In a lecture at Oxford University earlier this year, former FSA chairman Howard Davies noted that the last few months haven’t been ‘a very good time’ to be a financial regulator. You can only imagine things must be a little frantic, to say the least, within the corridors of the FSA and other regulators around the world. It’s all too tempting to lay some of the blame for the ongoing credit crunch on regulators’ failure to clamp down on excessive risk-taking and poor underwriting practices.
Putting aside how we should apportion blame – there have been many complicit hands and contributing factors, to be sure – it seems almost certain that we will see tighter financial regulation. Any remnant of free-market fundamentalism, any faith in the self-regulating discipline of financial players, has been put to rest. There is a consensus that the emergence of hedge funds and private equity, and the growth of new instruments such as collateralised debt obligations, mean the architecture of regulation needs updating. Financial pages are awash with proposals for reforming capital markets, ratings agencies, and bankers’ pay among other things. But exactly which steps should be taken? And on what basis?
If nothing else, Global Financial Regulation, jointly authored by Davies, now director of the London School of Economics, and David Green, a former policy advisor at the FSA, is well timed. When there’s trouble, sober voices are always needed. The regulatory reflex in such times is that of a clunking fist thumping on the boardroom table – take the American case and the Sarbanes-Oxley Act, brought in during the post-Enron era to tighten lax American financial regulation. Today, many would say it is opportune to conduct a wholesale overhaul of the existing international regulatory system. But Davies and Green make a measured case for reform. They don’t believe, for instance, in the creation of a world financial Leviathan with wide-ranging regulatory authority. ‘It is not,’ they argue, ‘currently realistic to argue for the pooling of sovereignty in this area.’
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