Stability and change in policy networks

The role of policy networks in policymaking is prevalent. Policy networks can be defined as subsystems of the political system, and concern all constellations of interdependent actors with different capabilities and policy positions that provide solutions to policy problems (Laumann and Knoke Reference Laumann and Knoke1987; Knoke Reference Knoke1990; Heinz et al. Reference Heinz, Laumann, Nelson and Salisbury1993; Scharpf Reference Scharpf1997; see also Carpenter et al. Reference Carpenter, Esterling and Lazer1998). Generally, policy networks have varying structures of both public and private actors. These structures vary in terms of stability and membership, and mediate the halt or accommodation of policy change (Baumgartner and Jones Reference Baumgartner and Jones1991; Peterson Reference Peterson1995). Policy networks can be “policy communities”: networks with stable relationships between actors, a restrictive membership, interdependences between actors and insulation from the general public (Judge Reference Judge1993; in Richardson Reference Richardson2000). These policy communities are imperative in policymaking as they decide which issues to include and exclude from the policy agenda (Rhodes Reference Rhodes1997; Marsh and Smith Reference Marsh and Smith2000). As a result, policy communities consisting of a few powerful (economic) interests – insulated from the influence of the general public or citizen interests – dictate and sustain existing policy agendas, thus largely ruling out drastic policy change (Baumgartner and Jones Reference Baumgartner and Jones1991).

However, stable network structures, such as policy communities, can be disrupted by shocks (Baumgartner and Jones Reference Baumgartner and Jones1993; Baumgartner et al. Reference Baumgartner, Berry, Hojnacki, Leech and Kimball2009). Long-standing policy networks of well-established groups lose out to other groups who were previously not mobilised in relation to the policy community. For example, studying networks of airline companies, Corbo et al. (Reference Corbo, Corrado and Ferriani2015) finds that the exogenous shock of the September 11 terrorist attacks increases the mobilisation of actors previously not active within the policy network. Such newcomers may manage to construct a new “image” of existing policy problems (Heclo, Reference Heclo and King1978; Baumgartner and Jones Reference Baumgartner and Jones1991; for an overview: Richardson Reference Richardson2000). As such, shocks can change the image of a certain policy field and may induce participation of interests not generally supportive of the already involved industry (Baumgartner and Jones Reference Baumgartner and Jones1991:1051). As a result, the policymaking arena becomes less cohesive, or “club-like” (Heclo Reference Heclo and King1978), as policy communities’ structures open up and transform to “issue networks” that exhibit a lower level of stability and cohesiveness (Heclo Reference Heclo and King1978; Baumgartner and Jones Reference Baumgartner and Jones1991; Peterson Reference Peterson1995). Consequently, policymaking in issue networks is less stable and more subject to rapid change as new interests bring different values, policy frames, demands, and modes of behaviour to the negotiating table (Richardson Reference Richardson2000). In other words, shocks can transform tight networks (i.e. clubs) into unstable networks characterised with alternating memberships of and relationships between interest groups (i.e. hubs).

These theories about stability and shocks in policy networks directly apply to the specific case of financial regulation: one clearly sees that a cohesive policy community experienced a major shock. Both USA and European precrisis literature argue that the networks surrounding financial regulation were close policy communities of financial sector interests, which lobbied in a unified and cohesive manner (Mügge Reference Mügge2006; Baker Reference Baker2010; Tsingou Reference Tsingou2010, Baxter Reference Baxter2011; Young Reference Young2013; Tsingou Reference Tsingou2015). This cosiness between regulators and private interests is the result of regulators’ struggles to keep up with financial instruments and methods. As a consequence, regulators turned to private actors for advice on financial regulation. In turn, the financial sector used their expertise in managing complex financial regulation as a means to command authority over public regulators (Tsingou Reference Tsingou2015). Consequently, private actors gained substantial leverage in their dealings with regulators which led to interdependencies between the two (Newman and Posner Reference Newman and Posner2011; Tsingou Reference Tsingou2015). Due to these interdependencies, closely cooperating networks of interest groups and policymakers were formed (Mügge Reference Mügge2006; Quaglia Reference Quaglia2008; Christopoulos and Quaglia Reference Christopoulos and Quaglia2009; Young Reference Young2013; Tsingou Reference Tsingou2015).

