Regulating financial markets

We are not short of regulators, nor lacking rules. The last few years have seen a crisis of regulation as well as disastrous central banking and greedy and incompetent banking.

We should expect less of regulators. They cannot guarantee us all against loss from financial transactions. We should also expect more of them. We should expect them to know when banks and other financial institutions are taking wild amounts of risk, and should restrain them. They do not need more powers to do this. They have the powers already.

Yesterday morning financial regulation was raised with me by the Chief Minister and others in Guernsey when I was giving a speech there on the Credit Crunch. Guernsey is worried lest the EU seeks to extend its regulatory reach to the Channel Islands in clumsy ways that will transfer the business to some other offshore centre well away from us. The topic came up in the Commons debate on Europe yeaterday afternoon and evening, when the Conservatives attacked the government for failing to have influence over the current draft of the hedge funds regulation. Today an unrepentant Chancellor says thank you to his boss the Prime Minister for keeping him in post by defending the indefensible tripartite system at the Mansion House this evening.

What should they do?

The UK government should say that the tripartite system failed its first big test. The lack of clarity over responsibility for banking risks between the Bank and the FSA was partly to blame. We need a unified command, with the Bank of England taking responsibility for issuing government debt, supervising banks and the day the day operations of the money market. We need people running the Bank who understand markets and are capable of judging the cycle better.

The regulatory system should aim to avoid violent swings in bank balance sheets and the amount of money in issue. The Bank should call for more cash and capital to be held by banks when things are going too quickly, and for less when things are slowing down. Discussion to get banks to strengthen their positions should always be held in confidence.

The government should tell the EU that as it falls to national taxpayers to bail out failing institutions or to pay compensation to victims of poorly regulated businesses, so it should be the task of national governments to do the regulating. The UK has a much larger and more successful fianncial sector than France or Germany. The government should not let the EU use regulation to threaten London’s business, which clumsy regulation can do. That would drive the business away from the EU altogether.

We did not have too few regulators. The Chancellor who is the chief regulator did not understand the system he presided over and apparently failed to read the balance sheets of the top banks, which were obviously over doing it. We need to change people, not build a new bureaucracy. Keep it simple and do it better should be the slogan. And tell the EU to keep out.


  1. Lola
    June 17, 2009

    Amen to all that.

  2. alan jutson
    June 17, 2009

    Agreed Regulation needs to be simple, but it also needs to be enforced by a body that understands the financial system.

    The tripartite sysytem has failed, because like everything else one element thought the other would deal with it, and the FSA had a record of failure in the Insurance industry.

    Whenever did a committee run or design anything that worked properly or efficiently.

    We now have the UK making up Regulations, the USA doing the same, and the EU also doing likewise.

    I thought the G20 had agreed to sort this out in a manner which would give sensible and similar guildlines throughout the banking world so as not to put anyone at a disadvantage.

    Another Brown publicity spin (saviour of the World) which has unravelled.

    Makes you wonder if our Politicians, yourself excluded, can even read a balance sheet properly, even if they were presented with one..

  3. Henry Schnarr
    June 17, 2009

    Funny that, Alistair Darling has said that he “does not plan fundamental reform of the way UK financial institutions are regulated”. He reckons that “the tripartite system is not to blame for the crisis, it is the heads of the financial institutions”! After all that has gone on, he still doesn’t understand the situation and he doesn’t know what he is doing.

    When Kipling wrote “If you can keep your head, when all around you are losing theirs…”, he should have added ‘then you don’t understand the situation’. I suppose ignorance is bliss!

  4. Mick Anderson
    June 17, 2009

    Too many people argue for more or less regulation. How about more people arguing for the right regulation?

    The tripartite system was an obvious crock from the beginning, just on the too many cooks principle. Keep it simple, stupid!

    We also need proper differentiation between different types of financial institiution. Those who are simply trading (gambling) should have to live or die on their own. If they mess up, they must be allowed to fail (like Lehmann Brothers).

    If an organisation expects to be bailed out by the taxpayer, they should not be allowed to gamble. Their degree of protection should be decided in calm times, before they run into trouble. It should be part of defining to the Regulator what areas an individual institiution should be trading in. If the Regulator is in any doubt (or doesn’t understand some new area of trading), permission is not granted.

    There is a place for boring banking, and if an organisation has not been working under the appropriate regime then that is their problem. Taking out an policy with an insurance company against losses is no substitute for due dilligence in authorising any sort of transaction.

    There should be no blurring between these lines, and that’s what strong regulation is for.

    1. Lola
      June 17, 2009

      Quite. Trouble is the banks are a cartelised supplier of a monopoly product and have been ‘bought’ by New Labour, so reforming the existing structures is almost impossible. Unless they are allowed to go bust and then the banking businesses that rise from the ashes will be better run, smaller, more appropriate the markets they serve and financially stronger. For example had RBS been allowed to go bust (as it should) all the toxic stuff would have gone and the rest of the group would have been broken up. What price Virgin or Tesco retail banking high street brands then? Doing that would have shaken the other cartel members to their roots and they’d have had to do something about their attitudes prices and service.

