nach oben

2015 | Buch

Kapitel lesen Erstes Kapitel lesen

Reinventing Financial Regulation

A Blueprint for Overcoming Systemic Risk

verfasst von: Avinash D. Persaud

Verlag: Apress

Enthalten in: Springer Professional "Wirtschaft+Technik" , Springer Professional "Wirtschaft"

Einloggen, um Zugang zu erhalten

Über dieses Buch

Reinventing Financial Regulation offers an analysis of the fundamental flaws that plague the current system of financial regulation, one built around ideas of "risk-sensitivity" and "capital adequacy." Author Avinash Persaud argues that while some sensible reforms have been introduced, a fresh approach—centered on risk capacity—is required. When the entire regime is compromised, simply slapping bandages on each new wound will do nothing to cure the underlying disease.

Reinventing Financial Regulation goes beyond an urgent call to fix our profoundly troubled and damaged financial markets. It is a blueprint for an effective financial regulation system that could very well save the future of finance.

What would a well-regulated financial system look like? Until now, policymakers, financial experts, and leading academics have been content to avoid facing this question head–on. We have been offered piecemeal reforms that ultimately leave the global financial system exposed to different versions of the same risks that so recently brought it to its knees. The world economy literally cannot afford to dodge this question any longer.

Persaud's goal to bring clarity and a powerful simplicity to the financial regulation process results in a systematic and apolitical framework for fixing the world's fractured financial industry and transforming its regulation—not just for today's financial climate, but once and for all.

Inhaltsverzeichnis

Frontmatter

Chapter 1. Reinventing Financial Regulation

Abstract

Financial regulation has lost its compass and been led astray. The perspective of this book is neither that of the neoliberal who is instinctively against meddling regulators nor that of the unreconstructed Stalinist who is suspicious of private enterprise. If we are to finance better health and education for all of our citizens, we need economic growth. Growth requires risk takers. Too little risktaking starves the economy, feeding economic, social, and political malaise. Excessive risktaking allows a few players to flash brightly before plunging us all into darkness. To achieve a Goldilocks amount of risktaking—not too hot, not too cold, not too large, not too little—requires a fresh take on financial regulation. This is not to be confused with the decision to have more or less regulation—the binary choice presented by competing political ideologies. What we need is a substantial reinvention.

Avinash D. Persaud

Chapter 2. Why Do We Regulate Finance?

And Do So Over and Above the Way We Regulate Other Businesses?

Abstract

In this chapter, we look at regulation of financial institutions and how it differs from regulation in other industries.

Avinash D. Persaud

Chapter 3. What Causes Financial Crashes

And the Implications for Financial Regulation

Abstract

Financial crashes ought to be occasions of great learning and introspection. Crashes occur as a result of being largely unanticipated. Those who had warned of an unsustainable boom had long before been ridiculed or beaten into submission. Furthermore, crises appear to be such multifaceted and complex affairs that all and sundry can point to an aspect of the crisis they had predicted. Positions can become entrenched rather than open to reassessment. Authority figures who had dismissed the warning signs characterize the root causes as unknowable and suggest the crisis merits fundamental changes to our understanding of economics, institutional arrangements, and legal regimes. When banks are bailed out to the tune of trillions and social security net0073 are cut back in response, the regulatory debate, traditionally carried out in dimly lit corridors, is suddenly bathed in the bright light of political intrigue. Politics sends the debate down a parochial and partisan chute that produces recycled proposals often harbored for decades by one side or the other. The aftermath of financial crises creates a situation of numerous solutions in search of a problem.

Avinash D. Persaud

Chapter 4. Why Taxpayers Need to Be on the Hook

The Financial System Cannot Insure Itself

Abstract

The period immediately after a major financial crisis, such as the Global Financial Crisis that engulfed the industrialized economies since 2007, is one ripe for radical financial reform. Cries of “this time is different” heard during the boom are replaced with shouts of “never again” as the bust unfolds. Crises are the handmaidens of financial reform. For example, the requirement that a bank must publish an audited account of its assets and liabilities can be traced back to the collapse of Royal British Bank in 1856. The US Federal Reserve was created in 1913 as a direct response to the Panic of 1907. The 1929 stock market crash gave birth to the 1933 Glass-Steagall Act, which separated US commercial and investment banking for over 50 years. The 1974 establishment of the Basel Committee of G-10 Bank Supervisors followed the collapse of Germany’s Bankhaus Herstatt in June of that year and the subsequent liquidity crisis in New York. The list goes on.

Avinash D. Persaud

Chapter 5. How Should We Regulate the Financial System?

