BY Amber Abdul

On September 15, 2008, the US-based investment bank Lehman Brothers filed for bankruptcy, signaling the beginning of the 2008 financial crisis, caused by the collapse of the US housing market. This collapse was triggered by a sudden drop in housing prices and the value-decline of real estate assets held by investment banks. As the value of these real estate assets plummeted, it left many homeowners owing more on their mortgages than their homes were worth. This made it challenging for homeowners to refinance or sell their properties, resulting in increased mortgage-payment delinquencies, which rippled out into the larger economy. As investment banks such as JP Morgan Chase, Lloyds, and BNP Paribas began to show signs of failure, governments around the world drew up comprehensive bailout plans. Despite the bailouts, the harms caused by the global financial crisis of 2008 were significant, exposing the weakness of governments, banking sectors, and their complementary institutions, regardless of their capitalist characteristics.

In the wake of the crisis, there was a reemergence in the academic literature of the Varieties of Capitalism (VoC) approach to understanding capitalism in different countries. Pioneered by Peter A. Hall and David Soskice in 2001, this approach seeks to understand how capitalist economies differ across countries, categorizing the economies based on their organization structure and the level of government coordination present.[1] Hall and Soskice identify two capitalist typologies: liberal market economies (LMEs) and coordinated market economies (CMEs). In LMEs, the government takes a more laissez-faire approach to oversight of the private sector, allowing markets to facilitate coordination among economic actors. Governments and firms in CMEs, however, rely more heavily on non-market relationships, such as information networks, to make agreements rather than relying on the market to coordinate economic actions.[2] CMEs are by no means command economies, but governments in CMEs are far more likely than LME governments to use targeted interventions and intersectoral planning, creating cooperation between businesses and labor. Britain and the United States are widely considered LMEs, whereas Germany is considered a typical CME.[3] The VoC approach is crucial because it highlights the diversity in economic and institutional structures across nations. Through this, it sheds light on the adaptation of economic models to specific national contexts, of which the 2008 financial crisis is one of many.

Because the global financial crisis of 2008 affected all countries regardless of their capitalist typology, many scholars began to doubt the VoC framework’s ability to accurately predict the effects of economic crises. However, this paper argues that VoC-predicted institutional frameworks can help predict how countries were affected by the crisis insofar as they reflect how countries created their bailout plans. This paper seeks to analyze how and to what extent the VoC framework influences bailout design. It also hopes to reintroduce the framework into the literature surrounding the global financial crisis. The paper will begin with a literature review to understand the current scholarly attitudes towards the VoC typology in the context of the crisis. The paper will then delve into the case studies of the United States, Britain, and France. These case studies will introduce nuance to how LMEs are defined, shed light on state-coordinated market economies (SMEs) which will later be introduced by the paper Schmidt (2012), provide a brief understanding of CMEs, and illustrate how these categorizations play out in the real world. This paper will conclude with thoughts about the VoC framework and its relationship to financial institutional structures and bailout methods.

Literature Review on the VoC Framework and Brief of Bank Bailout Games

In general, scholars believe the VoC framework is unhelpful in analyzing national responses to the 2008 financial crisis. Regini (2014) argues that the VoC framework falls short in describing the national structures in which firms fail, showing a gap between how structural characteristics might influence a national response. Given the different institutional arrangements that the VoC model defines, the surrounding literature is divided on whether government institutions, such as formal rules and structures, or power resources, such as lobbying, corporations, and other informal relationships between the public and private sector, explain the variation in national responses.[4] This debate is important to the bank bailout case, as there exists a two-way relationship between government and banks: banks have lobbying power which can constrain the institutional power of governments, and government officials who have passed through the revolving door can tap into their former Wall Street relationships. Returning to the VoC framework, while the particular type of capitalism a country practiced may not predict crisis response, the crisis opened the possibility of unpredictable forms of institutional reorganization.[5] Though the VoC framework lacks explanation for this reorganization scheme, a deeper analysis can improve the framework by assessing how professional networks shape economic and government behavior within different capitalist systems. The VoC framework must account for the new institutional arrangements the crisis produced as well as recognize the importance of power resources in regards to possible lobbying groups, businesses, and other bodies that can influence government policy. Exploring the relationship between VoC and bailout methods may answer the question of which analytical method is more powerful.

Scholars largely agree that the VoC framework does not place enough importance on the power resources and government institutional debate. However, there is some disagreement about whether the government institutional approach or power resources approach is more effective. Drahokoupil and Myant (2010) prioritize the power resources section of the debate, whereas Howell (2015) finds a deeper analysis of institutions to be more convincing in the context of financial crises. Drahokoupil and Myant (2010) argue that the VoC literature understates the importance of the state’s developmental capacity, stability of the financial system, and separation of politics and business.[6] Howell, arguing that government institutions primarily determine bailout methods, identifies the European Union as a market-coordinating institution.[7] Howell posits that EU regulations restrict the bank bailout methods its member nations are able to employ, leading, often, to coordinated actions among member states. These scholars thus continue the power resources and institutional debate but begin to open avenues where bank bailout method analysis can be used to better the VoC framework analysis.

Two papers seek to discuss this tension between domestic and international obligations. Welch (2011) identifies strain that was caused by the European Commission’s desire to form an EU-wide response despite most EU nations wanting to individually stabilize their banking systems rather than focus on the EU at large.[8] Swagel (2015) finds a similar tension in the US, where differing institutional, policymaker and corporate interests contributed to a delayed response to the crisis.[9] Analyzing diverging incentives and institutional allegiances can help strengthen the VoC framework. Such diversity can constrain bank bailout methods as it affects the dialogue between the banking and governmental sector. Bank bailout methods shed light on both and can thus be used to strengthen the VoC framework.