Recent postcrisis literature shows a more nuanced image of actors involved in financial lobbying. Although the financial sector is still dominant in the lobbying community after the financial crisis (Quaglia Reference Quaglia2008; Lall Reference Lall2012; Woll Reference Woll2013; Pagliari and Young Reference Pagliari and Young2015), postcrisis literature has shown that financial industry lobbying involves a greater plurality of actors than previously expected (see Kirsch and Mayer Reference Kirsch and Mayer2013; Kastner Reference Kastner2014; Chalmers Reference Chalmers2015; Pagliari and Young Reference Pagliari and Young2015; Chalmers Reference Chalmers2017). Instead of a cohesive community, this literature paints a picture of a lobbying network consisting of a wide array of interest groups with different policy preferences. Comparing these studies, the financial crisis is indeed a disruptive event which has transformed a club-like network structure into a more pluralized, diversified policy network – or as argued by LaPira, Thomas, and Baumgartner:

The effect of the global financial crisis on policy networks is also clearly reflected by empirical evidence showing an increase of volatility in the participation of interest groups in public consultations concerning financial regulation (Redert Reference Redert2020). Whereas before the crisis, a few interest groups continuously participate in public consultations, after the crisis and subsequent reforms new interest groups participate in consultations. This clearly reflects that once stable lobbying networks become increasingly volatile after the financial crisis. It makes financial regulation a fitting policy field to explore how networks change after exogenous shocks.

But why is the crisis likely to transform these networks? I make a distinction between short- and long-term effects of the financial crisis on the policy network of financial regulation. In the short term, the global financial crisis highlighted the failure of microprudential oversight by financial regulators. Consequently, the crisis changed the image of how economic governance actually functions and put policy networks in financial regulation closer to the forefront (Young Reference Young2013). In this regard, Chalmers (Reference Chalmers2015) argues that the crisis highlighted the extensive role and influence of the financial sector in policymaking. The crisis showed that the interdependencies between industry and policymakers might have resulted in policy outputs that systematically favour business interests at the disadvantage of the general interest (Mügge Reference Mügge2006; Baker Reference Baker2010; Tsingou Reference Tsingou2010, Baxter Reference Baxter2011; Young Reference Young2013; Tsingou Reference Tsingou2015). After all, it was the industry that created high-risk financial products and proposed self-regulation during the years before the crisis (Quaglia Reference Quaglia2008; Baxter Reference Baxter2011; Tsingou Reference Tsingou2010). Consequently, also the notion that the making of financial regulation should be a joint effort between regulatee and regulator changes drastically.

Besides the changing image, I also expect that institutional and regulatory reforms affect lobbying networks in the long term. In the wake of the financial crisis, it became painfully clear that European regulators lacked the instruments for strict microprudential oversight deemed necessary to control and supervise the financial sector. Hence, the Commission decided to reform the European framework concerning financial regulation. These reforms were aimed to increase EU integration in this policy field and to remove any differences in enforcement and practices concerning financial regulation (for a discussion see Hennessy Reference Hennessy2014). Specifically, three committees with nonbinding powers (the Lamfalussy Committees) were transformed into EU agencies (changing their names to the European Supervisory Authorities, or ESAs – also see Table 1) with legally binding decisionmaking and supervisory powers (Busuioc Reference Busuioc2013; Hennessy Reference Hennessy2014; Scholten and Van Rijsbergen Reference Scholten and Van Rijsbergen2014). The delegation of these extensive powers made that the advisory Lamfalussy Committees transformed into powerful regulatory EU agencies. The delegation of these powers made the ESAs the most powerful regulatory agencies in the EU (for a discussion see Busuioc Reference Busuioc2013).

Table 1. Overview of Lamfalussy Committees and European Supervisory authorities. ^*

* To avoid any confusion, the remainder of the article will address the institutions by their new name: EBA, EIOPA, and ESMA.

This increase of powers is likely to disrupt the policy networks in two ways. First, whereas the Lamfalussy committees first had a mere advisory role, their transformation into EU agencies meant that they gained rulemaking competencies, making them an imperative cog in the policymaking process. This makes the agencies crucial venues for interest groups to make their voice heard, trying to influence financial regulation. Second, not only did the agencies get more competences, but they were also tasked with redesigning the financial regulatory framework in the EU in the wake of the crisis. The ESAs are tasked with drafting new and extensive European regulation and strict financial oversight. To this end, they are mandated to implement extensive regulatory packages (i.e. Solvency II, MiFID II, and Single Rulebook for banking). As such, it is expected that these reforms also induce participation of new interest groups formerly absent or less active in this policy field. Therefore, the analysis presented below will assess the change in the network structures on the short term (i.e. after the financial crisis in 2007) and on the long term (i.e. after the institutional reforms in 2010).