Abstract

In this chapter, the focus is on the areas where my work offers the greatest departure from current practice and thinking. I will show that a reinvention of financial regulation can deliver a financial system that is less prone to crash and can do this without ossifying finance. It will achieve these goals because it is better at managing financial risk across the financial system.

Avinash D. Persaud

Chapter 6. Putting the New Framework to the Test

The Regulation of Life-Insurance and Pension Funds

Abstract

Insurance regulation, often viewed as a dreary backwater by politicians and economists, is as critical as the banking sector in promoting financial stability, economic growth, and consumer protection. Life insurance and pension plans are almost as ubiquitous as mortgages. Their providers hold $50 trillion worth of assets worldwide. In the last chapter, I argued that financial stability is best achieved through a transfer of risk based on the different risk capacities between short-term funded institutions like banks and long-term funded institutions such as life insurers and pensioners. Banking and insurance stability are simply different sides of the same coin. To view them as two separate endeavors is a grave mistake. The regulation of both banking and insurance must be integrated from a systemic risk perspective.

Avinash D. Persaud

Chapter 7. Protecting Consumers

Abstract

My principal objective in writing this book has been to correct a fallacy of composition, namely that the current regulatory route has made individual firms safe but in so doing has actually increased the whole financial system’s fragility. Casualties among ordinary consumers in a systemic crash are high. If we can make the system safer, this should give them greater protection. Often, proposals presented as making the system safer are really about better consumer protection. Examples of these include measures that encourage or ban certain instruments, the choice of discouraging bad behavior through either civil or criminal law, and the rearrangement of regulatory institutions. I address these questions over the next few chapters.

Avinash D. Persaud

Chapter 8. How Accounting, Credit, and Risk Standards Create Risk

And What To Do About It

Abstract

Financial practitioners and regulators largely agree that the Global Financial Crisis, and other recent crises, was compounded by the use of International Financial Reporting Standards. These standards emphasize marking the value of assets to their current market price. The accountant shorthand for this practice is “mark-to-market.” The application of IFRS’s standard that governs the loan-loss provisions for financial institutions and extends mark-to-market meant that when asset prices fell sharply in 2007 and 2008, financial institutions were forced to raise capital to set against the deterioration in their asset/liability ratio. To raise cash quickly they had to liquidate assets. This depressed asset prices, which in turn caused an increase in computed risk, a need for more capital and more selling. A vicious cycle ensued that was driven primarily by these valuation conventions rather than an actual need for readily available cash.

Avinash D. Persaud

Chapter 9. What to Do About Complex Financial Instruments

Abstract

In 2014, at €700 trillion, the notional amount of outstanding derivative contracts that were traded over the counter exceeded the size of the underlying cash markets by more than five times. This goes against the better instincts of many outside the financial sector. It seems an unnatural state where the tail is wagging the dog. None other than the successful investor Warren Buffet famously wrote in the 2002 annual report of his investment vehicle, Berkshire Hathaway, “In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.” When suspicions over the lethal nature of derivatives were seemingly vindicated by the central role credit derivatives played in the Global Financial Crisis, the popular image of the financial crisis that we painted earlier in Chapters 3 and 4 was of bankers pulling smoking, toxic credit instruments out of their back pockets. These instruments were thrown into a crowd of bewildered consumers and the bankers were last seen grabbing the money and sprinting away. The argument was made that the time had come to ban the use of these weapons of mass destruction.

Avinash D. Persaud

Chapter 10. Bankers’ Pay

Abstract

Should bankers’ pay be subject to government regulation? I am referring to bankers ensconced in the private sector rather than those employed by state-owned banks or even to those temporarily in state hands. Many people of a certain age instinctively balk at the idea—their attitude colored by memories of low, rigid public sector pay scales exorcising motivation and talent. Others, touched by a little schadenfreude, believe that the time is ripe for government involvement in private-sector pay. It fills me with dread. Having been involved in setting investment bankers’ pay, bitter experience has taught me that getting it right is nigh impossible at the best of times. This is before introducing the added dimension of political, national interests.

Avinash D. Persaud

Chapter 11. Why Locking Them Up Will Not Work

The New Criminal Regime in Financial Regulation

Abstract

In Voltaire’s Candide, the protagonist and his traveling companion, Martin, arrive in England to see an admiral being shot for losing a battle. Martin explains to Candide that Britain finds it necessary “to shoot an admiral from time to time to encourage the others.” We can see how this could work. Indeed it is what countless hollered should be the fate of bankers following the GFC after thousands had experienced great distress, lost homes, jobs, and pensions. Although banks were fined an unprecedented $100 billion in the five years post crisis, these punitive fines still left many victims and observers of the crisis dissatisfied. This discontent was exacerbated by the added insult that shareholders paid these fines rather the individual bankers. Moreover, a handful of the heavily fined banks, such as the Royal Bank of Scotland in the UK, were government owned at the time so ultimately the taxpayer paid the tab for the misdeeds of the loathed bankers. Hatred and anger towards bankers was immense—overflowing into the Occupy movement in New York, London and beyond.

