Financial Regulators’ Global Variety Show

PARIS – In the early phases of the financial crisis, it was fashionable to argue that the United States’ system of regulation needed a fundamental structural overhaul. Differences of opinion between the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) had obstructed effective oversight of investment banks and derivatives trading (only the US believes that it makes sense to regulate securities and derivatives separately).

Indeed, the plethora of separate banking regulators had created opportunities for banks to arbitrage the system in search of a more indulgent approach to capital. Likewise, the lack of a federal insurance regulator had left AIG regulated by the Office of Thrift Supervision (OTS) and the New York State Insurance Department, which proved to be a wholly inadequate arrangement.

Little has come of these arguments. The Dodd-Frank Act did succeed in putting the OTS out of its misery, but jealous congressional oversight committees have prevented a merger of the SEC and CFTC, and nothing has been done to rationalize banking supervision. So the American system looks remarkably similar to the one that turned a collective blind eye to the rise of fatal tensions in the early 2000’s.

One factor that contributed to institutional stasis was the absence of a persuasive alternative. In the decade or so leading up to the meltdown of 2007-2008, the global trend was toward regulatory integration. Almost 40 countries had introduced single regulators, merging all types of oversight into a single all-powerful entity. The movement began in Scandinavia in the early 1990’s, but the most dramatic change came in 1997, when the United Kingdom introduced its Financial Services Authority (I was its first chairman).