Now that I have illustrated that the principal agent model may only be of limited use, I will discuss to what extent the mechanisms as described in the theoretical framework are applicable to the case of Dutch financial sector regulation. I specifically aim to illustrate under which conditions the mechanisms are most likely to occur.
6.2.1. The institutional design mechanism
To recap, the institutional design mechanism is once more summarized in the explanatory hypothesis below.
Hypothesis I: If the institutional powers of an independent regulatory agency increase as a result of participation in transnational regulatory networks, then it is likely that the de facto bureaucratic autonomy of an independent regulatory agency vis-à-vis its parent ministry will increase.
In regard to the AFM, the most outstanding institutional change related to transnational network participation that may have had an effect on the de facto auto vis-à-vis the parent ministry is the signing of the Multilateral Memorandum of Understanding (MMoU) with IOSCO in 2007. The WFT had to be changed, before the AFM was able to sign the MMoU. Unfortunately, however, both respondents did not know which parts of the WFT had to be changed or to what extent it affected the de facto autonomy of the AFM. Therefore, the argument about the institutional design mechanism is based on other observations.
For instance, in the years after its founding, according to Mr. Docters van Leeuwen, it occurred that the AFM undertook activities that lacked a legal base. Mr. Docters van Leeuwen: ‘’One of our colleagues at the ministry of Finance asked what we did in regard to insider trading and told us that there was no sufficient legal base for these activities. And he was right. There were rules in the Criminal Code, but everything we had built around it actually lacked an institutional foundation.’’
Although this situation is not related to transnational network participation, it is a clear example of how the institutional setting might differ from an agencies autonomy in practice. More specifically, the AFM experienced more autonomy in practice than it gained by its institutional base. A possible explanation for the ministry’s allowance of this discrepancy, is the fact that the AFM was a young organization which was meant to be truly independent (also see section on principle agent model). Moreover, given the critique on the principle agent model, it may be that the ministry was not interested in strictly monitoring and steering the AFM’s activities. This brings us to the following sub- conclusion:
Possibly, the institutional design mechanism is less likely to occur if a principle intentionally drifts away from monitoring and steering its agent. In such cases, the de facto autonomy of an independent regulatory agency may exceed the autonomy that it gains by institution.
DNB had to cope with significant institutional changes that derived from its participation in European transnational networks. In response to the financial crisis, the SSM was introduced, by which DNB shared responsibility with the ECB and other national central banks in Europe for the supervision on all major banks in Europe. This institutional change had a significant effect on the relationship between DNB and the ministry of Finance, because as of SSM, DNB no longer reports to the ministry regarding banking supervision. Instead, it reports to the ECB in Frankfurt. According to Mr. Goudswaard, professor in Applied Economics and member of the DNB supervision board, in this regard the influence of the ministry of Finance is decreasing (transcript interview Mr. Goudswaard). I regard this as major evidence that confirms the institutional design mechanism, which is backed up by a statement of Mr. Boot:
‘’The fact that DNB reports to Frankfurt, that process on itself, sidelines the ministry of Finance.’’ Another significant institutional change for DNB that emerged after the financial crisis, was the establishment of SRM. As discussed in the previous chapter, DNB was appointed as resolution authority, instead of the ministry of Finance. Hereby, DNB was provided with formal autonomy vis-à- vis the ministry, that made DNB fully independent in regard to SRM. However, according to Mr. Boot, DNB still is partially dependent on the ministry. If a bank collapses, the subsequent bills still have to be paid by the ministry (transcript interview Mr. Boot). Therefore, in practice, DNB is less autonomous. This brings us to the following sub-conclusion:
The institutional design mechanism may be likely to occur if a financial crisis leads to significant institutional changes, by which independent regulatory agencies extensively gain de facto autonomy vis-à-vis their parent ministry. However, flaws in the institutional design may put a limit on the de facto autonomy of independent regulatory agencies.
