When regulators Balkanize

By Felix Salmon
June 16, 2009

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.

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2 comments so far

I think back to the SEC and CFTC squabbling over single-stock futures, and my concern with multiple regulators isn’t just forum shopping, but actual gaps in coverage. The more you divide up the jurisdictions, the more likely that some future innovation fits cleanly into space where nobody has jurisdiction.

One other point on that SEC and CFTC squabbling, the reason that Rubin, Greenspan, Summers, Gramm, and eventually Clinton, gave for not regulating OTC derivatives was that if the US regulated the OTC market, then the market would simply move elsewhere. And they were right … at least about a lot of the derivatives the business moving overseas. Wasn’t AIG’s Cassano based in London?

The point is, even if the U.S. gets its regulatory system in perfect order, what’s to stop financial services companies from locating to the jurisdiction with the lightest touch? Any solution has to be global in scope.

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