If there’s one thing everyone can agree on, however, it’s that the current system is riddled with Byzantine institutional structures. Thus over the past decade, the number of international committees of which the FSA was a member doubled from around 70 to more than 150. Unavoidably, much of this complexity makes it into this book. Thumbing through it, anyone other than an expert in regulation will find it necessary to consult the glossary of abbreviations for committees and organisations, which spans some six pages. After all, it is easy to confuse the CECEI with the CEIOPS, IFIs with the IIF, and the FSC with the FSCS (which is of course different from the FSAP).
The reform agenda outlined in this book, so far as there is one, is for a more ‘integrated’ system of international regulation. Increasingly sophisticated financial markets have made redundant the old ‘three pillars’ system of regulation, where there are separate regulators for banking, securities and insurance. The authors endorse a shift among countries to a unitary regulatory system with one institution covering most, if not all, of the financial sector.
This is hardly surprising given the authors’ former affiliation with the FSA, perhaps the leading example of a unitary regulator. And there is an attractive rationale to an integrated approach. As the authors suggest, thinking about regulation in sectoral terms makes less sense in today’s financial world. Many of the challenges to financial stability now come from institutions, including private equity and hedge funds, which do not fit neatly into traditional categories. ‘Their activities are fuelled by credit provided by the banking system, yet they operate largely in traded markets, both regulated and unregulated. They are invested in by insurance and pension funds. It is most unlikely that any future crisis will be confined to a single regulated sector.’ The contagion of the US subprime crisis is proof enough.
Yet as the example of Northern Rock shows, there remain question marks over the integrated-FSA model, no matter the strength of the logic. When last month the US Treasury Secretary, Hank Paulson, decided to announce a plan to overhaul the US financial system it involved something akin to the ‘Twin Peaks’ approach (adopted in Australia and the Netherlands), where prudential regulation of banks and regulation of other financial institutions are kept separate. The case for an integrated model remains far from settled.
Also still under discussion is how best to reform the system at an international level. According to the authors, the best answer lies in strengthening the Financial Stability Forum and in creating a G7 ministerial group to oversee it. Leadership is certainly required at this time. The matter of financial regulation – usually an arcane topic discussed only among central bankers and others who frequent Basel – has taken on unusual urgency and no-one quite knows where to start. It might be impossible to make financial regulation a riveting topic, but Davies and Green offer an admirable starting point for coming to grips with the historical and institutional background to the ongoing debate.
Tim Southphommasane is a freelance journalist who is also completing a doctorate in political theory at Oxford University
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