Another observation that is relevant in this regard refers to institutional change that occurred during the transformation of CEIOPS to EIOPA. Compared to its predecessor, EIOPA was provided with more institutional powers, such as the comply or explain principle. It, for instance, used this principle during the development of preparatory guidelines regarding Solvency II. These guidelines were developed within EIOPA and national regulators were requested to adopt them. Thereafter, DNB requested the ministry to change national legislation, so that it could comply with the guidelines and increase its regulatory tasks in regard to the insurance sector. I have already discussed this process in the previous chapter by referring to the legislation letter of 2012, but it is also verified by the interview with the EIOPA coordinators (transcript interview EIOPA coordinators). Despite DNB’s dependence
on the ministry in terms of legislation, this is an example of how transnational network participation increases the de facto autonomy of an independent regulatory agency vis-à-vis the ministry. The initial driver of the increase in de facto autonomy in this case is not an institutional change of DNB, but of the network in which DNB participates. This brings us to the following sub-conclusion:
The de facto autonomy of an independent regulatory agency vis-à-vis the parent ministry may not only increase because of a change in institutional design of the independent regulatory agency itself, but may also increase because of a change in institutional design of the transnational network it participates in.
6.2.2. The information asymmetry mechanism
Now that I have elaborated on the institutional design mechanism, in the following paragraphs I will turn to the information asymmetry mechanism, which is once more summarized in the explanatory hypothesis below.
Hypothesis II: If the information asymmetry between an independent regulatory agency and its parent ministry increases as a result of participation in transnational regulatory networks, then it is likely that the de facto bureaucratic autonomy of an independent regulatory agency vis-à-vis its parent ministry will increase.
As mentioned in the coding scheme section of the research design chapter, scholars rather strictly refer to the information asymmetry mechanism. According to these scholars, the causal chain within this mechanism consists of different subsequent steps. First, ministries lose their gatekeeper position in transnational networks. Thereafter, independent regulatory agencies gain negotiation knowledge, which they then may strategically use to bypass their parent ministry. I have not found evidence in regard of this strict definition of the information asymmetry mechanism.
Nevertheless, the observations of this thesis illustrate an increasing information asymmetry between the AFM/DNB and the ministry of Finance. Although the civil servants at the ministry of Finance are considered to be effective (transcript interview Mr. Boot), most respondents state that the ministry of Finance has become increasingly dependent on the expertise of the AFM and DNB. For instance, Mr. Docters van Leeuwen states that the ministry was dependent on the AFM’s employees in regard to highly complex policy fields, such as clearing (transcript interview Mr. Docters van Leeuwen). This finding is confirmed by Mr. Valkenburg, who participates in the Occupational Pensions Stakeholder Group of EIOPA as an independent actuarial expert. Mr. Valkenburg:
‘’The ministry of Finance is responsible for developing [regulatory] legislation and a regulator should only supervise. However, of course they [the regulators] do influence the content of the legislation. A financial assessment framework [in regard to occupational pension regulation] has many technical
elements, that certainly are developed by the experts that work for DNB. Not all civil servants understand such topics.’’
Possibly the most clear example in this regard involves the development of Solvency II. According to Mr. Van Hulle, the European Commission’s highest ranking civil servant in the field of insurances who has been responsible for developing Solvency II, the technical expertise regarding insurance regulation has moved from central governments to regulators. Mr. Van Hulle:
‘’So, one of the evolutions I have witnessed through the years, is that in the beginning the ministries of Finance negotiated. Legislation emerged out of this, through the Council and Parliament. Today, the required expertise is no longer present at the ministries of Finance, but has moved to the national regulators.’’
Looking at the distribution of employees and expertise in regard to Solvency II between DNB and the ministry, this statement is confirmed. According to DNB’s EIOPA coordinators, the Dutch ministry of Finance only has 2 FTE at its disposal for insurance regulation, whereas DNB has many more employees. They state the following:
‘’If we would inform the ministry of Finance about everything, then they would turn mad, because they would need 10 more FTE. I think you should not underestimate their limited capacity and their limited focus on details.’’
