individual worker to decide where to invest their contributions. While the 
uptake of the new scheme was initially disappointing, and further changes followed in 
2003, the reforms marked a major long-term shift away from state pension provision to 
one dependent upon financial market returns.
However, the introduction of funded pensions was only one, if very significant 
element of the privatization of financial risk. Both governments have offered tax 
incentives over a prolonged period to encourage long-term savings, which while 
structured differently, had a similar effect of encouraging individuals to switch their 
savings out of bank deposits into risk assets such as stocks and mutual funds managed by 
financial institutions. The encouragement of citizens to buy shares in  privatized  state 
companies was a further aspect of the state's encouragement of the purchase of risk 
assets. 

Table 1. Composition of household assets (in % of gross financial assets) 

     
1980
1990
2000
Britain






Germany
Deposits
Risk Assets 

Bonds
Equities
 Institutions

Deposits
Risk Assets

       Bonds
       Equities
       Institutions



43
53 

  7
12
30

59
33

12
  4
17



31
61 

  1
12
48

48
44

16
  7
21



 
22
74
 
  1
17
56

34
60

10
16
34



                     Source: Davis 2003

Privatization of Risk and Regulatory Reform
What does this transfer of risk from governments and firms to individuals mean 
for the politics of financial regulation? There are two, related paths that can be identified 
as important in influencing the incentives of political actors. First, the increased exposure 
of voters to the viscitudes of the financial markets gives politicians a clear incentive to 
ensure that that the interests of these financial "consumers" are represented in the 
governance of those markets. Second, there is an increased incentive for political actors 
to ensure that savings institutions, such as banks, mutual funds and insurance companies, 
where voters place their savings, are well run and remain financially solvent. It is clear 
that the incentive for state actors to ensure that financial institutions do not fail is not 
new. The introduction of deposit insurance and lender of last resort mechanisms to ensure 
confidence in the banking sector is evidence of such an incentive. However, the argument 
here is that the shift in risk to the individual raises the political costs of financial failure 
thereby making the prevention of such failure more desirable. 
However, as the privatization of risk increased and with it the number of voters 
exposed to financial markets, it was the incentive to create a regulatory institution with a 
strong consumer mandate that became a new phenomenon. An institution with such a 
mandate can be seen both to play a proactive role in creating suitable safeguards for 
financial consumers while also allowing for a level of blame avoidance when regulatory 
failures do occur.
It is important to point out that this objective of consumer protections can, 
however, come into conflict with the political incentive to promote other macroeconomic 
goals. In this regard, Lindblom's famous phrase " the privileged position of business" in 
capitalist democracies encapsulates the regulatory dilemma faced by government actors 
as states depend upon private entrepreneurs to develop and run businesses that generate 
wealth (Lindblom 1977). A regulatory regime must therefore balance the interests of 
financial consumers with those of private financial actors that have played an 
increasingly important role in the economy while also determining the capacity of 
business to generate wealth by providing credit and the means by which savings are 
invested in the economy. Such private financial actors are quick to point out the onerous 
nature of regulation in terms of cost and the effect on a financial center's competitive 
position. 

Center-Left parties and Consumer Protection
The paper argues that it is not a coincidence that center-left parties in both our 
cases have initiated regulatory change. It can safely be assumed that political parties seek 
policy areas that increase their chances of election (Downs 1957). In this regard, 
Kitschelt points to the incentives for parties "to map new issues onto an existing 
unidimensional space of competition" so as "to take advantage of opportunities offered 
by the dynamic of competitive party democracy' (Kitschelt 2001: 265). The paper argues 
that there are two reasons why the issue of protecting the interests of financial consumers 
raised by the privatization of risk is attractive to center-left parties such as New Labour 
and the SPD/Green coalition. First, the attraction of such an issue is that it is clearly 
consistent with the consumer orientation of left and green parties and their traditional 
suspicion of financial institutions and the role of financial markets. Second and more 
importantly, it offers the opportunity to appeal to all those voters that had become 
exposed to financial markets through the changes in the long-term savings markets. Such 
a policy has added electoral attraction at a time when center-left parties have struggled to 
find issues that lay out explicit differences across the ideological spectrum (Garrett and 
Lange 1991).
However, the electoral advantage of creating a single new regulatory agency was 
also attractive because it could also be couched in efficiency terms, appealing to a wider 
business audience that "new" left parties interested in a third or Mitte Weg did not want 
to alienate. 
 
The paper now turns to an examination of the preferences of the specific state and private 
actors in light of the privatization of risk.

State Actors:
Treasury: 
For senior Treasury officials, the readily apparent failings of both the SIB/SRO 
regime and those of the Bank of England prompted serious concerns. The Treasury's first 
priority, which as a government department had only assumed responsibility for the 
regulatory framework from the Department of Trade and Industry in 1992, was to ensure 
the continued competitiveness of the City of London because of its major contribution to 
the national economy. This concern was heightened because of a perception that much of 
the City's activities were not naturally rooted in the economy and that regulatory 
duplication and failure could undermine their competitive position (Interview: London 
11/8/04). The Treasury's reaction to regulatory failure and the increased political salience 
of financial regulation due to the privatization of risk was therefore a conscious attempt 
to improve its efficiency.
 By 1996, the management board of the Treasury had agreed in principle that the 
regulatory structure should be consolidated into a single regulator, but did not consider 
that there was a possibility that the Bank of England would agree to give up its 
supervisory role of the banking sector. There was a realization that such a change was 
fundamental given that no other major economy had attempted a similar move, but it was 
argued that there was no other realistic policy alternative. However, the Conservative 
Chancellor, Ken Clarke, when presented with the proposal, showed no interest in it. 
(Interviews: London 11/8/04 and 11/9/04).  The option of handing over regulation to the 
Bank of England as a means of consolidating all regulation was not seriously considered 
as it was felt that would have entailed "too many conflicts of interest", due primarily to 
fears of contamination of the Bank's monetary responsibilities (Interview: London 
11/8/04). Such a transfer of powers would also have entailed a serious loss of 
responsibility for the Treasury and given the clear, if low-key, rivalry between the two 
institutions, it was never realistically considered. 
	For the Treasury as an institution, economic competitiveness and efficiency 
arguments were clearly prevalent. However, due to the lack of interest from the 
Conservative chancellor, they had no means of implementing their desire for change.

Bank of England;
Having played a pivotal role in the decision to remove "club government" from the City 
in 1982, and in designing the SIB/SRO structure that was decided upon in 1986, the Bank 
was the clear regulatory "loser" among the regulatory actors during the nineties as its 
supervisory role came under serious scrutiny and was ultimately removed. 
The Bank defended itself vigorously following BCCI and Barings by arguing that 
failure was inevitable under any regulatory regime and that the Barings failure had not 
meant any loss of government moneys (George 1995). It did not officially discuss any 
formal change in its supervisory role but in internal discussions, considered creating an 
agency such as the Commission Bancaire in France, which while formally controlled by 
the Banque de France, was a separate agency that undertook supervisory responsibilities 
(Interview: London 5/18 2004). 
However, if the failure of BCCI and Barings had put the supervisory role under a 
major cloud, the Bank began to assume a more public role in terms of its monetary policy 
role following the Conservative government's decision to publish the minutes of the 
meetings between the Chancellor and the Governor of the Bank in 1994. (King 2005). 
New Labour's decision to grant operational independence to the Bank for conduct of 
monetary policy days after the May 1997 election victory was greeted with great elation 
by both the financial markets and the bank. However, the Chancellor's statement at the 
time announced that it was the government's intention to consider transferring part of the 
Bank of England's responsibility for banking supervision to another statutory body. 
(Brown May 6th 1997). This was taken by the Bank to mean that this was a proposal to be 
discussed so there was major surprise when on the 20th May, the Chancellor informed the 
Governor that all supervisory responsibilities were to be removed and a new single 
financial regulator was to be established (Brown May 20th, 1997) . The news was 
described by two former senior Bank of England officials as "a bolt from the blue" and 
that it "came as a thunderclap" with the result that it was widely reported that the 
Governor consider resigning (Interviews: London: 5/17/04, 5/18/04). 
The Bank of England, in contrast to the Bundesbank, did not publicly comment 
after the FSA decision, issued no formal statement and did not lobby against the decision 
. There was a realization that given the political realities, there was no choice but to 
accept the loss of regulation and consequent prestige. It is easy to point to the failures of 
both BCCI and Barings as the key factors in New Labour's decision to remove 
supervision from the Bank. However, it is clear from a comparative perspective that 
banking failures do not always mean that governments choose to strip central banks of 
their oversight role. The example of Credit Lyonnais in France, which was bailed out in 
spectacular fashion in 1995 and ultimately cost the French government some 24 billion 
dollars, led to no change in the supervisory role of the Commission Bancaire and its 
overseer, the Banque de France (Coleman 2001).

