Financial regulation, collective cognition, and nation state crisis management

Abstract

Purpose – The purpose of this cross-national study is to evaluate the communality and differences in experiences and policy responses in the run up to the 2007-2009 credit crisis and during its critical early stages in Germany, Ireland and the UK. The importance of shared cognitive illusions regarding the power and stability of financial markets is emphasised. Design/methodology/approach – A multiple case study approach is used which draws on publicly available information to trace developments leading up to bank failures (or near failures) and the evolution of government responses drawing upon alternative paradigms used to justify State intervention. Findings – Findings emphasise the role of state regulatory bodies and their response to the crisis as a primary source of the “rules of the game” in financial markets, here it is the “game of bank bargains” and a potential source of repair. Given the degree of interconnectedness, opacity and complexity of financial markets investors/politicians/regulators will fall victim to cognitive biases which affect their decisions. Research limitations/implications – This case study method allows identification of patterns in decision-makers’ behaviour and yields richer insights than a quantitative approach but is limited in its generalisability. Practical implications – This paper offers practical implications in suggesting that a pivotal step in effective crisis management requires directly addressing sources of uncertainty, namely, time pressure, complexity and opacity of underlying cause–effect relationships, empowering decision-makers to act responsibly. Originality/value – This paper is novel in its illustration of the collective cognitive paradigm for justifying regulatory action across three countries using six case studies.