Works such as Schmidt (2012) try to combine the institutional and power resources analysis through the consideration of a new addition to the VoC framework: the state-influenced market economies (SMEs). SMEs are countries where the government takes on a large role in the involvement and direction of the economy through centralized-decision making and regulations.[10] SMEs exist, in effect, somewhere between CMEs and command economies, though they remain primarily liberal and capitalist. In contrast, CMEs foster cooperative relationships with corporations and government while LMEs prioritize flexible labor markets and market competition. The financial crisis of 2008 was a notable instance where free markets and minimal government intervention were not optimal. The crisis forced governments to be involved in the direction of their economies and intervene in the day-to-day operations of private sector businesses in a way they may not have previously, demonstrating that countries do not have “set” VoC typologies, but may find it valuable to switch between typologies during major crises.

Hindmoor and McConnell (2015), however, argue that many regulators and institutions in LMEs, which had historically solved economic problems by relying on free markets, were blinded by their faith in market forces, leading to divided responses to the financial crisis.[11] Hindmoor and McConnell contend that good responses depended on quality government-delivered solutions rather than firm-delivered ones, but that this division prevented the decisive response necessary to mitigate the crisis. Like Schmidt, Hindmoor and McConnell argue that, in order to best respond during the 2008 financial crisis, LMEs needed to, in effect, temporarily become SMEs, using the state far to influence the market far more than had been previously done. Overall, however, the literature finds that the VoC framework must work to improve its government, institutional, and power resource analysis to explain response patterns to the financial crisis.

When crafting bank bailouts, government officials must navigate a minefield of obstacles, including contagion effects, coordination games both domestically and abroad, and moral hazard. Possibly the most important of these concerns is the contagion effect, where the actions taken in one nation affect other nations, especially given the interconnectedness of the global economy. Because it increased the perception that policies implemented in one nation might clash with the policies implemented in another, the 2008 financial crisis caused experts to increasingly believe that more coordination for crisis management between countries was needed.[12] This concern was especially relevant in the highly connected European Union (EU), which placed rules on the laws member nations could enact, although still giving its member nations a substantial degree of freedom. This forced EU countries to seriously consider the potentially negative impact, such as the propagation of economic instability, their policies have on their neighbors, often greatly restricting what bailout policies a country can implement.[13] This was not seen in the US, where bailout design was merely a federal issue.

Moral hazard is the most commonly cited argument against bailouts. In this case, moral hazard manifests as potential encouragement for reckless behavior since investment banks would be supported or rescued in times of failure. Governments needed to strike a balance between intervening in the short term (i.e. bailing out banks to mitigate the impact of the crisis) and managing long term risks (i.e. that generous bailouts would lead banks, assuming more bailouts would come in the event of another crisis, to adopt riskier policy).[14]

The United States Case: A Corporate Advisor and a Temporary SME

1. The United States Political and Institutional Environment

The 2008 financial crisis in the US raised questions on how the bailout design would be constructed given its LME structure. Many scholars assumed that, because it tended to enact laissez-faire policy, the US would choose to uphold current market conditions as much as possible, with intervention consisting only of aid designed to create liquidity for businesses. In the US, firms have opportunities to invest fluid capital in search of higher returns and acquire liquid assets.[15] The structure of financial markets in LMEs links a firm’s profitability to its access to capital, even in recessions.[16] This is because firms in flexible labor markets, such as in the US, are able to lay off workers when access to capital is limited. Flexible labor markets are a common characteristic of LMEs because these kinds of economies typically have less stringent employee protections and wages decided at the firm level rather than through collective bargaining, unlike their CME and SME counterparts.

In the US, institutions are influenced by powerful lobbyists and their fragmented nature makes it hard to coordinate. The institutional design of the US banking sector consists of many small banks, with a few major investment banks such as JP Morgan and Goldman Sachs dominating the sector.[17] Figure 5.1 shows a clear trend of increasing consolidation of these major investment banks. In 2008, the first year of the financial crisis, fewer than 50 banks, with assets totaling over $350 billion, failed. In subsequent years, more, smaller banks, with a combined $250 billion in assets, failed. The financial crisis in the US thus first hit the largest investment banks and spread to the rest of the economy. Major investment banks were the most vulnerable early in the crisis, suggesting that policy designed to prevent big banks from failing might stop a crisis before it ever begins. This vulnerability can be predicted by the LME typology because it ties access to highly mobile capital to firm profitability. LMEs prefer highly mobile capital due to their emphasis on market-driven mechanisms that attract individual investors and investment banks. During this crisis, declining asset values and mortgage defaults restricted the mobility of capital, impacting investment banks who were heavily reliant on these assets. Larger investment banks, despite having greater access to capital, were more impacted due to their higher exposure to high-risk mortgage-backed securities, amplifying their vulnerability compared to smaller banks. Because LMEs tend to encourage investments in these riskier but more profitable and mobile securities, the VoC typology may indicate which banks of the economy were most vulnerable, which can point to a bailout design crafted to aid such banks.

