Regulation: quality, not quantity please

Editor's Letter


Regulatory reform is grabbing the headlines - there is quite a bit for everyone to think about. Already, some individuals and associations are saying no real reform is needed. Others are calling for the complete overhaul of the supervision as we know it. Some feel immediate action is called for, while others are counselling a more 'wait and see' approach. The politics of retribution threatens to overwhelm in some places.

So, in the spirit of my usual frankness, I'd like to put some random thoughts to the collective OpRisk & Compliance community on the topic of regulatory reform:

First, risk management failed, people failed, systems and controls failed. But what happened over the past two years was also the collapse of a classic liquidity bubble - reading about John Law's remarkable Mississippi Bubble or indeed the South Sea Bubble raises all sorts of mental comparisons from an economic and monetary policy perspective (... and I'm not saying all bankers are crooks!!). Regulators must look at the bigger picture and figure out how to balance financial innovation and systemic stability - and that is really the basis on which any attempts to reform the global financial framework should begin.

Therefore, global financial framework reform must begin at the very top - I think a nightmare scenario would be where individual countries each set off on their own paths and we wind up with a rising protectionist tide in financial services. Financial innovation must be allowed to continue, but we should also understand how to nurture it and give it boundaries. As part of this, regulators need to set parameters around how banks grow businesses - firms must be encouraged to invest in infrastructure and talent if they won't adopt best practices of their own free will. Airlines and pharmaceutical companies have aspects of their operations tightly defined by regulation because of the consequences of "getting it wrong". The current crisis shows just how much everybody pays if the banks get it wrong.

I would argue, however, that instead of 'more' regulation, in many cases what's needed is 'better' regulation. And governments need to invest in their regulators to ensure laws and rules are implemented properly.

Over time, I think we'll find that analysing what went wrong will prove to be the easy bit. Fixing the system - from the top, down - will prove to be infinitely more challenging.

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