Unfortunately, over the past year the financial regulatory system has been extremely visible, and not in a good way. As the post-mortems on the economic downturn continue, regulatory bodies are being put in the spotlight. Why didn't they prevent the crisis or at least send early warning signals? How did the examiners allow institutions such as Lehman Brothers, AIG, Bear Stearns, and Citibank to assume so much risk? How did various Ponzi schemers slip through the regulatory nets for so many years?
Even at the Securities Industry and Financial Markets Association's annual conference in New York, the head of the SEC, Mary Schapiro, said, "the right questions were not asked...to mitigate the risk before we coasted to the brink."
Given the chorus of criticisms, momentum is building to fix or change the financial regulatory framework. Many are calling for new regulations and new regulatory bodies, such as a consumer protection agency. Others are suggesting that all of the regulatory agencies be combined into some sort of "super regulator." Another suggestion is to give new powers to existing bodies to fill some of the gaps in regulating hedge funds or new financial products. There's also a movement afoot to create a "systemic regulator" that will look at issues that cut across the entire financial system.
Clearly not all of these reform proposals will be developed or enacted. But before rushing into any of them, it may be useful to step back and think about simplifying the system, rather than just reforming it.
(From Harvard Business Review)
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