Over the last couple of years, DNB mainly focused on the debate within EIOPA in regard to the Ultimate Forward Rating (UFR) of Solvency II. This highly complex rate is used to calculate the solvability of insurance companies regarding their long term insurance products (DNB annual report 2015). The EIOPA coordinators of DNB as well as Mr. Van Hulle state that such expertise is not present at the ministry of Finance. Mr. Van Hulle:
‘’Today, legislation is being made that is highly complex. For instance, if you take a look at the document of Solvency II, the basic formula. If you don’t have an actuarial background, it is very hard to understand what it even is about. […] The ministries of Finance cannot catch up, so it is done by the regulators.’’
This leads to the following sub-conclusion:
The information asymmetry mechanism is likely to occur, if the nature of the regulatory field is highly complex. In other words, if regulation that is developed in transnational networks is highly complex – and if regulators do participate in transnational networks whereas ministries do not – then it is likely that the de facto autonomy of an independent regulatory agency increases vis-à-vis its parent ministry.
6.2.3. The reputational effects mechanism
In this paragraph, the last mechanism is discussed, which is the reputational effects mechanism. Below it is once more summarized in the form of an explanatory hypothesis:
Hypothesis III: If the independent regulatory agency is perceived to be effective by its
audience as a result of participation in transnational regulatory networks, then it is likely that the de facto bureaucratic autonomy of an independent regulatory agency vis-à-vis its parent ministry will increase.
In short, the reputational effects mechanism developed by Bianculli et al. (2015) refers to a causal chain that consists of three different steps. First, an independent regulatory agency without a good reputation joins a transnational network. In the transnational network it then gains expert knowledge and develops itself in such a way that it is perceived as effective in its national context. I.e. it generates a good reputation by applying skills that it learned at the international level to the state level. Thereafter, because of this good reputation, the agency gains de facto autonomy vis-à-vis its parent ministry. The observations of this thesis do not find evidence in this regard. For instance, Mr. Docters van Leeuwen states that the international activities of the AFM did not necessarily provide the AFM with a better reputation in the national domain (transcript interview Mr. Docters van Leeuwen). Instead, many observations point out that the AFM as well as DNB were already perceived to be effective by their audience before they joined transnational networks. Mr. Valkenburg:
‘’I think they have [the AFM and DNB] always had a good reputation and possibly only weaker regulators significantly gain from the European or other international contexts.’’
This quote invites us to take a closer look at the research of Bianculli et al. Their argument is based on a case of a Spanish nuclear regulator, that was perceived as ineffective by its audience prior to joining the transnational network. As a result of its transnational network participation, this regulator was provided with expertise and it adopted the networks’ standards, such as corporate governance codes. However, expertise and standards do not emerge out of the blue. Instead, they need to be developed by other actors within the transnational network. Hence, a network consists of net contributors and net beneficiaries.
The observations of this thesis illustrate that especially DNB by its audience is regarded as an influential actor – and thus as a possible net contributor – on specific policy domains. For instance, Mrs. Van der Lecq, who is professor in Pension Markets and member of EIOPA’s Occupational Pensions Stakeholder Group, states that the Dutch pension system and its regulation is considered to be top tier (transcript interview Van der Lecq). DNB also is perceived to be effective in regard to insurance regulation. Mr. Van Hulle:
‘’Klaas Knot, the governor, was an insurance regulator and he was in the management board of CEIOPS [the predecessor of EIOPA]. He played a decisive role, especially in the beginning, to get Solvency II. In this regard, I believe that the Dutch have contributed positively.’’
Internal actors of DNB confirm the fact that transnational networks consist of net contributors and net beneficiaries. According to the EIOPA coordinators, regulators of small nations or small sectors, in general mainly participate in the network in order to gain expertise. One of the EIOPA coordinators: ‘’I have attended some BoS meetings [the highest decision making body of EIOPA] and I have seen how that process goes. It simply are the big countries that actively participate, and the rest of the countries attend the meeting to stay up to date in regard to all developments.’’
This brings us to the last sub-conclusion of this paragraph:
If a regulator already is perceived as effective, transnational network participation does not necessarily result in more de facto autonomy vis-à-vis a parent ministry. Moreover, the reputational design mechanism of Bianculli et al. (2015) only holds, if some actors within transnational networks are net contributors, who are the source of the expertise and standards. Hereby, they enable other actors to be net beneficiaries.