Crucially, accepting aid from the government often comes with added regulations and oversight, which is not in the best interest of investment banks – especially those that have not failed. This is a characteristic present in the US as well as other LMEs. As previously stated, the US has uniquely strong special interests and lobbying groups. Powerful and large contributors to the economy such as investment banks play a larger role than the government in determining policy towards the markets, with their interests being represented by such lobbying groups. It is thus expected that healthy investment banks will exercise their political power to influence government intervention in order to avoid regulations. This is because a healthy bank would not need the bailout and thereby would not want to be restricted by the government. Such action would likely create a bailout design with a sort of “opt out” option, or a threshold that a bank reaches where they can opt out.

Fragmentation of government institutions also contributed to the crafting of a bailout design. Leading the crisis response were the US Department of the Treasury and the Federal Reserve. Feeling the tremors of the crisis as early as August 2007, these institutions relied on tried-and-tested tools of monetary policy and regulatory discretion.[18] The US’ initial response was thus one of status quo. Even after regulators began to realize intervention was necessary to limit the damage caused by the crisis, the tools available to them were limited by legal [and political?] constraints, with the Treasury often having to rely on the Fed’s emergency authority rather than directing policy itself.[19] While this fragmentation is primarily a result of the historical development of the roles of the Treasury and the Fed, it is important to note the specific influence that large investment banks can wield over the design of bailout strategies. The influence of large investment banks is a characteristic feature of LMEs. This highlights how the VoC may indeed retain relevance, especially when examining the specific dynamics within LMEs related to the influence of major financial institutions on bailout policies. Bailout design must consider differing bank wants, institutional fragmentation, and the dialogue between the governmental and banking sectors.

2. Early Bailout Schemes

In March 2008, the collapse of Bear Stearns marked the first bailout of the financial crisis.[20] The failure worried policymakers because of the bank's interconnectedness with other financial firms had the potential to create a domino effect across the financial system.18 This fear of additional failures arose out of the prevailing ideology of “too big to fail,” which refers to the notion that some financial firms are so large and of such systematic importance that their failure would severely damage the economy, compelling the government to rescue them. The failure of a large investment bank would greatly damage the economy due to the outsized role they play in hiring, lending, and reputability of credit. A failure of such a bank would usher a larger scale of unemployment and the freezing of credit markets as banks would be hesitant to lend to one another. The bailout design for Bear Stearns involved minimal government funding and the presence of a major private buyer, JP Morgan. The Fed financed Bear Stearns’ illiquid assets, forced Bear Stearns shareholders to take large losses, and left JP Morgan to acquire Bear Stearns while the Fed took only $1 billion in losses.17 This bailout method was clearly crafted in a manner expected of an LME. It assumed a smaller role for government intervention, and benefited another large investment bank. In addition, JP Morgan was incentivized to acquire Bear Stearns to expand the scope and size of its company. Although the Fed financed Bear Stearns’ illiquid assets, this bailout method was primarily based around non-government actors and largely followed the predictions set out by the US’ LME typology of the government relying on an acquisition as opposed to a liquidity injection. However, the initial financing of Bear Stearns’ illiquid assets showed the beginnings of the US government acting as an SME.

The Lehman Brothers’ collapse in September 2008 provided the impetus for the second major government bailout. This collapse is especially noteworthy because Lehman Brothers was a more international bank, with a sizable U.K. arm containing 5,500 employees.[21] This bailout design, unlike that of Bear Stearns, did not follow traditional LME predictions. Rather, its bailout design allowed for Lehman’s collapse by the government actively denying Lehman’s acquisition by other investment banks. The decision to not bail them out can be largely explained by public opinion. The public took interest in the transparency of government bank bailout policy and accountability of investment banks. Facing immense amounts of public pressure to ensure this accountability, and prevent the moral hazard of continuously bailing out banks, policymakers took a stricter approach to markets.[22] The Lehman Brothers’ collapse is a noteworthy example of the institutional power of government superseding the power of major investment banks, such as Barclays, who signaled initial interest in buying, but was only permitted to buy after government approval after a fire sale held by Lehman Brothers.[23] It also signaled the point where government institutions became significantly more involved in bailout design, and thus when the US temporarily exhibited SME characteristics despite traditionally being regarded as an LME.

3. The Troubled Asset Relief Program

As failures mounted, the US government moved to create a general bailout design. The government hoped to be widely cooperative and general in the services it provided. The Troubled Asset Relief Program (TARP), a Treasury Department initiative that began after the 2008 financial crisis, required the participation of all major banks, including healthy ones.[24] TARP provided insurance for up to $700 billion in troubled assets to banks.[25] The program also placed caps on corporate compensation, which is compensation given to senior management and executives of a company. This plan required the participation of healthy banks because it helped avoid the perception that the banks in the program were especially unstable.[26] Facing pressure from the Treasury, the largest banks, such as Citigroup, Goldman Sachs, Morgan Stanley, JP Morgan, and Wells Fargo, agreed to accept a total of $125 billion worth of TARP assistance.[27] This pressured acceptance of aid shows that the government assumed an SME-like role: it heavily influenced the decisions made by the top banks. This coordination, though happening due to pressure, is also reminiscent of the expected action of CMEs. In addition, the fact that banks were forced to participate in TARP shows that healthy banks such as JP Morgan and Wells Fargo were unable to exercise their political capital to negotiate themselves out of accepting government aid. Overall, this represents the increasing directive of the government and the fluidity of the US VoC typology during dire crises.

