October 6, 2010
Over the last few months, your author has made occassional musings that the regulatory stance of governments trying to deal with the aftermath of the financial crisis might be in vain.
Lets be clear, it is the job of law makers to make laws. But sooner or later someone needs to enforce those rules. As I suggested here almost one year ago and here in March, a very reasonable case could be made for no new regulations, but instead a much greater emphasis on enforcing the existing financial rules.
After all, those rules were made for a reason and they were made by intelligent and thoughtful people. They must have some potential to work properly if fully used.
Perhaps now this subject is getting the attention that it deserves…
Earlier today, I attended an event in the Brussels Stanhope Hotel which had been laid on by Deutsche Bank’s EU Representation. The event was titled “The New EU Financial Supervisory Architecture – How To Make It Work”, and featured just two speakers. The first, Didier Reynders is currently the Deputy Prime Minister and Minister for Finance and Institutional Reforms here in Belgium. The second, Jacques De Larosiere, has a list of achievements too long to mention, but has been an instumental thinker in leading the financial regulation model to where we now stand.
Both men clearly have incredibly talented minds. These are not topics for the faint-hearted.
Several things came from this debate. The most glaringly obvious (for those that are not derivative or capital funding regulation experts such as myself) is the problems that will be created in staffing financial supervisory agencies.
This problem could potentially exist at all levels.
Mr Reynders suggested that a key priority from the Belgians is that the chairs of the new regulatory agencies must have lots of time. Finding independent and experienced staff is an obvious problem – the more experienced you are, the more likely you are to not be independent – but for many in the upper echelons of finance (and every industry) their collection of roles and positions does not permit them to have much time to actually devote to each endeavour.
Both men seemed to think that a much wider group of supervisory bodies will soon be required and this will provide another staffing problem. As more competencies are transferred to central agencies that will hopefully be able to harmonise rules (all financial regulators seem intent to do their best to end regulatory arbitrage), there will be a pull into Europe of the better staff in Member States.
The implicaction is that this pull of staff will leave national bodies even less able to regulate their home markets. How they will deal with this is a topic for reflection.
The real problem therefore, as Mr De Larosiere explained, is that, ” the quality of supervision is more important than rules”. Implementation will be a massive problem it seems.
After the event, speaking to an individual involved in financial regulation, it was suggested to me that work needs to be done to make financial regulation much more of a career than currently exists. As we know, the big banks tend to be able to hire all the best minds because of their ability to pay. If civil service style bodies cannot compete on price, they must try harder to compete on other issues. Without these talented individuals, the implementation of any new rules will be less than the world needs.
An obvious potential solution is to recruit from the financial services industry. As De Larosiere pointed out, the only people that really know what is going on in the markets are already in the markets.
However, both speakers felt that this could cause it’s own set of problems. The “light touch” era of regulation that has existed in some countries is gradually being replaced by an “intrusive” era. Will people with experience deep in the heart of capitalism be the right people to step in and say no? A background in trading markets and experience in making deals “work” if there is a profit to be made, may not actually be all that good for policemen.
While progress on market regulation is clearly being made – and fast – there are still lots of potential stumbling blocks to overcome.financialguy