The weakness of strong ties

In conditions of strong political tasking at the national level, such as may obtain when financial market issues become overly politicized, there is a possibility for differences to emerge between national regulatory jurisdictions. Such difference pushes market structures, offerings and participants away from global business models, and more in the direction of heterogeneity, so reducing TCTF. In such conditions, not only do national policymakers and regulators try to detach individual firms within their jurisdiction from wider regional or global linkages, which might make them vulnerable to market contagion - they also self-consciously seek to maintain some freedom of manoeuvre, vis-a-vis their regional regulatory peers.

On the other hand, when the loci of regulatory and market networking and decision-making move more to the regional and/or global levels (for example, Basel Committee, Financial Stability Board, European Regulatory Agencies and the European Central Bank), so regulation tends to part company with the national level and its specific political inputs. A converging, increasingly homogenous regulatory space emerges. For some commentators, this may be seen as an essential counter-weight to global capital; to others, including the present author, globally convergent regulation accelerates and magnifies TCTF. Regulators not only interact within the converging (if not yet single) architecture, they also maintain a culturally close and financially stimulating 'revolving door' relationship with global finance firms. Thus, previously nationally orientated regulators develop a globally shared professional culture, a single mindset. This makes for easy cooperation in day-to-day regulatory work in calm times. Highly connected/coupled systems deal well with small or medium-level shocks (for example, the failure of a single market participant), since ripples become diluted within the larger market environment (Haldane and May 2011). Also, regulatory colleges can cooperate to manage and contain the fallout from minor events: connectedness facilitates mutual aid.

However, when a series of major shocks appeared from 2007, the connectedness of the system proved to be counterproductive, as contagion was transmitted through it. Epistemic convergence is inseparable from shared cognitive blind spots (on epistemic communities, see Adler and Haas 1996) and regulators tolerate the build-up of systemic risk in the form of a 'level playing field', which stimulates ever greater connectedness. In such conditions (closely coupled markets), if larger shocks occur, these have the potential to be transmitted throughout the system, bringing down the whole. Just as it may be true in some cases that weak social ties can result in strength (Granovetter 1973), so strong ties can be a weakness, as has been briefly illustrated.

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