Ultimately, the goal of these bailout designs and of TARP was to restore investors’ confidence in financial markets. The US stayed true to its goal of returning to the status quo of self-sufficient markets, but the government understood it had to increase its role and thus act as an SME in order to achieve this goal. What this raises for the VoC literature is the idea that a country’s VoC typology is not stagnant and can change given the presence of an extreme strain on either government or economy. This is especially true of LMEs, as the VoC literature assumes them to be one-dimensional due to their presumed heavy reliance on markets. There must be an understanding that LMEs are multidimensional, in that their tools to stabilize crises can involve temporarily switching to other VoC typologies such as SMEs. Bank bailouts in the United States serve as evidence of the fluidity of VoC typologies.

The United Kingdom Case: An “Intrusive” Temporary SME

1. The United Kingdom’s Political and Banking Environment

The United Kingdom, with one of the largest banking sectors in Europe, had major exposure to the United States’ financial crisis. The beginning of the financial crisis in the UK is widely considered to be Northern Rock’s request for financial support from the Bank of England. After being publicized by the British Broadcasting Corporation (BBC), news of the request caused a £1 billion bank run on Northern Rock.[28] Although an LME with the goal of returning to the market status quo, the UK’s response deviated greatly from the US’ response. This is primarily because the media beat the government in informing the media of the crisis.[29] Because of this media publicization, the UK suffered from a more politically salient lack of market trust than the US. This forced the government to take a greater role from the start to stave off this stigmatization. While suffering from the typical problems faced by an LME such as institutional coordination, the UK uniquely had to craft a bailout plan that wrested control from the media and appeased public sentiments.

As a member state of the European Union, the UK had to create a bailout plan within the constraint of the European Commission’s (EC) guidelines. Article 87(1) EC states that “any aid granted by a Member State or through state resources [that] distorts or threatens to distort competition [is] incompatible with the common market.”[30] Two things are to be gleaned from such language: that a member state must have its bailout package approved by the EC and that this package must be compatible with the ”common market.” Unlike the US, the UK had an added legal constraint of creating a bailout package that did not benefit itself at the expense of other member states. Article 87 (3) (b) EC defines common market compatibility as aid that “remedies a serious disturbance in the economy of the member state” and must “be applied restrictively and must tackle a disturbance in the entire economy of a member state.”[31] Based on the rules given by the EC, the UK had to craft a bailout package that limited contagion effects to other member states, encompassed all main economic problems, and had measures that offset the distortions in competition.

The UK had to balance two different objectives: that of wresting control of public sentiments from the media and appeasing a larger, sovereign body, the EC. Insight can also be gleaned from statements made by the Chancellor of the Exchequer, the chief financial official in the UK, and the Prime Minister. The Chancellor of the Exchequer during the crisis was Alistair Darling, whose early rhetoric capitalized on the UK’s EU membership and its economic relationship with the US. Darling placed blame for the crisis on outside actors such as the US and the EU’s financial institutions, rather than the British government itself.[32] This lack of accountability crafted a press that was highly critical of Darling and the Labour Government, placing blame on globalization and British financial regulation.[33] Interestingly, Prime Minister Gordon Brown’s response echoed one of cooperation: ”the global crisis required a global solution, [to increase] international cooperation to regulate global capital flow.”[34] Given Brown’s rhetoric, being a member of the EU caused an ideology that was in support of a sort of global “bailout plan” between states. This rhetoric also indicates that the UK government was interested in pushing the narrative that they were not responsible for the crisis. This support is likely because EU states are used to policy that supersedes the national level. Overall, however, the UK was beholden to restrictions imposed by a supranational organization, whereas the US only answered to its own market and governmental structures. Thus, the UK suffered more from political constraints than the US.

Darling and Brown’s strategy of basing their rhetoric on globalization is based in fact. The UK’s banking sector is one of the most globalized of all major capitalist economies.[35] Barclays, Lloyds, HSBC and many others are headquartered in London’s “Square Mile,” where over 550 international banks and 170 global securities houses conduct their services.[36] From 2007–2008, there was an increase in foreign involvement in the banking sector from 14% to 19% of the UK's total banking assets.[37] The UK’s banking sector was more globalized than the US’ banking sector, which had large investment banks that mainly conducted their services within the US. However, the UK’s banking sector was also highly concentrated, with 5 banks making up 76.8%–79.1% of total banking assets from 2007–2008.[38] The size of the banking sector increased from $4,895.3 billion in total assets to $5,299.6 billion from 2007–2008.[39] There is a clear trend with the UK that is not seen in the US: in the early stages of the crisis, the UK experienced an expanding banking sector with an increase in foreign involvement. This indicates the slight delay of the contagion effects, where UK investment banks were likely still investing in assets very early into the announcement of the US’ Lehman Brothers failure. This also points to the idea that the UK government, along with the banks, initially undermined the crisis, relying on Darling’s belief in the market’s self-correcting power and the Bank of England’s (BOE) ability to stabilize the banking sector with its interest rate changes. The UK was on a similar bailout trajectory to the US; however, their bailout design had to be uniquely crafted to protect its large, EU constrained banking sector.

2. Early Responses and the Credit Guarantee Scheme

The UK’s crisis response first deviated from the US’ with the government takeover of banks Northern Rock and Bradford & Bingley (B&B). In LMEs, adjustment to economic changes is almost always company-led, with the government acting as a shareholder, giving aid in the form of loans, grants and relatively low levels of equity acquisition.[40] However, in the cases of these banks, both were nationalized via equity transfer. Equity transfer is the internal transfer of shares to existing shareholders, in this case the government, whereas equity acquisition is when an external actor buys a large stake in a company. This was the first time the British government had taken control of a bank since 1984.[41] Recall that the US allowed JP Morgan to acquire Bear Stearns and allowed Lehman Brothers to collapse early in the crisis. While the UK government made attempts to find large buyers for Northern Rock and B&B, a lack of trust in banks and desire to punish incompetent managers caused the nationalization schemes.[42] Nationalization of banks are punishments to managers because they are constrained by government interests and are paid less than if they were managing a private bank. While both acted like SMEs, the US stayed closer to LME principles, intervening in the crisis far less than the UK. The US took an “advisor” SME approach, merely acting as an arbiter between large investment banks, their CEOs, and potential buyers. The UK, however, took on an “intrusive” SME approach, seeking to nationalize rather than letting the banks collapse.