Private Actors
There is little formal evidence that private financial actors or their representative 
groups lobbied for a single financial regulator. None of the four key trade groups that 
represent the City firms, the London Investment Banking Association (LIBA), the British 
Bankers Association (BBA), the Investment Managers Association (IMA), nor the 
Association of British Insurers (ABI) sought such a change, either formally or informally. 
There was undoubted dissatisfaction expressed by both LIBA and the IMA to the 
Treasury about the cost of regulatory duplication caused by the SRO structure. However, 
it is clear all four groups were shocked at New Labour's decision to create a single 
regulator and, in particular, to remove the Bank's powers of supervision (interviews).
There were four important reasons for this surprising acquesance. First, New 
Labour had just been elected with a very large majority and could claim a decisive 
electoral mandate to implement their manifesto, making it difficult for financial firms to 
oppose the new governments' policies. Second, the institutional ownership of the City in 
terms of the securities markets was unrecognizable from that of a decade earlier. 
Virtually all the major stockbroking firms and investment banks had sold their businesses 
to American or continental firms, leading to the term Wimbledonisation, where as with 
the tennis tournament, no British player could win but the tournament was always a 
success (Augar 2001). The consequence of this was a significant disruption in the long 
established networks between the City and state actors during the nineties as compared to 
a decade previously. Third, the consolidation and conglomeration among financial firms 
that had taken place over the previous decade, created a collective action problem in 
terms of firms and their industry groups in terms of presenting a cohesive position 
(Interview: May 2004). For example, investment bankers had different regulatory 
priorities from fund managers and it was difficult for individual firms to present a 
coherent regulatory position. Fourth, the creation of a strong regulator with the power to 
oversee markets, may well have been in the institutions' interests in terms of assuaging 
the concerns of investors as to the credibility of their savings following the high-profile 
regulatory failures. Financial firms had been, not surprisingly, a major supporter of the 
Conservative government's policies that promoted the privatization of risk. The pension 
reforms of 1988, privatization and the promotion of shareholder capitalism, and tax 
induced long-term savings plans were all policies that were of major benefit to City 
firms. It is clear therefore that evidence of the pension misselling and other regulatory 
failures came to light during the nineties, it was difficult for financial firms to actively 
oppose a major regulatory reform.
The FSA was certainly surprised how little opposition there was to the concept of 
a single regulator from private sector actors (interview: 11/9/05). All the trade bodies did 
have an opportunity in the consultative period that followed the announcement to 
formally outline their positions and both LIBA and BBA formally expressed their support 
for the concept of a single regulator and the need for robust regulation. However, they 
also expressed concerns about the powers of the FSA and argued for a regime that 
recognized the need for international competitiveness and the dangers of overtly 
prescriptive regulation (House of Commons Treasury Select Committee: 1999). 
In terms of private actors, there is therefore evidence of continuity in Moran's 
observation of the lack of active participation in the shaping of regulatory institutions. It 
would be a mistake, however, to interpret this lack of formal involvement as meaning a 
lack of influence. The evidence is clear that the Treasury, in particular, were acutely 
aware of the importance of the financial sector to the broader economy. However, it was 
New Labour that decided to create a single regulator without any prior formal 
consultation with private sector actors and presented the City with a fait accompli.

The Political Parties
New Labour
The Labour party's traditional relationship with the City of London and financial 
markets was not as confrontational as ideology might suggest. Having nationalized the 
Bank of England in 1946, the party promptly left the Bank to conduct its business exactly 
as before (Cairncross 1988) and made little attempt to interfere in the self- regulatory 
regime when in power between 1964 and 1970 and 1974 and 1979. However, the party 
did oppose the 1986 Financial Services Act, arguing that it provided insufficient 
protection to the consumers of financial services and that the SIB did not have sufficient 
powers to oversee the SROs as compared to the SEC in the United States. However, 
given its apparent lack of interest in reform during its previous long periods in power, it 
is clear that financial regulation was not a significant political priority. 
It was the manifest failings of the SIB/SRO regime, and its inability to prevent the 
regulatory failures, particularly the pensions misselling scandal and the Barings failure 
that provided the immediate political opportunity for New Labour to attack the regulatory 
regime created by the Conservative party and to ensure that financial regulation emerged 
as a distinct area of policy difference between the parties. Gordon Brown as Shadow 
Chancellor used these failures to relentlessly attack both the SIB/SRO regime and the 
Bank of England as a supervisor. In 1993, Brown committed the party to examine the 
accountability structure of the Bank of England and again in 1995, he reiterated this 
commitment in a further formal policy document (Labour 1993, 1995). He consistently 
referred to the lack of accountability of the Bank of England and the need to better 
protect the interests of consumers. Prior to the 1997 General Election, the Labour party 
committed itself in its Business Manifesto, to reform the regulatory regime when, without 
giving any details, it promised to create what was termed a "Super-SIB", that brought 
together the SROs and gave the regulator increased powers (Labour 1997). 
It was the decision to give the Bank of England operational independence over 
monetary policy that provided the opportunity to redesign the regulatory framework and 
create a single regulator by removing the Bank's supervisory responsibilities and 
transferring them to the new regulator (interview: London 11/9/2004, Bower 2004). 
When the Chancellor announced the decision some two weeks after the monetary policy 
statement, he couched it in distinct terms using both consumer protection and economic 
efficiency arguments, stating that the new regulator would "raise the standard of 
supervision and investment protection that industry and the public have a right to 
expect", (Brown 1997). He also strongly emphasized the importance of transparent 
accountability structures for the new actor in terms of both its relationship with the 
Treasury and the House of Commons. 
In terms of political incentives, such a move was designed to play to both a new 
constituency as well as appealing to what may be termed traditional Labour party 
interests. First, the consistent emphasis on protecting the interests of the consumer and 
increasing the accountability of regulation gave New Labour the opportunity to identify 
what Kitschelt identified in terms of new policy issues. The new and important 
constituency of citizens that had purchased private pensions and other financial products 
created an opportunity for New Labour to argue that the new financial regulatory regime 
would defend the rights of the consumers of financial services. Indeed, the FSA was 
given as one of its four statutory objectives that of defending the interests of financial 
consumers. Second, it was designed to allay the concerns that traditional Labour 
politicians might have over the decision to give the Bank of England monetary policy 
independence as well as concerns over the relationship between the state and the City. 
Third, it was clearly a policy that offered a clear opportunity to differentiate themselves 
from the previous Conservative government (Interview: February 2003).

Conservatives
For the Conservative party, having introduced the SIB/SRO regime in 1986, financial 
regulation became an issue of considerable subsequent political embarrassment as it was 
forced into a policy of continually having to justify the very apparent failings of the 
regime. However, there is no evidence that it ever contemplated changing the corporatist 
system during its period in office. First, given its ideological disposition about the 
preeminent role of markets, it was never convinced of the need for state oversight of the 
financial markets in the first place (Tebbit,1986). To increase the role of the state in 
regulation was therefore never considered as a viable political option (Interview: London 
11/9/04). Second, when the cumulative affect of the deficiencies in the regulatory regime 
became clear in the mid nineties, there was a realization that they were going to lose the 
next election, so even if they had wanted to reform the system, they had no incentive to 
initiate it.  
However, what is clear is that if they had remained in office, it is extremely 
unlikely that they would have created a single regulator in the manner of the FSA that 
involved removing supervisory responsibility from the Bank of England. Described by 
one former Tory Treasury minister as "a socialist measure", the party was, not 
surprisingly, immediately critical of the powers given to the FSA (Interview:11/9/04). 
Typical of the criticism was a pamphlet, co-written by a Conservative MP that described 
the FSA as "a too powerful Leviathan, overbearing and unaccountable" (McElwee and 
Tyrie 2000). In terms of a counterfactual, it is likely that the Conservatives would have 
consolidated the SRO structure and possibly strengthened the powers of the SIB, but 
there is no evidence that they would have removed responsibility for banking regulation 
from the Bank of England. The politics of New Labour can be therefore seen as decisive 
in the creation of the FSA.
  
