The power of people versus institutions
What political science tells us about the open banking lead
“I’ve been noticing that we are privileging new positions over meaningful regulatory change,” wrote Vass Bednar in her newsletter Regs to Riches. Consider the headlines she linked to: Canada wants to create a new regulator to crack down on illegal online porn, or a data commissioner to protect personal data and privacy, or a consumer advocate to help Canadians raise complaints about banks, telecom giants, or transportation companies. It’s as if we want to signal our recognition of a problem by putting a person on the job, rather than making public policy to solve the problem. Bednar added that the signal-over-substance approach neglects the “structures that said new person is parachuting into, and the toes they may be stepping on,” which ultimately sets the appointed person up to fail.
People aren’t substitutes for public policy, and yet here we are. The federal government is supposed to appoint Canada’s open banking lead. According to the Logic, the Department of Finance has a shortlist of candidates after “canvassing the tech and financial-services sectors for months.” This is the person who, according to the government’s advisory committee on open banking, is to convene the industry to design and begin implementing the system.
Many fintechs are excited for this person to be appointed and get to work. Though I wouldn’t say I’m excited for it, I’m looking forward to the government appointing someone: people aren’t substitutes for public policy, but people do matter. The government’s advisory committee made several recommendations, and the appointment of the open banking lead could set them all in motion. The advisory committee knew the federal government likely wouldn’t make fast progress on open banking, and so getting a government-appointed person to guide the industry while the government gets its act together seems like a good compromise. Or does it?
People matter, sort of…
Political scientists Mark Copelovitch and Stephanie Rickard recently uncovered new evidence in a long-standing debate: can leaders transcend their structural constraints to change the world, or do their structural constraints all but pre-determine the influence they’ll have? Some think that history is a collection of stories about powerful people doing powerful things, their barriers be damned. Others think that leaders and elites have little power at their disposal, blocked by the barriers imposed upon them by the institutions within which they’re operating. It’s something political scientists have long debated in the context of international organizations.
In a recent essay, entitled “Partisan Technocrats: How Leaders Matter in International Organizations,” Copelovitch and Rickard studied one of the most powerful international organizations around: the International Monetary Fund (IMF). Created in the 1940s by the Bretton Woods agreement, the IMF is meant to maintain the global financial order. Acting as a lender of last resort for governments on the brink of insolvency, the IMF bails out governments. There is, however, no such thing as a free lunch. To get IMF money, governments on the brink need to implement reforms. And the reforms vary from country to country: some countries get money that comes with fewer conditions, while others get money that comes with more.
Copelovitch and Rickard checked for relationships between the variation in the loan conditions and the political ideology of the IMF’s managing director. The managing director is, as the political scientists wrote, “the most powerful person at the IMF.” They rub shoulders with the highest officials of IMF member governments. Also the chairperson of the IMF’s board, the managing director influences the research and policymaking agenda, as well oversees the approval of loans to struggling governments. The managing director can also hire people with a similar ideology.
Convenient for Copelovitch and Rickard is that managing directors at the IMF are, as they also wrote, “political animals.” For decades, managing directors have come to the IMF with political histories. The current managing director, Kristalina Georgieva, served as vice president of the European Commission. Before her, Christine Lagarde took the role after serving as a French politician. Before her, Dominique Strauss Kahn was the managing director. He’d enter the role after a stint in French politics, with ties to France’s socialist party. I could go on, as Copelovitch and Rickard do in their essay, but you get the point.
To check whether a managing director’s political ideology influenced the conditions that come with their IMF loans, the political scientists looked at two things.
The first is the variability of what they called “labour market conditionality,” which are just IMF loan conditions that have to do with labour market reforms. When IMF loans are contingent on labour market reforms, according to Copelovitch and Rickard, they tend to make workers worse off. These labour market reforms include cuts in wages and benefits, such as pensions, unemployment insurance, and job protections that make it harder for employers to fire people. It’s not hard to imagine why a lender of a particular political persuasion should want to impose such conditions on a financially challenged government.
