Regulatory Dis-Harmony at Baruch College
February 11, 2012
Roberta Romano gave her presentation in the second session of the morning, putting forward her ideas that what was needed was greater regulatory dis-harmony rather than world-wide harmonisation. Fundamentally she argued that this diversity of approaches in different regulatory regimes would minimise the impact of regulatory error (since it would confine the error to less of the system) and it would provide a test bed for ideas so that it could be seen what regulations work and what do not.
Certainly there is some basis for this idea from others in the industry (see post on Pierre Guilleman concern's on the impact of Solvency II) and I first heard the idea of diversity in financial services put forward by Avinish Persaud at Riskminds a few years back (see post).
Roberta spent a good amount of the presentation putting forward how the process of putting this diverse regulation in place would work, with individual regimes applying to the Basel Committee putting forward why they wanted to deviate from Basel III and justify how such a desired deviation would not increase systemic risk. The Basel Committee would then have a short time frame for approval (say 3 months) and the burden of proof would be placed on the Committee to show that the deviation was a detrimental one. She also described how some of the home-host regulatory conflicts would be dealt with under her proposed process.
I thought that the overall aims of her proposal were sound (diversity leading to a more robust financial system) but the implementation process would be difficult to implement I would suggest and very open to regulatory arbitrage (both by banks and by countries seeking to boost their own economies). Roberta did touch on this, but my biggest criticism was that if one of the benefits was that for a while such a diverse system would demonstrate which regulations work and which do not, then logically everyone would eventually converge on the regulations that work, re-harmonising regulations and reducing diversity.This convergence would then introduce its own (potentially new?) risks and you would be back to where you started.
A few points from the panel debate following the presentation:
- There was more criticism of how Basel regulations were gamed by the banks, particularly in relation to optimising Risk Weighted Assets
- One member of the panel pointed out that non-Basel US banks faired better in the crisis than those subject to Basel
- Rodgin Cohen suggested that RWA should receive more focus rather than the level of the capital charge (echoing the previous panel session).
- Rodgin was highly critical in the cutbacks in funding for regulators in the US
- Rodgin also said that London had its standing as the leading world financial centre due to the US Congress (refering to the Eurobond market and the Sarbanes-Oxley)
- Regulators should never forget that the "Law of Unintended Consequences" rules