Germany
State Actors: Finance Ministry
The concerns that led the Finance ministry to propose the creation of BaFin had 
evolved from those of the competitiveness of Germany as a financial center that were 
central to the decision to set up BaWe six years earlier. While competitiveness remained 
of crucial interest, particularly after the British government's decision to create the FSA, 
there was a deeper concern about the condition of the overall financial system (Interviews 
Berlin: 5/15/04, 11/15/04). Of particular concern were the low levels of return on capital 
of the financial system during the nineties as compared to other major EU and OECD 
states, which increased the vulnerability of individual institutions to economic shocks. As 
the IMF remarked "the German system appears to be less strong than those of other 
countries reviewed, owing to lower profitability or weaker capitalization' (IMF 2003). 
The proposal to increase the funded component of pensions, outlined in the Riester 
reforms, was a further incentive to ensure that the regulatory regime could ensure the 
robustness of the financial institutions that would manage the savings products. The 
Finance ministry was also concerned about the effect of further reforms emanating from 
the EU challenge to the status of the Landesbanks and the ongoing Basel 11 negotiations, 
both of which had the potential to further reduce the profitability of the banking system. 
There was less concern about improving efficiencies in terms of functional separation 
because as Schueler points out, the German financial system was marked by relatively 
low levels of financial conglomeration and bancassurance as compared to other large EU 
states (Schueler 2004). The major merger of Dresdner Bank and Allianz, was only 
announced some months after decision to create BaFin in January 2001. 
The ministry also wished to improve the professionalism of the regulatory system. 
However, it is clear that given the sensitivities involved in reform, the ministry was very 
reluctant to be seen to have an explicit view about the role of the Bundesbank, because of 
their sometimes tempestuous relationship. The Finance ministry's concerns about the 
German financial system were not new but the previous CDU/FDP had expressed little 
interest in reform. For the Finance ministry, the increased privatization of risk was 
therefore of prime concern from a perspective of the capability of the financial system to 
avoid significant financial failures
 
Bundesbank:
It is an apparent paradox as to why the Bundesbank failed in its efforts to expand 
its supervisory role given its status as one of the key parapublic institutions of the federal 
Republic due to its identification with postwar economic success (Katzenstein 1987:60). 
It is clear that the Bundesbank was an important member of the Frankfurt coalition at the 
end of the eighties that lobbied for regulatory reform in the interests of promoting 
Finanzplatz Deutschland. However, there is little evidence that its interest in regulation 
and financial supervision remained particularly profound until the imminent arrival of 
European Monetary Union towards the end of the nineties. Up until then, it is clear that 
supervision was seen very much as the poor relation as compared to its vaunted monetary 
policy role  and that risk of "regulatory contagion" was to be avoided at all costs.  
The effective arrival of EMU in 1999 and the transfer of responsibility for 
monetary policy to the European Central Bank, appears to have marked a realization that 
regulation was an obvious task to augment its now diminishing responsibilities. A former 
president, Karl Otto Pohl, described the Bundesbank as "a very political institution" that 
"really makes policy, unlike other central banks" (Katzenstein 1987: 60). Evidence of 
Pohl's assertation began to become evident as both the President, Ernest Welteke and the 
Vorstand member responsible for regulation, Edgar Meister, began a campaign in1999, to 
argue that given the Bundesbank's "closeness to the market", the BaKred should "be 
taken under its roof"(Meister 1999). Welteke, quickly followed up with a more ambitious 
plan in an interview some months later, when he remarked that there were "many good 
reasons why the BaWe and BaV should also came under the roof of the Bundesbank 
(Welteke, 2000). Other speeches and interviews followed during 2000 that reflected their 
confidence that the government would agree to this solution as a means of reforming the 
regulatory regime. 
It was therefore a major shock when Finance minister Eichel announced in 
January 2001 that the government had decided to set up BaFin, and leaving it unclear as 
to whether the Bundesbank would have any regulatory role. The Bundesbank 
immediately issued a strong statement of disapproval and Meister was quoted that, 
"banking oversight is not suitable for the business of politics"(FAZ 1/26/01). While the 
Bundesbank gained support from the Lander government of Hesse and Bayern in its 
opposition to the government's proposals, it had managed to alienate many of the other 
Lander governments with its proposal to reduce the number of Lander members of its 
Vorstand (Busch 2004b). The Federal government did concede some ground when it 
agreed to leave the Bundesbank's supervisory responsibilities unchanged and the 
legislation finally clarified the relationship between the Bundesbank and BaFin by 
outlining its implementary role. However, the failed attempt to expand its regulatory 
remit was evidence of its diminished role as a parapublic institution in German politics.

