Shedding Light on EU Financial Regulators: A Sociological and Psychological Perspective

Abstract

The paper adopts a socio-psychological perspective to approach financial regulation in the European Union. It aims at advancing the understanding of the political dimension of financial regulation by studying regulators' behavioural within the financial system. While behavioural approaches to finance have expanded the understanding of markets' dynamics, regulatory and public-choice theories appear to be largely influenced by the rationality postulate to describe the governance activity performed by public authorities. Through the lenses of social-psychology the paper fills a gap in the literature and explores how financial regulators 'think' and, in particular, how decisions are made in order to achieve key policy goals, such as financial stability and market confidence.

To this aim complex social dynamics that describe the functioning and the interactions of regulatory bodies – here intended as groups of individuals – are analysed by referencing to the fundamental forms of 'sociality', as isolated in social-psychology and constituted of: i) communal sharing, when members of the group share resources equally; ii) authority ranking, when members of the group are hierarchically organised and resources are distributed accordingly; iii) equality matching, when relations among members are governed to ensure an imbalance between individual inputs and resources allocation; iv) market pricing, when members seek a form of value maximisation.

After introducing the four psychological models, the paper maps the decision-making process characterising each of the layers of EU markets governance. All four behavioural models are present in the regulatory sphere, but it will emerge that each layer is characterised by one specific model only. Treaty institutions, such as the Council and the EU Parliament, appear to follow the 'communal sharing' and the 'equality matching' forms of sociality. While the European Commission, the European Supervisory Authorities, and the Colleges of Supervisors appear to organise their social relationship around the 'authority ranking' and 'market pricing' models. Through these lenses regulatory behaviours, vis-à-vis sensitive policy decisions, are isolated. A fresh look over the unfolding European architectural framework for financial regulation and supervision will be then offered, with particular emphasis over the relational arrangements between Eurozone and non-Eurozone countries in regulating and supervising financial markets.