|
About Z/Yen
History
Clients
People
Testimonials
Z/EALOUS
FAQ
Services
Strategy
Intelligence
Systems
SpecialiZm
Change management
Outsourcing
Sectors
Financial services
Technology
Not-for-Profit
Commercial
Public sector
Activities
GFCI
GIPI
The London Accord
Events
On-line surveys
c
Products
Compliance workstation
Benchmarking
Training
games
PPRISM
PropheZy
VizZy
Knowledge
Books
Articles
Research &
Presentations
Press
Now & Z/Yen
Media coverage
Press releases
Z/Yen imagery
Fun
Photo gallery
Caption competition
Humour
ExtZy
Links
Reading list
Risk/Reward surfing
© The Z/Yen Group of Companies 2009
| |
Securities & Investment Institute
Annual Debate
Mansion House, London
Wednesday, 14 January 2009
"In this current financial environment, more financial regulation is a major
part of the solution"
For the motion:
Dr Vince Cable MP
Mr Alan Yarrow FSI
Against the motion:
Professor Michael Mainelli FSI
Mr David Bennett FSI
Chairman - My Lord Mayor, Ladies and Gentlemen.
Chairman:
Mr Christopher Jones-Warner FSI
Text of Professor Mainelli’s response:
[STARTS]
Tonight I am that kid who told you that Santa
Claus didn’t exist. More and better regulation is a lie-for-children
alongside Santa Claus, the Easter Bunny, Nessie, immaculate conception,
evolutionary design and honours-on-merit.
Wikipedia’s definition of financial services regulation “is a set of beliefs and
practices, often centered upon specific supernatural and moral claims about
reality, the cosmos, and human nature, and often codified as prayer, ritual, and
[religious] law”. Oops, that’s Wikipedia’s definition of religion. But
financial services regulation is a religion. Recent regulatory failure has
created apostates, the worst challenge for a religion, so the establishment is
performing the classic redoubling ploy, “regulation failed because you really
really didn’t believe enough in regulation. So pray harder.”
Market failure comes in three broad categories: lack of competition, information
asymmetry/agency problems, and externalities. Wholesale finance certainly
exhibits classic signs of lack of competition: an industry that went from a
market capitalisation in the USA of 5% in 1990 to 23.5% in 2007 – a quarter of
the US economy is pushing paper around? And self-evidently excessive salaries, a
banking industry with 2006 profits per employee a magical 26 times higher than
the average of all other industries worldwide (according to McKinsey), and a
cast list of the top 10 that would be largely recognisable back in 1929: Goldman
Sachs, Merrill Lynch, Lehman Brothers (oops), Morgan Stanley, Bear Stearns
(oops), JP Morgan Chase, Citi … mid last year - less than 20 global investment
banks, 4 auditing firms, 2 credit rating agencies, 2 actuarial firms.
Frank Partnoy covers two decades of scandalous abuse of investment banking
customers in nauseating detail in his 2003 book, Infectious Greed – and
taxpayers pick up the cost.
When we see market failure we should first try and fix it through trust-busting
or anti-monopoly laws or regulation – the 1890s in Britain, the 1900s in the
USA. The religious faithful of regulation want to go much further the
other way and now seek powers to create and follow mega-banks, rather than
question whether size itself might be a sign of regulatory failure. Only
Private Eye had the guts to call a spade a spade – “Gordon Brown promised to
increase regulation to deal with collapsing financial institutions, but his
biggest move so far is a massive decrease in regulation” suspending normal
competition and takeover rules for Lloyds and or Santander. Yet as The
Economist points out, "In a world in which big financial firms were allowed to
go broke, many of these [regulatory] flaws would matter little." ["Northern
Rock: Who Regulates The Regulators?", 29 March 2008, pages 41-42]
Regulation has caused overly-large dangerous banks. Regulation creates
barriers to entry, promotes the large over the small, and reduces competitive
variation. Too big to fail means too big to regulate.
Everyone has their favourite fixes (including me – changes to credit market
structures, to credit rating agencies, to auditing, to accounting, to
regulation, to risk management, and fundamentally, to competition). Looking back
over the past two years, it is apparent that everyone has stumbled and bumbled
from incident to event to problem to fix, yet almost all have failed to separate
temporary fixes from permanent solutions. Permanent solutions need
permanent questions, such as “how would we know when the financial system is
working?”
The Credit Crunch is not amenable to quick fixes but, in today’s world of
“keep-it-simple-stupid” bullet points, some high-level conclusions include:
-
too big to fail is too big to regulate –
financial services is a bit special (so are pharmaceuticals, defence,
electricity, air travel, shipping, water, …), but the fundamental regulatory
tool in all markets is competition and we need to increase competition in
financial services, not reduce it;
-
increases in regulation reduce diversity – a
healthy financial services ecosystem should exhibit diversity, yet society
appears to over-value presumed economies of scale in financial services;
-
less regulation is just as important as
better regulation – what we have here is a failure to regulate, but more
regulation is not a measure of success;
-
government intervention displaces private
sector investment, as a multiple – the sooner government activity and
funding of financial services returns to a minimal level, the sooner
longer-term reforms can begin.
I would urge all those embarking on financial
services reform to have answers to "how would you know when the financial system
is working?", i.e. what is the desired outcome. Some of those answers
might be "when a 20 year old can safely enter into a financial structure for
retirement" or "when we can sensibly finance a forest" – sustainable financing
over 75 to 100 years, not just quickly flipped transactions. Given recent
events, the financial system, if not broken, reveals itself to be incapable of
dealing with the long-term. Yes, regulation must change, but moreover I
would encourage research into the idea of Long Finance.
I do believe in the power of competitive markets to make the world a better
place. I equally believe that markets are social tools requiring design
and oversight to meet their objectives. Still you must vote against the
motion, for sane discussion in the City, even from those of you who, like me,
think that our industry is culpable. Human nature means that competition
works, and other regulation must be limited, whatever lies for children
politicians and journalists want to sell. Let’s be The City. Tell it
like it is – first competition, then better regulation, but certainly not more.
[ENDS]
Result:
The opening vote was 30% in favour of the motion, 30% against the motion and 40%
undecided.
The closing vote was 39% in favour of the motion and 61% against.
Supplementary information from Wikipedia:
"Between 1980 and 1994 more than 1,600 banks insured by the Federal Deposit
Insurance Corporation (FDIC) were closed or received FDIC financial assistance.
From 1986 to 1995, the number of US federally insured savings and loans in the
United States declined from 3,234 to 1,645. This was primarily, but not
exclusively, due to unsound real estate lending.
The market share of S&Ls for single family mortgage loans went from 53% in 1975
to 30% in 1990. U.S. General Accounting Office estimated cost of the
crisis to around USD $160.1 billion, about $124.6 billion of which was directly
paid for by the U.S. government from 1986 to 1996. That figure does not
include thrift insurance funds used before 1986 or after 1996. It also
does not include state run thrift insurance funds or state bailouts.
The U.S. government ultimately appropriated 105 billion dollars to resolve the
crisis. After banks repaid loans through various procedures, there was a
net loss to taxpayers of 40 billion dollars by the end of 1999."
Related News Articles
|