Private Sector Actors:
Luetz describes the key role that private sector actors notably the BdB, as the 
lobby group for the private banks, and Deutsche Bank as the largest private bank, played 
in the Frankfurt coalition that led to the creation of BaWe in 1994 (Luetz 1998). In terms 
of incentives, it was a concern to ensure the competitiveness of German financial 
institutions in an evolving global financial marketplace. This motivation was little 
changed in the debate about regulatory reform, where both the BdB and Deutsche Bank 
again played a key role, both in terms of influencing the public debate and lobbying the 
government as supporters of a new, single regulator. For Deutsche Bank, as Germany's 
largest bank, the fragmented regulatory structure was considered an impediment to its 
strategic development (interview: Frankfurt: 11/16/04). A measure of the concern was the 
bank chairman's Rolf Breuer's unusually forceful speech in February 2000 when he 
argued that there must be an integrated regulator and that 'the supervisory authority must 
be subject to a reporting requirement and democratic control' (Breuer 2000). This can be 
interpreted as an attempt to head off the Bundesbank's ambitions to expand its regulatory 
remit and is evidence of the robustness of the debate when the central bank and the state's 
largest bank are willing to enter into a very public disagreement. The BdB also publicly 
challenged the Bundesbank's attempts to increase its oversight role and, echoing Breuer's 
earlier comments, described the dual oversight role as outmoded, and argued that banking 
regulation needed political control, making the Bundesbank unsuitable to be the regulator 
(Suddeutschland Zeitung 5/30/00).
What was also notable about the debate was the public split between the different 
financial interest groups, disturbing the usual corporatist consensus, as the BdB assumed 
the role as the champion of the move to a single regulator, while the DSGV argued in 
favor of the Bundesbank.. One leading financial commentator described it " as amazing 
that in Germany it is only the private banking sector that is calling for a legally 
independent authority in financial supervision. The savings bank sector have been on the 
sidelines and the cooperative banks openly calling for supervision under the Bundsbank" 
(Englelen 2000). For the savings and cooperative banks, there was a concern that any 
change in the regulatory regime might disturb their well-developed network of political 
support at both a Federal and Lander level. 
German Political Parties
In the case of the German political parties, it is clear that there was a high level of 
political consensus on the need for reform of financial regulation up until the decision to 
create BaFin in 2001. In the three previous Financial Market Promotion Acts of 1990, 
1994 and 1997, all the parties voted in favor of the legislation and the SPD's main 
criticism (as the opposition party) was that the legislation was continuously too late in 
being implemented (Bundestag proceedings) . However, as the effect of the first three 
pieces of legislation was only to bring Germany belatedly into line with the regulatory 
norms of the other large EU states, and did not involve any contentious decisions about 
institutional responsibilities, such unanimity was not surprising. 
However, such unanimity soon dissipated when the debate began about institutional 
reform. The issue that was immediately contentious was again the role of the Bundesbank 
and its ambitions to expand its regulatory remit. What emerged was a clear split between 
the SPD/Green government who were strongly in favor of the new single regulator, and 
the CDU and FDP who were equally vehement in their views that the Bundesbank should 
have its supervisory role expanded.

SPD/Green
 	The incentives in promoting reform from a partisan perspective were broadly 
similar to those of New Labour in Britain. The nature of German savings markets 
changed rapidly in the latter half of the nineties due to the major privatization of 
Deutsche Telekom and an equity boom that saw a rapid rise in the individual holdings of 
stocks (DAI 2003). The creation of a regulatory actor that actively promoted the 
protection of the consumers of financial services can be seen as a strategic response to 
such a change. However, unlike New Labor, there is little evidence that the SPD/Green 
government had considered regulatory reform prior to coming to power and the 
protection of consumers was not a contentious issue during the 1998 election as the 
financial system had not undergone such high-profile failures. 
The difference is that the SPD/Green government were introducing private pension 
reforms as opposed to the British case where New Labour were reacting to the failures of 
the previous Conservative government's policy. This meant that the SPD/Greens had to 
be seen to be creating a new regulatory regime that could protect the interests of 
prospective savers as opposed to the New Labour case of creating a regime to protect 
existing savers. It also meant that the SPD/Greens were concerned about the need to 
prevent regulatory failure because of the potential damage it would cause to the case for 
transferring pension risk from the state to the individual and the institutions where they 
committed their pension savings.
For the SPD there were therefore three objectives in terms of promoting BaFin; 
firstly, a desire to increase the protection of investors, secondly, a clear concern about 
lack of democratic accountability of the Bundesbank as a regulator and thirdly, concern 
that financial regulation should function effectively and efficiently. In terms of all three 
objectives, the proposed Riester pension reforms were clearly a further important impetus 
(Interview, Berlin:11/10/04). However, unlike New Labour, the SPD were in coalition, 
and their partners, the Greens had a strong consumer protection objective as a key 
component of their electoral strategy across a range of policy areas. An example of this 
commitment was their promotion of the Ministry of the Rights of the Consumer, which 
among other policy areas was established to oversee financial claims (Interview, Berlin 
11/15/04). For the coalition, both could agree on the creation of a financial regulator with 
a strong consumer orientation, while also dismissing the claims of the Bundesbank to 
take control of regulating a policy area of increasing political significance.

