Re-regulation, or rather, improving the existing financial regulatory system, is moving back onto the agenda in the US and UK.
It’s no wonder after the hundreds of billions of dollars of losses, bank failures, rescues, support and aid from governments and central banks in both countries.
Both countries’ financial systems have been crippled by the credit crunch and recession, both have seen banks fail and others come close and be bailed out by the respective governments in paralleled examples of state intervention.
The two economies have also been brought to their knees, and depression has been only averted by unprecedented spending by the Fed and the Bank of England and other measures not normally associated with central banks.
Banks have stopped lending, and they are still faced with rising bad debts and impaired loans and recovery is still distant, even if the markets ( the US market in particular) have risen strongly on one quarter’s trading performance in the three months to March.
Now both the US and UK are starting the task of changing the rules and structure for overseeing banks and others in the markets to try and ensure there is no repeat (at least for a generation) of what we have been through and will continue to experience in the next couple of years.
We in Australia have little to learn from President Obama’s proposed reforms of financial regulation in the US, and some of the ideas emerging from the UK.
Our banks are stronger and better capitalised, but more arrogant than ever.
The Big Four: NAB, CBA, Westpac and the ANZ, also dominate the economy and the financial system to the point where regulators here will have to treat them very carefully and be ever vigilant to ensure one or more doesn’t do something silly and imperil the whole economy.
In fact it can be argued that President Obama has much to learn from Australia and the way we have managed to arrive at what appears to be a sensible structure.
Australia has a council of regulators consisting of Federal Treasury, the Reserve Bank which regulates the economy through monetary policy, APRA which regulates all financial groups and ASIC which regulates markets and companies.
The Council was set up to make sure nothing slipped through the cracks, as they did in the US and UK, for example.
Australia has not had a bank or financial failure so far this crisis (we learned a lot from the $A5.3 billion failure of HIH) and APRA moved early to force up the cost of some forms of off balance sheet financing by the banks.
The key here seems to be better co-ordination, good intelligence and information flows and a willingness to use the regulatory powers: especially at APRA.
ASIC, like the SEC in the US, has been a weak point with scandals like Opes Prime, Allco, Babcock & Brown and a host of other financial engineers were allowed to flourish with no regulatory checks.
The Managed Investment Scheme debacles are further examples involving Timbercorp and Great Southern are other examples.
But the main point to be made from the President’s proposals (the main points of the President’s proposals are here is that no matter how much you change, revamp, re-work and legislate, it comes down to two things: the quality of the regulators and their independence from the industries/sectors they oversee.
The Fed gets a significant boost in its powers to regulate the financial system and override (very nicely, mind you) other regulators, especially in assessing systemic risk. It’s the only way the President can work his way round the entrenched interest in Congress.
Too many regulators get captured, to varying degrees, by their industries and key players and end up defending their turf, rather than regulating for a broader, national good.
The US Securities and Exchange Commission is a recent example of that, as is the Office of Thrift Supervision and the Office Of The Comptroller of The Currency, both of whom allowed some of the biggest failures to happen.
The SEC regulated Bear Stearns and Lehman Brothers, not to mention Merrill Lynch and yet in all cases the Fed in the end ran the rescue attempts and oversaw the outcomes.
When a body like the US Congress has an oversight role, there’s a further problem.
Congress itself has been shown to be venal, captured by lobbyists for industries and major companies, and more interested in protecting rather than regulating banks, stockbrokers, investment banks, commodity traders, mutual funds and the like.
This capture can be seen from the reaction to the proposed axing of just one of America’s many regulatory bodies, the Office of Thrift Supervision (OTS). It was created 20 years ago from the US Treasury Department to oversee Savings and Loans, or "thrifts’, as Americans call them.
It failed, completely as some of the biggest failures happened under its regulation: IndyMac, Countrywide and Washington Mutual. The losses in this trio are close to $US300 billion, including Washington Mutual which is the biggest bank failure in US history.
Even AIG, the insurer now in US government hands, was part regulated by the ITS, despite it being an insurance company. AIG has cost US taxpayers over $US130 billion, including continuing support.
But some also point out that the organisation that is taking over the OTS is the OCC (Office of The comptroller of the Currenc
