Thursday, March 12, 2009

regulators’ analyses should be collated and sifted by a super-regulatory body with the power to head off systemic threats

TO BE NOTED: I've called this Rationalization: From the FT:

Why the US needs a super-regulator

Published: March 11 2009 20:00 | Last updated: March 11 2009 20:00

Ben Bernanke says we are going to need a bigger boat. The Federal Reserve chairman has suggested a number of reforms to the regulation of US financial services – some of which would probably increase the size of the Fed’s remit. Although politically controversial, his ideas deserve to be followed through.

The US regulatory system is riddled with extreme complexity. Insurance companies’ risks are not monitored in the same way as banks’ are. The resolution regime for insolvent financial institutions varies according to whether or not they have insured depositors. And there is no single institution standing far enough back from the coalface to spot systemic problems.

Last autumn, these small cracks in the regulatory system turned out to be shuddering fault lines. The global importance of Lehman Brothers and AIG was not grasped until it was too late. The risks posed by systemic financial problems to the business models of these companies were overlooked. And the authorities lacked the tools to dismantle failing institutions safely.

Mr Bernanke is right that the US regulatory system needs consolidation. The watchdogs, between them, must understand every part of the companies they are inspecting and a regularised resolution regime for insolvent financial companies is an absolute must. One might add that companies also need to be regulated consistently and according to what they do, rather than what kind of business they are. The US could do with fewer, bigger regulators.

What is more, as Mr Bernanke argues, regulators’ analyses should be collated and sifted by a super-regulatory body with the power to head off systemic threats. Mr Bernanke noted that the Fed would need to be involved with such an agency. In truth, it makes sense to give “macro-prudential” oversight to the Fed; monetary policy, the lender of last resort function and financial stability should all be dovetailed.

This is not simple; the Bank of England has a financial stability remit which it has neglected. In the US, political difficulties make the task yet harder. Insurance is largely regulated on a state-wide basis, but will need to be part of the super-regulator’s remit. Concentrating more power, even power which the federal government wields, in the hands of the already-mighty Fed would also be contentious.

Crucially, consolidation would make it easier for the US to collaborate with other countries to fight cross-border risks. Especially so if recent plans for European cross-border supra-regulators are adopted. No matter how big they are, regulators must work in convoy.

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