Published on January 23rd, 2014 |
by Jack Cowell
Image © latestleaf 2013
The irrationalities of financial regulation
Banker bashing would appear to have gone out of fashion. For this I am sure many are relieved; their cars can once again be parked on the drive rather than in the garage, and securities speculators no longer have to tell people that they work in “sales”. It is for this reason that we can now begin to wonder what we have learned from our forray into mob hatred over the last 24 months.
One thing has not come as a surprise and that is the fact that we over-demand regulation. We seem to see it as some kind of economic good that we must receive and the “bankers” must give us. The reason our ravenous hunger for regulation has not been surprising is because, firstly, journalists who are keen to have an opinion and gain a following by “saying it like it is” have churned out thousands of words on why anyone who has ever set foot in a Barclays is one of Bob Diamond’s minions, aiding the dark Lord in his quest to erase pensions.
The second reason, and the much more important, is that economic rationality dictates that we will seek to over-regulate. Supervisory bodies and regulation in the form of laws are not provided by market processes but are simply given to us. As such, many seem to view regulation as a good, which we are going to pay a set price for, but which can vary in amounts as this price stays the same. The logic of homo economicus, therefore, drives us to demand more and more for our money. The real danger however is when the media manages to scare regulators into being so terrified of repercussions when (not if) things go wrong that they are kicked from inertia by this over-demand and begin to supply legislation that is unnecessary, ineffective and inefficient.
The abolition of the FSA (Financial Services Authority) in February 2013 saw the creation of a few distinct new bodies to split between them the previous mandate of the FSA. That means that financial institutions now have several bodies to report to. At certain times, institutions could report to two at once on a given matter. Most banks, insurance providers, credit unions and building societies must report to both the Financial Conduct Authority and the Prudential Regulation Authority, both of which have distinct roles, but both have vaguely defined objectives such as ensuring the integrity and strength of the financial system.
I have faith that the new framework is sufficiently tight so as not to allow gaps for issues to fall through and robust enough to act where the FSA could not. In fact the concern has little to do with the structure of financial regulation, which differs country to country with little relative variation. The only worry, as always, comes down to the regulation itself, and with that, resources. The FSA was a weak and limited institution because, above all else, it didn’t have the resources to effectively regulate every aspect of the financial system. The newly formed bodies, given that the most important role of governing the overall stability of the UK business system has been transferred to the Bank of England, are doubtful to do any better. Yet we can help them by recognising our ignorance and stop knee-jerking away any talk of loosening regulation or repealing some that may have been applied rather hap-hazardly during the “crisis”, or trough, whichever you’d prefer.
Too few people realise that the peak and trough mode of economic progression is the one we have been given, and it is the one we are stuck with. Chaos inevitably plays a role (which I have discussed elsewhere). Should we not be more keen to make it as painless as possible? For all the work that has gone into proving that over-regulating is as damaging as having no regulation at all, we seem fairly keen as a body politic to shoot ourselves in the foot. The separation of bodies may assure the public that their deposited money now receives different levels of protection to speculative holdings, but this has always been the case. It is merely the irrational demands of an angry mob that has made such placebos necessary. It is not the fact that your bank played the slots that made productive activity slow down, nor is it that they were doing it with your money, because that is something that has not changed throughout the history of banking.
Much of the debate now seems to be over, with the conclusion that “the more regulation the better”. Perhaps when sufficient time has passed, people more qualified than the general public, myself included, can revise recently passed laws for efficiency and necessity. One can only hope it will be better late than never.
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