Weak Interests and the Politics of Legitimation: An Empirical Examination of Financial Reforms in the EU and the US after the Subprime Crisis

This research project takes a comparative view of the politics of financial reforms after the subprime crisis in the United States and the European Union. According to many observers, financial reform efforts were considerably watered-down or scaled back by private-sector lobbies. Capture theories are, however, inadequate to explain important aspect of regulatory dynamics in times of crises. Public outrage pushes financial regulatory reform out of the arena of ‘quiet politics’, where interest group politics take place behind closed doors, into the arena of ‘noisy politics’, which forces politicians to react to public and interest group pressures. Yet crises are not a sufficient condition for substantial financial reforms. Instead, this analysis seeks to shed light upon how weak and diffuse interests can achieve their advocacy goals in financial reforms. Questioning the claim of regulatory capture, I examine the extent to which outsider groups to finance such as consumer associations, unions and NGOs seized the opportunity of a policy window to promote their advocacy aims. I will argue that weak interests were able to coordinate their actions around legitimizing narratives, construct moral outrage and build legitimizing coalitions with policy-makers to have their preferences met at different stages in the policy process. This pattern of the puzzling power of weak interests is evident in two domains of regulatory change: the reform of consumer credit markets and taxation of financial transactions. The paper employs a process-tracing approach to illuminate social mechanisms linking weak interests to institutional change in financial markets.