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Consolidation or Competition for Financial Regulators?

How many financial regulatory agencies does a country need? One? Two? Perhaps three or four? How about two hundred? Such questions are gaining in urgency as more and more countries, and the European Union itself, debate whether or not to consolidate financial regulation under the umbrella of one all-powerful body.

Financial regulators' activities focus on maintaining the integrity of a country's financial system: its financial institutions and financial transactions. Their domain encompasses banks, other depository institutions, insurance companies, securities firms, pension funds, finance companies - indeed, just about any entity that conducts financial transactions. The current trend is for countries to consolidate their financial regulatory apparatus into a single agency, with Britain's Financial Services Agency (FSA) a leading example.

I believe that this trend is a serious mistake which, quite myopically, overlooks the potential for mistakes in regulation. Though I do not necessarily advocate 200 financial regulatory agencies (more about this below), I believe that a structure involving multiple financial regulators in a country is likely to create a healthier financial system than would a single all-encompassing regulator.

The argument for a single regulator is deceptively simple: after all, a single country has a single national government, so why not have a single regulator for all financial regulation? If the European Union is to have a single market, the argument continues, then it needs a single financial regulator. Agency rivalries will be avoided. No one will be confused as to who is responsible. There can be ``one stop shopping.'' Government will speak with ``one voice.''