    2. alan jutson
      June 17, 2009

      Agreed, it seems such a sensible comment, with which many would agree.

      That is why it will not happen, its too simple for those who want to micro manage everything.

  5. Acorn
    June 17, 2009

    A word in your shell-like John boy, wanna buy some Gordos? I can do you a nice little deal on 4.5% 25 year beauties; brand spanking new.

    Give me a ring on the mobile, or just turn up at my lock-up on the corner of Treadneedle Street. Be quick, these beauties will fly out of the barrow.

    It makes you wonder where all the cash is coming from to buy this stuff; or does it.

  6. Robert George
    June 17, 2009

    The BOE, Treasury and FSA are clearly playing and prioritising their turf wars whilst Mr Brown and the non-entity at number 11 totally fail to protect British Interests.

  7. Mike Stallard
    June 17, 2009

    Isn’t the essence of Conservatism to preserve all that is good and to reform all that is bad?
    The Bank of England under Ken Clarke and Eddie George (remember them?), was doing superbly well. Why change it?
    Do we blame the EU (again)?
    Do we blame the centralising and uncontrolled Chancellor of the time who was simply pulling all power to himself?
    If a thing ain’t broke, don’t fix it – the essence of Conservatism.
    So, please may we have our country and its Bank back as they were before little fingers started meddling.
    Or do we have to get permission from the Enarchs in Brussels now?

  8. Adrian Peirson
    June 17, 2009

    Whether or not this document is authentic is not the point, the point is it can fairly accurately describe the world we currently live in.

  9. Mark
    June 17, 2009

    Regulation has failed across the board – not just for banking. Part of the problem is the belief that regulation should be about setting up complex rulebooks, with a jargon infested priesthood ensuring compliance (or at least completion of the ticking of boxes) – rather than having a clear understanding of the various types of business and a moral principles based approach, coupled with a healthy scepticism about the purpose of innovation.

    The raising of the Old Lady’s eyebrows used to be a very efficient shot across the bows against shady or unsound practice, with the sanction of naming and shaming and consequent ostracism being a very real threat (far better than fines or even jail-if-we-can-convince-a-jury). It required judgement, and thinking outside the box (ticking).

  10. joe
    June 17, 2009

    Listened to AD on the Today programme this morning.

    He said:

    (i) financial institutions have been reckless in utilising off balance sheet mechanisms (from the Government that has presided over the greatest expansion of off balance sheet public funding and stealth tax in history);

    (ii) banks need people in the boardroom who understand the complexities of what they are dealing with (from a Government that has set new standareds in incompetance and political short termism);

    (iii) the choice is between labour “investment” (uncontrolled, unvalued spending) and tory cuts (which as far as I can see merely reflect labour’s own budget proposals).

    I was screaming at the radio – the barefaced cheek of this excuse for a Government – do they really think we are idiots who can be treated with such contempt? Sadly I suspect the answer is yes.

    However I note with some pleasure reports today of the fall in support for labour amongst their client voters in the public sector. They’re so bad they’ve even got turkeys voting for Christmas!

    1. alan jutson
      June 18, 2009


      Yes makes your blood boil.

      But I think they actually believe what they are saying when they say it.

      Its almost as if their brain is disengaged with reality, so practiced are they at spinning anything.

      During the past few years we have reached a new level of disregard for the voter.

  11. figurewizard
    June 18, 2009

    Among all of the talk of regulation no one seems to be concerned with the fact that not once were the valuations placed on CDOs and the like questioned by their auditors. No doubt the firms concerned might argue that this was a matter for the FSA but an audit is supposed to be an independent and unbiased assessment of the health of the business in the interests oif the shareholders.

  12. Robert K, Oxford
    June 18, 2009

    Again, a simple solution:
    1) Break up the zombie banks so that none of them is too big to fail.
    2) Make it clear that no government ever again will bail out a bank that fails. Its success or failure is down to its shareholders and creditors, in that order, just like for any other business.
    Then there will be little or no need to regulate the banks and we can worry about other imporant issues – such as cutting taxes and public spending.

  13. chaplain
    June 18, 2009

    Isnt this all academic. The EU has competency, authority, call it what you like, over this area of law making. What the European Commission wants and its institutions vote on, will be settled by qualified majority voting. Then it’s just down to how our UK government bodies want ot implement the EU centrally taken decision.

  14. Citizen Responsible
    June 18, 2009

    “A senior French official has confirmed Gordon Brown is almost powerless to stop the creation of a European regulatory machinery at today’s EU summit, opening the way for a transfer of control over the City from London to Brussels. ” so says the Telegraph article 17/06/09. “Britain cannot veto the proposals because EU single market laws are passed by qualified majority voting (QMV). ”

    Brussels is using the current financial crisis to try to sieze control of the City and if the UK loses control we will never get it back. As JR says, we should tell the EU to keep out, but which of our leaders is going take a brave pill and do that?

    1. Adrian Peirson
      June 21, 2009

      Defeats the Argument that we should be at the centre of Europe because it will give us a greater say.

      No we’d have more say over our own affairs if we were outside.

      I think Von Mises might agree.

      Von Mises Institute

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