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Is Regulation Really for Sale?

LONDON – Relationships between London banks and their regulators are not especially warm just now. The latest bonus rules issued by the Committee of European Banking Supervisors (soon to morph into the European Banking Authority), have left those sensitive souls on the trading floors feeling rather bruised and unloved. In the future, 70% of their bonuses will have to be deferred. Imagine living on only $3 million a year, with the other $7 million paid only if the profits you earned turn out to be real? It is a shocking turn of events.

Yet, in narratives of the financial crisis, regulatory capture is often an important part of the story. Will Hutton, a prominent British commentator, has described the Financial Services Authority, which I chaired from 1997-2003 (the date things began to go wrong!) as a trade association for the financial sector. Even more aggressive criticism has been advanced about American regulators – and, indeed, about Congress – alleging that they were in the pockets of investment banks, hedge funds, and anyone else with lots of money to spend on Capitol Hill.

How plausible is this argument? Can benign regulation really be bought?

When I was a regulator, I would certainly have denied it. I had never worked in the financial industry, and knew few people who did. (Full disclosure: I am now an independent Director of Morgan Stanley.) My successors have all come from the financial sector, however, which, until recently, was regarded as a sign that they were street-wise. Now we are not so sure.