The second thing Copelovitch and Rickard looked at is managing directors’ political ideologies. For that, they turned to the Manifesto Project. Award-winning and state-funded collectors of data, the Manifesto Project reviews parties’ election platforms to systematically study parties’ public policy preferences. It’s not a perfect data set, but it’s been around so long that academics know the issues and their way around them. Using the Manifesto Project’s data from the time IMF managing directors spent in politics, Copelovitch and Rickard constructed a measure of left leaning-ness to rank the managing directors.
With these two things, the hypothesis is straightforward: the more left leaning the managing director, the fewer labour market conditions should come with an IMF loan.
But the findings are not so straightforward. After controlling for a number of other variables that influence IMF loan conditions, Copelovitch and Rickard find that the political ideology of the managing director does matter—sort of. In fact, the more left leaning the managing director is, the fewer labour market conditions come with an IMF loan. Still, Copelovitch and Rickard found the political ideology of the IMF’s major shareholders and executive board also matter. As they put it, the managing director’s political ideology is “partly endogenous,” which just means the IMF’s governance structure is less likely to appoint a managing director with whom it doesn’t share a political ideology.
The partial endogeneity blurs the lines between the variables that Copelovitch and Rickard are trying to study, and so we’re not too far from where we started: is it the person who has the power, or is it the institutional parameters within which the person was appointed and is operating?
The open banking lead? More familiar than you think
Open banking and other financial sector public policy initiatives are plagued by a similar feature. The people matter, but so do the institutional parameters within which people are being appointed and by which they’re being constrained.
The open banking lead is parachuting into a structure and will be asked to step on toes that are powerful and resistant to change. Recall that Canada’s biggest banks have had more than two decades to solve the problem of screen scraping and account disaggregation. The Globe and Mail reported 21 years ago that Bank of Montreal was “the first major Canadian bank to roll out its version of account aggregation, the hottest thing happening in on-line financial services.” There was a debate between the biggest banks at the time because this was happening via account aggregation platforms who required Canadians to give up their online banking usernames and passwords. Some banks rejected the idea because of the privacy and security concerns.
For the open banking lead, the biggest challenge is that the structure they’re going to parachute into is a public policy vacuum. To date, open banking has no legislative or regulatory foundation. And it’s far from obvious that open banking will ever get one. We’re expecting the Liberals to reintroduce a privacy bill that will give Canadians a data-mobility right, but that just gives us a vaguely defined, theoretical data-mobility right. Canada will need more policymaking, on top of privacy reform, to turn the vaguely defined, theoretical data-mobility right into a specific, exercisable data-mobility right. Nonetheless, there has yet to be a credible signal from the government that it will do anything other than appoint an open banking lead and nudge the industry to coalesce around a voluntary data-sharing arrangement.
In a public policy vacuum, the open banking lead has little leverage. Fintechs will tell the open banking lead to move mountains, and big banks will tell the open banking lead that mountains move for no one who isn’t a piece of federal legislation that applies to banks. Of course, the character of the open banking lead will determine, at the margin, what their next move is: do they throw up their hands, resigned to the fact that banks are powerful and resistant to change, or do they find a way to press on and persuade the banks? After all, people do matter.
While they’ll be tested by the toes they need to step on, as well as the little leverage they’ll inherit from the structure they’ve been parachuted into, the open banking lead’s character will likely match the Liberal government’s on the file. Recall that Copelovitch and Rickard found that the IMF managing director’s political ideology is partly selected for by the IMF’s governance structure, which is less likely to appoint a managing director with whom it would clash. There’s no good reason why we should assume the same won’t be true of the Liberal government’s selection of the open banking lead.
Whether that’s good or bad is, at this point, anyone’s guess. What I know, however, is that the market isn’t sure of how to interpret the government’s commitments to deliver open banking. Though the government’s advisory committee on open banking envisions the lead getting things started and the government finishing the job, the government hasn’t clarified whether and how it will finish the job. What I also know is that the ideal candidate is someone who is neither lopsidedly bank-friendly nor lopsidedly fintech-friendly. It’s someone respected by both sides of the aisle, which is its own sort of challenge because some fintechs and banks have interests that don’t seem reconcilable.
So if the government were to appoint an open banking lead who was similar in style and vision to the government, how would I describe them? I’d say they’re unsure of where they want to go, but they want to anger neither banks nor fintechs as they straddle the line between pulling and pushing to reconcile irreconcilable interests.
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