There's a lot of interesting activity these days with respect to reforming financial regulation and oversight. On one side of the pond, the US Senate just approved a "far reaching" regulatory bill, which, if stitched together with the House of Reps version, could mean big changes are coming to Wall Street. Meanwhile, on the other side of the pond, the United Kingdom's new Coalition Government of Everlasting Friendship seems set to push forward with reform of its own.
Commentary abounds on both of these projects, but I would merely point to two articles: the first by Clive Crook on the US Senate bill; the second by Howard Davies and David Green (both formerly of the Financial Services Authority) on the situation in the UK.
To set the stage, Davies and Green make a truly important point:
"Any objective assessment of regulatory structures around the world during the crisis would find little or no relationship between structure and success."
This is exactly right. We'll come back to that in a second. They continue:
"But we can draw three lessons from the crisis. First, the central bank needs good information about the financial system as a whole. Second, there is an argument for a second tool for the central bank to influence credit conditions. And third, the case for integrated regulation has been strengthened."
The second tool being referred to is the anomalous "macroprudential regulation" - the idea being that measures which would fall under this category (raising capital requirements, modify mortgage requirements, whatever else) might have a similar impact on the supply of credit as would changing the interest rate. It therefore makes sense to have them considered together. Okay, I'm convinced.
But under what structure? Davies and Green think that both should be under the roof of the central bank. Another possibility is the one proposed in the US Senate finance bill: create a financial stability oversight council. The council would consist of the most senior representatives from a whole range of government departments and agencies, including Treasury, the Fed, FDIC, the SEC, the new consumer protection agency, and the Federal Housing Finance Agency. In theory, interest rate decisions could be discussed alongside a whole range of financial policy considerations: fiscal policy, mortgage regulations, competition concerns, you name it. Get all the key players in the same room, the thinking goes, and problems can be identified and solved in a more coordinated manner.
Clive Crook dismisses this council idea as a weak solution. To be sure, it has not done anything to simplify the messy spiderweb that is financial regulation in the United States. On the other hand, a similar committee exists in Canada, a country widely praised of late for having weathered the financial storm quite nicely - maybe it could work in the US as well?
This is where we return to the opening statement from Davies and Green: there is no link between structure and success. Regulatory structure can be, at best, a facilitator; at worst, a barrier. I suspect that this council will only be as effective as its members allow it to be. An ineffective council would merely result in the status quo. Anything beyond the status quo is progress. Viewed that way, there is a lot of scope for this council to demonstrate its value in heading off future financial crises.
Nevertheless, I am increasingly of the view that who is sitting around the table matters more than the shape of the table*, so to speak. People matter. Regulatory culture matters. And that, unfortunately, is not something which can be legislated.
*It could very well be that I'm being heavily influenced by the book I am currently reading, Liaquat Ahamed's excellent Lords of Finance, which tells the story of the world's four most influential central bankers in the run-up to the Great Depression.