Avinash D. Persaud

12. Financial Transaction Taxes

Abstract

No subject is more certain to raise the hackles of traders in financial institutions than a financial transaction tax, however small. Measured for unleashing a torrent of abuse, it even edges out, in the City of London,, the question of continuing to be part of the European Union. The traditional banker’s response, something I initially bought into, is to adopt a rather superior air that suggests that the protagonists do not understand the realities of finance. We would, in patronizing tones, remark that it would be a wonderful tax if only it were feasible. But lamentably, finance is now conducted in cyberspace, and cannot be tracked down and taxed.

Avinash D. Persaud

Chapter 13. The Shape of Financial Regulation

Its Institutions and Their Organization

Abstract

In almost every country where the last financial crisis cut deep, there has been a major reorganization of the institutions of regulation. Perhaps the most dramatic changes so far have occurred in the UK. The UK’s unitary, separate Financial Services Authority (FSA), created as recently as 2001, was abolished in 2013. It was replaced with a new regulatory structure consisting of the Financial Policy Committee and the Prudential Regulation Authority at the Bank of England as well as a separate agency, the Financial Conduct Authority. Similarly dramatic changes are envisaged in the US, though the new arrangement is still evolving. In Europe, as I write, significant changes are being envisaged for a new European Banking Union.

Avinash D. Persaud

Chapter 14. The Locus of International Financial Regulation

Local or Global?

Abstract

In November 2008, China, India, and Brazil moved from waiting in the corridor outside as world powers met to being invited inside. This broadening legitimacy of the world’s steering committee, from the G-7 to the G-20, is right and to be commended. It is not without difficulty. The shift in influence is to a group of countries that share little other than economic power. They have diverse experiences, challenges, cultural perspectives and starting points. This is particularly apparent in the field of financial regulation. Reflecting this, the developments in financial regulation across these countries since the Global Financial Crisis (GFC)—despite the triumphalist language of global regulation—is increasingly local. The prospect of the new global being quite local has dismayed “internationalists.” It need not. This chapter challenges the traditional dichotomy of more global vs. more local. It argues that financial internationalism—greater cooperation by nations for the benefit of all—is better served by institutions that help to integrate diverse systems than by those that try to enforce the one-size-fits-all approach to countries as different as Austria and Zambia.

Avinash D. Persaud

Appendix A. Sending the Herd Off the Cliff Edge

The Disturbing Interaction Between Herding and Market-Sensitive Risk Management Practices

Abstract

In the international financial arena, G-7 policy makers chant three things: more market-sensitive risk management, stronger prudential standards, and improved transparency. The message is that we do not need a new world order but that we can improve the workings of the existing one. While many believe this is an inadequate response to the financial crises of the last two decades, few argue against risk management, prudence, and transparency. Perhaps we should, especially with regards to market- sensitive risk management and transparency. The underlying idea behind this holy trinity is that it better equips markets to reward good behaviour and penalise that which is bad, across governments and market players. However, while the market is discerning in the long run, there is now compelling evidence that in the short run, market participants find it hard to distinguish between the good and the unsustainable; they herd; and contagion is common.

Avinash D. Persaud

Appendix B. Banks Put Themselves at Risk at Basel

Abstract

The biggest problem for regulators is “capture”—a situation that happens when their activities are influenced excessively by those they are supposed to be regulating. In the case of banks, you can imagine how this happens. A bright, young regulator receives a call from a vice chairman of the bank he would quite like to work for later. The vice chairman explains that there are some complex issues at stake and to help clarify them he has asked an eminent economist to write a report explaining why a regulatory proposal is economically inefficient. The vice chairman adds that if the offending regulation is enacted, the bank will have to move its profitable operations to the British Virgin Islands, with the loss of hundreds of local jobs.

Avinash D. Persaud

Backmatter

Titel: Reinventing Financial Regulation
verfasst von: Avinash D. Persaud
Verlag: Apress
Electronic ISBN: 978-1-4302-4558-2
Print ISBN: 978-1-4302-4557-5
DOI: https://doi.org/10.1007/978-1-4302-4558-2