The power and the glory

: an evaluation of the legitimacy of independent macroprudential authorities

Abstract

The aim of this thesis is to find ways of designing legal frameworks that enhance the legitimacy of independent macroprudential authorities. The concept of legitimacy is closely related to and is used to justify the exercise of authority. In most western states public authority is accepted because the system of government accords with principles of democracy, embodied in the electoral process. Alternatively, as in the case of independent policy makers, their authority is accepted because they are better able to facilitate allocativeefficiency in the economy. This theoretical framework guides the research. This thesis begins by tracing the how and why of macroprudential policy’s growing usage after the Global Financial Crisis of 2007-2008. It is found to be better than the traditional methods of maintaining financial stability, which focused on regulating individual financial intermediaries, because it uses countercyclical and structural tools to limit system-wide risk and prevent disruption to key financial services and the economy. The thesis then proceeds to study the governance structures of macroprudential policymakers in the United Kingdom, the United States of America and the European Union to determine their legitimacy. In these three jurisdictions the mandate for maintaining financial stability has been delegated to independent authorities, which are thought to produce more efficient results than politicians. However, this has reopened debates regarding legitimacy of the independent regulatory state. The main fear is that since delegation removes policy from the direct control of citizens, macroprudential authorities’ activities may depart from society’s non-economic values. Analysis revealed that the response to a perceived legitimacy gap has been to increase political involvement in the policy making process, bolstering the democratic legitimacy of macroprudential authorities. This thesis posits that the real problem, however, is not a lack of democracy, but rather a lack of social justice. Pressure to increase political oversight in macroprudential policy stems from citizens’ growing dissatisfaction with a financial system and regulatory process that perpetuate inequalities. There are widespread calls for more socially just systems of economic governance, and macroprudential policy is not immune to these criticisms, more so because some policy tools have a marked distributional effect. The main contribution of this thesis is to advocate for an extension of macroprudential authorities’ mandate, to include a social justice objective. Of course, a commingling of competencies is not without its problems, but as this thesis attempts to demonstrate, difficult is not the same as impossible.

Date of Award	24 Feb 2021
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Jan Dalhuisen (Supervisor)