CDU/FDP
 Neither the CDU nor its previous coalition partner, the FDP, which were in 
government between 1982 and 1997, had shown evidence of an interest in reforming 
financial regulation when in power. In part, given the bank-based financial system, there 
was little electoral incentive for parties to promote reform as a political issue. However, it 
can also be seen to be a result of both parties' traditionally close relationship with the 
Bundesbank. While all German political parties pay homage to the Bundesbank, both the 
CDU and the FDP were particularly supportive of it as an institution.  As one CDU 
official stated "We are very pro-Bundebank, historically and today"(Interview, Berlin 
11/15/04). Given the Bundesbank's lack of interest in financial regulatory reform until 
the end of the nineties, neither of the two parties when in government wished to initiate a 
policy that ran counter to the Bundesbank's wishes.
 When the debate began over the future of the regulatory regime, both parties strongly 
supported the case for an expanded role for the Bundesbank, and opposed the idea of 
creating a new regulatory institution. When the government announced the BaFin 
decision, both parties continued to argue in committee and in the plenum sessions of the 
Bundestag that the case for change was not proven. However, despite the opposition 
party's majority in the Bundesrat, they failed to prevent the legislation being passed into 
law because of an extraordinary walkout of the chamber by the CDU leaders in a dispute 
over immigration policy (FT Deutschland 3/22/02). This meant that the legislation was 
not sent into the conciliation process that might have delayed the establishment of BaFin 
for a considerable period.
 
Comparison of Cases
The evidence from the cases points to a couple of significant findings. First in 
both cases, there were important changes in the interests of two key state actors that 
prevented the unanimity among them that led to earlier corporatist reforms. The 
Finance/Treasury actors were active proponents of regulatory change, concerned about 
the need to promote the competitiveness and efficiency of their respective financial 
systems. The center/left governments were advocates of regulatory change because of the 
electoral advantage they perceived in promoting a broad consumer agenda due to the 
privatization of risk and the changes to savings markets. (In the German case, the 
prospective nature of pension reform meant that concern for the effectiveness of the 
regulatory system was also an important to the SPD/Green government). The regulatory 
losers in both cases were the respective central banks, which as Thelen's argument 
suggests, was a result of having lost political support for their regulatory roles (Thelen 
2004). For both center/left governments, there was a reluctance to allow institutions 
perceived as insufficiently accountable to the state to assume regulatory powers, in a 
policy area of such increased political salience. For the Bank of England this meant the 
removal of all supervisory functions, while for the Bundesbank, an unceremonious stop 
to their attempt to expand their responsibilities. It should be stressed therefore that for 
both governments, the argument in favor of merging the functional regulators was about 
more than improving economic efficiency but also about ensuring the political 
accountability of the new regimes.
In both cases, there are two reasons that make the partisan argument so 
compelling. First, the right parties while in power showed little interest in reforming the 
corporate regimes. Second, when in opposition, both the Conservatives and the 
CDU/FDP actively opposed the creation of the new institutions and the increased role of 
the state. Their opposition, in particular, to the reduction in the role of the central banks 
points to a strong counterfactual argument that without New Labour's electoral success of 
1997 and the SPD/Green of 1998; neither the FSA nor BaFin would have been created.
The cases also show up two important differences in the evolution of the 
regulatory regimes. The first is the difference in the role of private financial actors where 
in contrast to Germany, British private actors are found not to have played an important 
role as either advocates of reform, or in opposing it once it was announced. This is an 
interesting finding in so far as it appears to challenge assertions of the "structural power" 
of financial firms found in the literature (Cerny 1993, Strange 1995). In the German case, 
a significant finding is the division the debate caused between the different banking 
associations, disturbing the usual consensual style of policy making.
The second difference is the very different type of debate that took place in both 
states reflecting the contrasting political systems. As we have seen, New Labour 
announced the decision to create a new regime without any formal consultation process. 
In Germany, by contrast, the debate stretched over an extended period, with state 
institutions and private sector actors taking very public positions and was only finally 
resolved by legislation.

