Wed, Feb 27, 2013 - Page 9 News List

Financial regulators’ global variety show fails to solve problems

By Howard Davies

Does it matter whether the central bank is directly involved? Many central bankers maintain that the central bank is uniquely placed to deal with systemic risks, and that it is essential to carry out monetary and financial policies in the same institution. Again, it is hard to find strong empirical support for that argument.

The Dutch and US central banks, with direct oversight of their banking systems, were no more effective in identifying potentially dangerous systemic issues than were non-central bank regulators elsewhere. Canada is often cited as a country that steered its banks away from trouble, even though they sit uncomfortably close to US markets. However, the Bank of Canada is not now, and has never been, a hands-on institutional supervisor. So perhaps the US Congress has been right to conclude that changing the structure of regulatory bodies is less important than getting the content of regulation right.

Elsewhere, though, a lot of structural change is under way. In the UK, every financial disturbance leads to calls to revamp the system. There were major overhauls in 1986, and again in 1997, when the Bank of England lost its banking supervision responsibilities as a delayed response to the collapse of Barings. Next month, it gets them back — and more.

For the first time, the Bank of England will supervise insurance companies as well. A similar change has been introduced in France, where a new Prudential Control Authority has been created. The British and French rarely agree on anything; one is tempted to say that when they do, they are highly likely to be wrong.

It is difficult now to discern a coherent pattern. Certainly, the trend toward full-service single regulators outside the central bank has slowed to a crawl (though Indonesia is consolidating regulators at present). There is no consensus on the role of the central bank. In around a third of countries, it is the dominant player, in another third it has responsibilities for banks only, while in the remaining third it is a system overseer only.

We could see this as a controlled experiment to try to identify a preferred model. After all, financial systems are not so different from one another, particularly in Organisation for Economic Co-operation and Development countries. However, there is no sign of a considered assessment being prepared, which might at least help countries to make better-informed choices, even if it did not conclude that one model was unambiguously best. The G20, under its current Russian presidency, is now in search of a role. Here is a useful practical task it might take on.

Howard Davies, former chairman of Britain’s Financial Services Authority, deputy governor of the Bank of England and director of the London School of Economics, is a professor at Sciences Po in Paris.

Copyright: Project Syndicate

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