Assessing change in lobbying networks

As discussed, the financial crisis is likely to disrupt and transform the policy network of EU financial regulation. However, how can one assess stability and change in policy networks? This research empirically focuses on one specific form of network, namely a lobbying network surrounding the public consultations of the ESAs. With lobbying network, I refer to the networks based on actors (i.e. interest groups, firms, business associations, research institutes, etc.) that partake in a certain political activity, such as cosigning policy briefs (LaPira et al. Reference LaPira, Thomas and Baumgartner2009; Box-Steffensmeier and Christenson Reference Box-Steffensmeier and Christenson2014; LaPira et al. Reference LaPira, Thomas and Baumgartner2014; Box-Steffensmeier and Christenson Reference Box-Steffensmeier and Christenson2015) or participation in public consultations (Ackland and Halpin Reference Ackland and Halpin2019; Chalmers and Young Reference Chalmers and Young2020). Such a network can be used as a proxy to visualise and measure to what extent the underlying lobbying network structures change over time. For example, Ackland and Halpin (Reference Ackland and Halpin2019) construct networks based on interest group participation in consultations to assess stability and change in the Scottish policy map. Following their work, this research uses lobbying networks to assess stability and change in the policy field of financial regulation. More specifically, it compares three lobbying networks’ size, interconnectedness, balkanisation, centralisation, and its core-periphery structure over three time periods.

First, the transformation from cohesive and club-like policy communities to less cohesive issue networks implies the participation of new additional interest groups that are generally not supportive of the status-quo (Richardson Reference Richardson2000). In the field of financial regulation, this is also clearly illustrated. The global crash of financial markets highlighted the importance of sound financial regulation in order to protect consumers, pensioners, business in the real economy, etc. As case-studies by Kastner (Reference Kastner2014, Reference Kastner2017), and Kirsch and Mayer (Reference Kirsch and Mayer2013) illustrate, the financial crisis induced the participation of groups that represented the interests of the “victims” of the financial crisis. These newly participating groups are thus expected to increase the size of the network. This effect is further exacerbated due to the reforms. As rulemaking powers are delegated to the ESAs, the agencies also become a more relevant venue for a wider range of interest groups in the long term. This is expected to induce participation of additional groups that have an interest in financial regulation. In other words, more groups will lobby the agencies, for example through participating in consultations. Additionally, as the agencies are expected to draft regulation after the reforms, they also have an inherent need for expert-knowledge provided by interest groups (also see Arras and Braun Reference Arras and Braun2018). To fulfil this informational need, the agencies are expected to organise more consultations on policy issues. Logically, the more consultations are organised the more opportunities there are for interest groups to participate. Thus:

Second, as new interest groups enter the arena, the once tight network becomes more instable. More specifically, I expect that the interconnectedness of the networks will decrease. Before the crisis, public consultations were dominated by a small network of interest groups (Mügge Reference Mügge2006; Tsingou Reference Tsingou2015). As shown by Tsingou (Reference Tsingou2015), the actors that are active in financial regulation form a tightly knit network. A selective club of interest groups participate in public consultations and do so on a regular basis. The crisis and subsequent reforms are expected to disintegrate this tightly knit club as new interest groups enter the arena. In this regard, recent research (Redert Reference Redert2020) has shown that volatility increases after the crisis and reforms due to participation of new interest groups, and repeat players becoming less active over time. This shows that the once highly interconnected club of a few selective groups disintegrates into a more loosely connected network of different (sets of) groups. Additionally, as there is an increase in organised consultations (also see Expectation 1), I expect that interest groups have to be more selective in their participation. As participating in a consultation requires organisational, informational, and financial resources, the more consultations are organised the more interest groups have to “pick their battles”. This means that interest groups are less capable of being continuously present at all organised consultations, which implies that, on average, there will be less ties between interest groups. Hence, I expect that:

A third concept used to determine the stability of lobbying networks is the level of balkanisation of the network. Balkanisation can be conceptualised as the extent to which subsystems of a network are more or less partitioned off from one another (Ackland and Halpin Reference Ackland and Halpin2019). As the lobbying network expands, groups seek out discrete and well-partitioned policy niches (Laumann and Knoke Reference Laumann and Knoke1987; Browne Reference Browne1990). Consequently, a balkanised policy map is composed of well-partitioned subsystems that are loosely connected with each other. Studying a wide range of Scottish policy fields, Ackland and Halpin (Reference Ackland and Halpin2019) find that as networks expand, they do not become more balkanised. Instead, expanding policy networks are characterised by overlap and linkages between subsystems, where most interest groups are involved in a wide range of policy areas and a diverse set of issues (also see Baumgartner and Leech Reference Baumgartner and Leech1998; Ackland and Halpin Reference Ackland and Halpin2019). However, the Scottish policy networks did not experience shocks: the networks expanded, but there was no increased participation of interest groups with alternative views, preferences, and policy positions to those of the well-established groups. The crisis, on the contrary, did change the perception of financial regulation and is thus expected to induce such participation. For example, Pagliari and Young (Reference Pagliari and Young2014) showed that the financial crisis increased mobilisation of nonfinancial business groups active in the real economy, such as agricultural businesses. These nonfinancial business groups were the victim of the excessive risk-taking conduct of the financial sector as they suffered from the economic recession that followed the crisis. As such, these groups are likely to participate in consultations regulating the financial sector or specific markets such as commodities (for a discussion, see Pagliari and Young Reference Pagliari and Young2014). This finding is supported by empirical evidence that those groups active in financial regulation largely cluster together based on their policy preferences on certain issues (Chalmers and Young Reference Chalmers and Young2020). In other words, interest groups cluster together around certain issues. If interest groups do this for multiple (types of) consultations, a clear community is formed. In such a community, interest groups are mainly attending the consultations that the other members within the same community also attend. Community-forming is thus a clear indicator of balkanisation of the policy network. The increase in balkanisation is exacerbated in the long term. As the ESAs become a more important venue due to their new institutional position, they attract more interest group activity. As the network transforms from a small, club-like structure to a broader, more pluralised network, balkanisation is expected to increase – clustering those groups that have an interest in the same consultations. Hence, I expect that:

A fourth concept that helps determining change in network is the core-periphery structure of the lobbying network. Generally, lobbying networks are characterised by some core-periphery structure in which many nodes (whether interest groups, individuals, countries etc.) revolve more or less closely around a single core (also see: Grote et al. Reference Grote, Lang and Schneider2008). In this research, the core consists of actors that continuously and repeatedly lobby regulators by participating in public consultations. These are mainly financial sector actors with extensive expertise and knowledge, which used to “assist” regulators in their rulemaking efforts. After the crisis, however, the credibility of these actors as trustworthy partners deteriorates (Baker Reference Baker2010; Baxter Reference Baxter2011). Hence, it is expected that the position of these core groups is affected. Indeed, it would be illogical to suppose that the network’s core disappears after the crisis and reforms. Groups that are in the core (i.e. international associations, large private enterprises) simply have too much at stake at the EU regulators for them to be less active in regulatory policymaking. A more credible hypothesis, however, would be that the core still exists but that the networks become less centralised.

Centrality is key in network analysis as it shows how important actors are in a network (see Freeman Reference Freeman1978; Knoke and Burt Reference Knoke, Burt, Burt and Minor1983; Friedkin Reference Friedkin1991; Faust and Wasserman Reference Faust and Wasserman1992; Faust Reference Faust1994; Wasserman and Faust Reference Wasserman and Faust1994). Central actors in a lobbying network repeatedly target and share their views on different issues with the agency. Peripheral actors, on the contrary, are those actors that participate less often or in a limited number of issues. Central groups link together subdomains within a policy domain and in doing so presumably ensure that policy conversations are shared and linked across the domain (Ackland and Halpin Reference Ackland and Halpin2019). Indeed, as the network increases in size and more interest groups participate in consultations, one might expect that the centralisation of the network decreases, indicating a declining importance of central players in the policy network (also see Ackland and Halpin Reference Ackland and Halpin2019). In other words, the lower the networks’ centralisation the less distinct the core-periphery structure in the network is. Moreover, following the empirical findings of Kastner (Reference Kastner2014, Reference Kastner2017), Kirsch and Mayer (Reference Kirsch and Mayer2013), and Pagliari and Young (Reference Pagliari and Young2015), I expect that as the system expands the network obtains a less pronounced core-periphery structure. Hence: