When regulators Balkanize
Robert Teitelman joins the chorus of disappointment in the damp squib which is going to be launced tomorrow under the grand title of regulatory reform:
What we seem to be heading for is an intensely Balkanized regulatory apparatus attempting to supervise a financial system that has converged even more than before Bear Stearns Cos.’ collapse. Even if the Fed does prove to be an effective systemic regulator — and its record as a regulator is spotty at best — how this council will operate in a crisis is a little scary. Half the folks on this council are currently engaged in desperate attempts to undermine each other, or are fighting over Vikram Pandit’s future or on the oversight of derivatives. Some dislike each other; others simply want to establish bureaucratic dominance. All this will only get worse as Congress, with its cast of intense self-interested characters, swings into action.
More conceptually, the problem with having multiple regulators is that risk is fungible, and will naturally flow to whichever regulator has the lightest touch. Which is a problem no council of overseers can effectively overcome.