This intrusive approach grew even more pronounced with the UK’s announcement of the Credit Guarantee Scheme. The Credit Guarantee Scheme had measures that intended to provide banks with sufficient funds to help firms restructure their finances and maintain lending in the medium term.[43] This bailout plan had measures that amounted to £250 billion, with debt issuance making up £100 billion[44] and a bank recapitalization fund making up £50 billion.[45] Steep, risk-based fees were also imposed on banks that opted into the plan.20 Participating institutions also faced prohibitions on the level of advertising.38 The government could also direct a firm’s payment of dividends on their shares to stockholders.[46] Finally, one of the most controversial components of the plan was the fact that the government cut bonus payments from banks that were fully or partly nationalized[47] and the Treasury could appoint new corporate board members when it saw fit.[48] This component was not popular among bank executives, and some banks likely chose not to opt into the plan due to these controls alone. The UK government was thus far more intrusive in the firms that joined the plan than the US was with the TARP.

3. Comparing the UK and the US

While the UK bailout plan was far stricter and more selective than the US bailout plan, it still displayed some LME characteristics, namely having the government act as a shareholder and imposing restrictions in order to maximize its shareholder profits, although in the end the government did nationalize the companies. However, the US and UK differ in their levels of intrusiveness. While the US pressured cooperation, the extent to which it involved itself in the corporate governance of the bank was very limited. The US government merely “advised” the CEOs of each bank. The UK government, however, directly involved itself in corporate governance, even going as far as to reappoint members to the board of directors. The UK was thus an intrusive temporary SME, whereas the US was an advisory temporary SME. The US government did not have the absolute authority over bank CEOs like the UK government did, hence the “advised” label.

It is widely understood that LMEs tend to stay out of corporate governance. The differences in responses between the US and UK lie in a separate but adjacent topic: central bank independence (CBI). Central bank independence indicates the level of influence politicians have on central bank policy and leadership. A 1998 paper by William Bernhard discusses the differences between the US’ and UK’s CBI. The US has a highly independent central bank, whereas the UK is characterized by a more dependent banking system. Despite both being LMEs, the US has a mean independence value of .73, whereas the UK has a mean value of .42.[49] These values are calculated on a scale of 0 to 1, with 0 indicating a low CBI and 1 indicating high CBI. These values were computed through averaging indices developed by other authors.[50] There is a relationship between CBI and the limits a government sets for itself when choosing to intervene in a firm‘s corporate governance. Having heavy oversight for central bank board appointments likely indicates that changing a corporate board is accepted as a viable solution for poor firm governance. This is because a lower CBI indicates that the government has more political influence over its central bank, thereby making the central bank with shorter-term policy goals due to changing administrations, and a greater inclination for government and the central bank to coordinate on policies. Low CBI shows that a government is more willing to intervene in the setting up of the boards of its financial institutions, thereby indicating a greater level of comfort in intervening in the corporate board of a failing firm if necessary. For example, a dependent central bank shares similar policy objectives with the government, tying efficient policy outcomes with government reputation.[51] This aligns with the Credit Guarantee Scheme’s bonus limit imposed on nationalized banks, as the performance of these banks laid under the government’s direction. This relationship underscores how a lower CBI corresponds with increased government involvement and oversight in bailout efforts.

Although both LMEs followed a similar SME-like strategy, the US and UK fundamentally differ in their level of “intrusiveness” in participating firms. It is true that both have unique characteristics, such as the US-based firm’s lobbying power and the UK’s early politicization of the crisis and their membership in the EU. However, their divergent responses point to the deeper institutional underpinnings, such as the regulatory frameworks and governance of each economy. With greater institutional understanding, the VoC literature can identify subtle differences between LMEs.

The French Case: The Maverick

1. Dirigisme and Post-Dirigisme

France, also with one of the largest banking sectors in the EU, stands as a peculiar case amongst the traditional LMEs. The paper Schmidt (2012) France an SME, with its statecraft being called “dirigiste,” in which firms exercise autonomy in their respective sectors but heed the advice and direction provided by the state.[52] Unlike its LME counterparts, however, France did not behave like an SME, which would be expected when crafting a bailout design. Instead, it relied on an informal network of cooperation and negotiations between the nation’s top banking CEOs. France, with its oligarchic capitalist system and negotiated bailout design, stands alone.

Beginning in the 1980s, the banking sector underwent radical privatization and internationalization. The three largest French banks, Société Générale, Banque Nationale de Paris (BNP), and (now dissolved) Crédit Lyonnais were privatized from 1987–2002.[53] These privatizations were designed to create national champions: large banks that would come to dominate the French financial sector and gain a global scale. This move aligned with a larger strategy to strengthen France’s financial sector. In 1988, legislation was passed to create confidence in the new financial technique of securitization, which condenses financial assets such as mortgages and loans into a single security, which was promoted due to new solvency guidelines given by the EC.[54] Other countries, like the UK, opted for a more laissez-faire approach when introducing securitization, meaning that the government allowed firms to operate with more freedom with this new financial instrument and did not immediately opt for explicit legislation.[55] In addition, the government’s behavior towards its financial sector points to the idea that EU membership forced economies to become more competitive. This competitiveness is fostered because it attracts more investors seeking diverse investment opportunities, lower borrowing costs, and increased liquidity in economies. This idea of competition appears to be in line with the LME model. Throughout the 1980s and into the early 2000s, the French state took on a leading role in transforming its banking sector to be internationally competitive, thereby diminishing the French government’s role in its economy. Dirigisme had temporarily come to an end.

This “diminishment,” however, was not to be taken at face-value. Where nationalization fell, informal contacts and cross-bank cooperation between firm and government took its place. In this post-dirigisme world, government officials and powerful bankers were not distinct groups.[56] These large private banks were controlled by an elite coming out of public service.[57] Consequently, there was a close and established relationship between the political and banking elites. Of the cases explored in this paper, only the US comes close to such intertwining relationships between government and banks through its powerful lobbying system. However, the difference between the US and France lies in the kind of relationships that were cultivated. In the US, these relationships were cultivated by lobbyists, intermediaries who leverage their governmental connections to further the interests of the organization they represent (typically a corporation). In France, however, these relationships were fortified by shared education and experiences, creating an “informal consortium” between the banking sector and government.[58] The government thus maintained a level of dirigisme through friendships. It is through these friendships that the government gained an “advising” nature similar to the US. However, given the unique friendship ties between the government and banking sector, its bank bailout system was informally decided through trust and agreements rather than by direct legislation.

2. Bailouts and the Structure of the French Banking Sector

Relative to other countries, France did not have significant exposure to the financial crisis. Compared to the UK and the US, France’s value-added of non-financial companies grew by 0.5%, where these had contracted in the UK and US by 2.1% and 1.7% respectively.[59] This is because the French government cultivated a balanced business model of banking, while the UK and US relied more heavily on their investment banking institutions. The fiscal policy of the 1980s–2000s produced a retail-focused economy, a highly saturated domestic retail market, and low-foreign penetration into the French banking sector.[60] France has a significantly smaller investment banking sector compared to the US and UK, saving them from major exposure to toxic assets. However, the liberalization policies of the 1980s–2000s increased equity investments from 29.1% to 79% among banks.[61] Equity market capitalization, a measure that estimates the market value of a company, also reached a peak of 105.5% of GDP in 2007, reflecting the French financial system’s increasing dependency on banks and valuation of their assets.[62] What this created was a dual market in which large, mutual banks (those owned by depositors rather than shareholders) had investment banking arms while investment banking was a secondary service to retail banking. The inseparability of mutual banks and investment banking, however, made these mutual bank arms suffer large losses.

Of the many small banks within the French system, two mutual banks and two commercial banks dominated. On the mutual bank side were Banques Populaire and the Caisse d’Epargne (BPCE) with their shared investment banking arm Natixis, and Crédit Agricole with its investment banking arm Calyon. On the commercial bank side, BNP Paribas stood as the largest, suffering the most losses out of any French bank, alongside Société Générale, which also suffered large losses. BNP Paribas, Société Générale and Crédit Agricole each increased their foreign bank lending in the years leading up to the financial crisis.[63] This penetration into foreign markets is where France suffered most of their losses. While the larger investment banks faced repercussions due to their foreign involvements with failing banks and markets, smaller banks operating solely within France were less exposed and shielded from the brunt of the crisis. This contrast in exposure levels led to unintentional safeguarding for the smaller French banks.

The cooperative and friendly nature between the banks and the government is the result of a “financial network economy.” The banking sector is closely knit in France, with each having membership in the French Banking Federation (FBF). Because of the government’s relationship with the banks, the FBF acted as a de facto government agency, although it was run by the banks. With over 500 members, five French banks make up its Executive Council.[64] Recall that an SME describes an economy where firms heed the advice of government but otherwise act freely, whereas a CME is close, constant coordination between businesses and government. France, under SME direction, has been displaying the coordinated networking characteristics of a CME. France thus cannot necessarily be called a pure SME, but is something in between. Characterizing France as an amalgamation of SME and CME characteristics is further proven by the role taken by the FBF during bailout discussions, in which the FBF decided how to distribute the bailout money to the member banks.[65] Overall, the banking sector is one that is highly coordinated, has strong friendly ties to the government, and shows that France is an SME and CME hybrid.

3. Plan De Soutien Bancaire – SFEF and SPPE

On October 16, 2008, the Société de Financement de l’Economie Française (SFEF) and the Société de Prise de Participation de l’Etat (SPPE) were established by legislation. The SFEF is jointly owned by the largest banks in the French economy and the government. The banks own 66% of the SFEF and the government owns 34%.[66] This ownership agreement represents the coordination between the government and the banks. This coordination also shows deference given to the banks, as they own most of SFEF. The purpose of SFEF was to raise funds by issuing debt instruments on the global market.[67] By the end of its operation, it had raised €77 billion.[68] Like the UK’S Credit Guarantee Scheme, institutions had to qualify to be considered under the plan. This plan raised funds on the international market and used the money raised to give loans to struggling banks in France.[69] Interestingly, however, beneficiary credit institutions had to abide by economic and ethical obligations with the French government.[70] Even within the fine print of SFEF, relationships between government and the banks were strengthened and maintained. It is clear that with SFEF, France leaned into more CME characteristics.

Interestingly, the French government acted as a company through SPPE. SPPE was a limited liability company owned entirely by the state that participated in both domestic and global bailouts.[71] Of its domestic banks, SPPE capital injections amounted to €21.9 billion to the top 6 banks in the French economy.[72] Abroad, the SPPE participated in the bailout of Dexia, a Belgian-owned bank that had made headway in the French banking sector. This demonstrates cross-border lines of cooperation, which can be attributed to both Belgian penetration in the French economy and EU membership facilitating coordination. Firms could participate voluntarily in SPPE, and those who took capital injections had to comply with lowering executive compensation and lending targets.[73] In addition, the French state acquired securities, albeit without voting rights, thus depriving major penetration into corporate governance.[74] With SPPE, the French government shows an intrusiveness reminiscent of the UK.

The significance of the SFEF and SPPE laid in their strategic role in navigating EC constraints. As an EU member, France faced the same EC constraints as the UK. However, unlike the UK, France created loopholes to avoid the restrictive rules on public debts.[75] The SFEF’s ownership structure creates ambiguity over whether the debt belongs to the state or to the banks. It should also be noted that the SFEF and SPPE were not explicitly structured as bailout designs, but rather as institutions that facilitated capital infusions from the government. This allowed France to introduce capital infusions without overtly violating EC rules. Originality of these state aid designs was thus on France’s side, as both SFEF and SPPE were eventually approved by the EC.

In contrast to the more explicit intervention designs of the US’ TARP and the UK’s Credit Guarantee Scheme, SFEF and SPPE were not initially structured as bank bailouts and were merely covers for capital infusions. This distinctiveness is crucial because it shows that France was leaning towards CME characteristics, emphasizing collaboration between the French government and investment banks and thereby showing the malleability of a country’s VoC typology under crisis. Overall, this emphasizes the importance of institutional flexibility when shaping bank bailout responses, and thereby adds nuance to how the VoC typology can be applied.

4. Comparing France, the UK, and the US

Despite both being EU members, France and the UK crafted bank bailout and state aid systems that were decidedly different. For the UK, it was the hardest hit due to its large and globalized investment banking sector. As an LME, the UK followed a similar path to the US, which was increasing government involvement in the economy, temporarily mimicking an SME. Interestingly, France, traditionally regarded as an SME, did not stick to an SME-like strategy. While the state did take a leading role in France, it is clear that deference was given to firms when crafting the SFEF and SPPE. From dirigisme to post-dirigisme, it appears that France cannot purely be regarded as an SME. Rather, France morphed into something that is both an SME and CME, and during the crisis, it transitioned to a more CME-centered strategy. More intrusive than France, the UK utilized nationalizations and saw board appointments as a viable solution; their bailout plan was more punishment based. Given that the French capitalist system is friendship-based, France did not use nationalization. In the event that they obtained securities, the French state even kept out of corporate governance by denying themselves voting rights. It is clear that the French government respected the authority of firms, and that some level of trust underlines the state aid process that was not observable in the UK. The more punishment-based UK bailout system also produced the largest budget, with France producing the smallest budget. The UK government thus dedicated the most resources, was the most intrusive, and was the strictest in its bailout design.

Previously, this paper considered CBI as a possible explanation for intrusiveness levels. However, the UK and France have similar CBIs at .40 and .47 respectively.50 With a consideration of the French case, it is clear that CBI alone does not determine intrusiveness. Rather, an in-depth analysis of the dialogue between the banking sector and the government must be explored. As an LME, the UK did not have an intimate dialogue with its banking sector, allowing it to increase its presence without damaging any existing relationships. Although the US is also an LME, there is still some direct dialogue between the government and the banking sector due to its powerful lobbying system. This is likely why the US avoided nationalizations. However, the French government has the strongest and most direct relationship with its banking sector due to years of SME-like interactions and policies cultivating a CME-like banking sector. In other words, the informal relationships between the French government and its financial sector cultivated an environment where coordination between the government and investment banks was the norm. There is thus more trust between the French government and its banking sector. Like the US, therefore, France was able to be far less intrusive than the United Kingdom.

In terms of cooperation between firms, the US was the only one to compel each firm to sign up for its bank bailout plans. Both France and the UK employed the use of voluntary participation. One possible explanation for this is the level and type of political salience in each country. Of the three, the UK faced heavy politicization of the financial crisis. The dissatisfied sentiments felt in the UK during this time would later lead to the 2016 referendum on continued EU membership, commonly known as Brexit. Voluntary participation in the UK bailout plan was likely a result of wanting to avoid public backlash and bank runs similar to Northern Rock. With regards to France and the US, lower levels of politicization occurred as the crisis progressed. France’s choice of voluntary participation likely rested in the trust between banks and the government, as compelling them to join would erode the relationship between the sectors. The US, being the starting location of the crisis, was primarily concerned with protecting confidence in its markets. The US employed a “blanket” strategy so that the weakest banks were not picked apart by public scrutiny. With varying levels of salience and interactions with their respective banking sectors, each country crafted different bailout plans.

Conclusion: What Does this Mean for the VoC Literature?

This paper has sought to answer to what extent VoC typology determines bank bailout design. Instead, this paper has found little relationship between VoC typology and bailout design. Rather, what has been found is that VoC typology determines the structure of the banking sector, which thereby determines exposure levels to the crisis. VoC typology is, however, indirectly related to bailout design. Overall, the development of bailout designs are influenced by many inputs such as the structure of the banking sector and the dialogue between government and banks. These are indirectly influenced by VoC typology due to differing institutional structures, norms, and relationships that shape a country’s economic landscape.

This paper has also found that VoC typology is fluid and should change under times of extreme crisis. The US and UK, both LMEs, employed an SME approach, and after the crisis, reverted back to being LMEs, albeit with new regulations. However, France, the SME, employed a hybrid of an SME-CME approach, with more CME characteristics. That said, France’s response was in line with their long-term transition from an SME to a CME that began with the mass privatization of the 1980s. As a result, France did not have any radical changes in VoC typology, unlike the UK and US. The exact reason for France’s shift from an SME to a CME occurred is beyond the scope of this paper, but it nonetheless displays the fluidity of VoC typology and questions whether France can still truly be considered an SME given its amalgamation of characteristics.

The VoC approach is an interesting baseline that can be used to analyze a variety of a country’s political and economic characteristics. This paper has shown that the VoC framework cannot alone determine a country’s bailout strategies and that additional analysis of a country’s institutions must be made. With an adoption of an expanded scope of analysis, the VoC framework can be improved to explain the response patterns to the 2008 financial crisis and beyond.

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[1] Hall & Soskice, “Varieties of Capitalism,” 8.

[2] Ibid.

[3] Ibid., 16.

[4] Regini, “Models of Capitalism and the Crisis,” 24.

[5] Ibid., 29.

[6] Drahokoupil & Myant, “Varieties of Vulnerabilities,” 271.

[7] Howell, “Coordination in a Crisis,” 133.

[8] Welch, “Financial Crisis,” 485.

[9] Swagel, ”Political and Institutional Constraints,” 108.

[10] Schmidt, ”State-Influenced Market Economies,” 156.

[11] Hindmoor & McConnell, ”The UK’s Great Financial Crisis,” 63.

[12] Niepmann & Eisenlohr, “Bank Bailouts,“ 270.

[13] Ibid., 288.

[14] Poole, ”Moral Hazard,” 17.

[15] Hall & Soskice, ”Varieties of Capitalism,” 17.

[16] Ibid., 8.

[17] Woll, ”The US and U.K.,” 95.

[18] Swagel, ”Institutional Constraints,” 108.

[19] Ibid., 111.

[20] Ibid., 110.

[21] The Guardian, “£1.1bn in fees, 3.1m hours, 14 years: the UK cost of winding up Lehman Brothers,” 2022.

[22] Dosdall & Rom-Jensen, “Letting Lehman Go,“ 202.

[23] White & Dash, New York Times, “Barclays Reaches $1.75 billion Deal for a Lehman Unit”, 2008.

[24] Culpepper & Reinke, ”Structural Power and Bank Bailouts”, Table 2.

[25] Swagel, ”The Financial Crisis,” 2.

[26] Culpepper & Reinke, ”Structural Power and Bank Bailouts,” 436.

[27] Calomiris & Khan, ”An Assessment of TARP,” 56.

[28] Pritchard, ”Dark Clouds and Turbulence in Europe,” 99.

[29] Ibid.

[30] European Commission, ”State Aid N 507/2008 - UK”, 6.

[31] Ibid, 7.

[32] Pritchard, ”Dark Clouds and Turbulence in Europe,” 105.

[33] Ibid, 106.

[34] Ibid, 110.

[35] Grossman & Woll, ”The Political Economy of Bailouts” Figure 3, 583.

[36] Moschella, ”Different Varieties of Capitalism?,” 85.

[37] McNamara, ”The UK’S Credit Guarantee Scheme (U.K GFC),” 930.

[38] Ibid.

[39] Ibid, 929.

[40] Moschella, ”Different Varieties of Capitalism?”, 84.

[41] Ibid, 86.

[42] Ibid, 79.

[43] United Kingdom Debt Management Office, 2008 Credit Guarantee Scheme.

[44] McNamara, ”United Kingdom: Credit Guarantee Scheme,” 927.

[45] Ibid., 934.

[46] Woll, ”The Power of Inaction”, Figure 2.2.

[47]Pritchard, “United Kingdom: Politics of Government Survival,“ 115.

[48] Moschella, ”Different Varieties of Capitalism?” 88.

[49] William Bernhard, ”Variations in Central Bank Independence,” Table 1.

[50] Ibid, 312.

[51] Ibid, 314.

[52] Schmidt, “What Happened to the SMEs?,” 162.

[53] Howarth, ”France and the International Financial Crisis,”383.

[54] Ibid, Directive no. 89/647., 384.

[55] Ibid.

[56] Jabko & Massoc, ”French Capitalism Under Stress,” 563.

[57] Ibid, 565.

[58] Ibid, 566.

[59] Cabannes et. al., “French Firms in the face of the 2008/2009 crisis,” 1.

[60] Howarth, ”France and the International Financial Crisis,” 385.

[61] Ibid, Table 1.

[62] Ibid.

[63] Ibid, 379.

[64] Jabko & Massoc, ”French Capitalism Under Stress,” 574.

[65] Ibid.

[66] Woll, ”The Power of Inaction,” 117.

[67] Fang, ”French Liquidity Support through SFEF”, 682.

[68] Ibid.

[69] Fang, “French Liquidity Support through SFEF,” 1.

[70] Ibid, 686.

[71] Jeffereis, ”France SPPE,” 65.

[72] Ibid, 70.

[73] Ibid, 65.

[74] Jabko & Massoc, ”French Capitalism Under Stress”, 571.

[75] Ibid, 576.