Conclusion
This paper argues that partisan politics matters when explaining change in the 
institutions of financial regulation. It points to the changing interests of two sets of state 
actors, Treasury/Finance and elected politicians that explains the shift from a corporatist 
to a state financial regulatory regime in Britain and Germany. For Treasury/Finance 
actors, it was a concern to increase regulatory efficiency, both to reduce the risk of 
regulatory failure and to promote the competitiveness of each state's respective financial 
centers. For elected actors, the changing nature of savings markets following the 
privatization of risk, offered the two center-left governments an opportunity to pursue an 
electorally attractive pro-consumer policy. The regulatory losers, in both cases, were the 
respective central banks, because of their perceived lack of political accountability.
	However, the cases indicate that the economic efficiency arguments of 
Treasury/Finance actors were not sufficient to explain the changes in regulatory regime 
and that the decisions of center/left governments were necessary for the change in regime 
to occur. 
The implications for the paper are obviously limited by the examination of just 
two cases, even if they do represent very different political and economic systems. 
However, it is interesting to note that the three states France, Spain and Italy that have 
chosen not to create a new single regulator have also chosen not to reform their pension 
systems in such a way as to encourage private funded schemes.
	The paper also points to a means of understanding the evolution of regulatory 
policy at a European Union level and why certain governments are reluctant to allow the 
ECB play a supervisory role in overseeing the banking system. 
	The paper also has a clear normative implications in so far as if and when center-
left parties relinquish power in Britain and Germany, given the opposition of the right 
parties to the removal of the regulatory roles of central banks, there may well be 
fundamental change to the institutional design of the financial regulators and a 
consequent lessening of focus upon the interests of financial consumers.

  Moran's argument does not dismiss the significance of domestic  politics in enabling state actors to 
overcome the resistance of domestic financial actors that were resistant to change, " a pluralist, competitive 
political system allowed disaffected interests to mobilize for change",  but he does not place emphasis on it 
as a variable as compared to Americanization (Moran 1991: 57).
  As Muller (2002) points out, significant regulatory tasks such as deposit insurance and auditing were 
delegated by the BaKred to "semi-private" organizations,confirming that banking regulation had a 
significant corporatist component.
  The Gramm-Riley reforms of 1999, that removed the barrier on banks and investment banks carrying out 
certain functions, meant that any functional argument against combining regulatory reforms is no longer 
valid.
  The Twin Peaks solution was the model decided upon by the Australian government in 1997 (Wallis 
Commission 1997).
  The Bank of England was however given the formal responsibility for ensuring the overall stability of the 
banking system.
  A former senior Bank of England official describes this view when he outlined how Bundesbank officials 
would take pleasure in describing the risks to the credibility of UK monetary policy arising from its 
financial supervisory role.
  An account that confirms this impression was the reported reaction of Bundesbank President Helmut 
Schlesinger during the aftermath of the Barings failure in early 1995, when questioning his officials about 
the Bundesbank's potential exposure to such an event, he made it clear that the BaKred's responsibility for 
regulation should be stressed (interview:Berlin:11/15/04).
  The SPD member Martin Bury was critical in the 1997 debate about the legislation due to the "big 
defects in terms of transparency and the protection of investors" but still described it as "a long-
overdue step in the right direction, even if it is still to little" (Bundestag proceedings 1997).
  Both the SDP and the Greens in the parliamentary debate about BaFin were careful not to criticize the 
Bundesbank in an overt fashion. As a Green official commented, "it is impossible in German politics to 
criticize the Bundesbank (Interview: Nov 15/2004).



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  The Bank of England was however given the formal responsibility for ensuring the overall stability of the 
banking system.
  A former senior Bank of England official describes this view when he outlined how Bundesbank officials 
would take pleasure in describing the risks to the credibility of UK monetary policy arising from its 
financial supervisory role.
  An account that confirms this impression was the reported reaction of Bundesbank President Helmut 
Schlesinger during the aftermath of the Barings failure in early 1995, when questioning his officials about 
the Bundesbank's potential exposure to such an event, he made it clear that the BaKred's responsibility for 
regulation should be stressed (interview:Berlin:11/15/04).
  The SPD member Martin Bury was critical in the 1997 debate about the legislation due to the "big 
defects in terms of transparency and the protection of investors" but still described it as "a long-
overdue step in the right direction, even if it is still to little" (Bundestag proceedings 1997).


  Both the SDP and the Greens in the parliamentary debate about BaFin were careful not to criticize the 
Bundesbank in an overt fashion. As a Green official commented, "it is impossible in German politics to 
criticize the Bundesbank (Interview: Nov 15/2004). 


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