Abstract
In almost every country where the last financial crisis cut deep, there has been a major reorganization of the institutions of regulation. Perhaps the most dramatic changes so far have occurred in the UK. The UK’s unitary, separate Financial Services Authority (FSA), created as recently as 2001, was abolished in 2013. It was replaced with a new regulatory structure consisting of the Financial Policy Committee and the Prudential Regulation Authority at the Bank of England as well as a separate agency, the Financial Conduct Authority. Similarly dramatic changes are envisaged in the US, though the new arrangement is still evolving. In Europe, as I write, significant changes are being envisaged for a new European Banking Union.
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Notes
- 1.
The reader will recall my exposition in Chapters 3 and 4 of the “Bad apple theory of financial crashes” that is attractive to those in power at the time of a crisis.
- 2.
The world over, issues of institutional structure are always interesting at a human level, as they are about jobs and power.
- 3.
We discuss this in detail in Chapter 6.
- 4.
This is often the case but not always. In the case of Trinidad & Tobago, for instance, and a number of other emerging economies, the central bank is responsible for insurance as well as bank regulation.
- 5.
States’ rights have a strong historical and emotional resonance in the United States. In 1945, the US Congress passed the McCarran-Ferguson Act, which reserved for the states the power to regulate and tax the business of insurance.
- 6.
In the United States, there is a live debate as to whether large asset-management companies are shadow banks and should be required to have bank-like levels of capital.
- 7.
I suspect that the regulator that is perceived as treading on the edge of everyone else’s turf is doing a more diligent, if less popular job than the one that is seen to be entirely self-contained.
- 8.
This discussion of the pension mis-selling scandal leans heavily on Chapter 4 in my earlier book with John Plender, All You Need to Know About Ethics and Finance: Finding a Moral Compass in Business Today (Avinash Persaud and John Plender, London: Longtail, 2007, pp. 54–55).
- 9.
A modest case could be made that the loss of trust in financial intermediaries reinforced the popular wisdom in the UK that the best investment is real estate. It can be carried out with tax incentives and leverage and without the management of intermediaries. This persuasion may have played a role in propelling the 1988–89 housing boom and subsequent bust. History would suggest, however, that no special accelerants are needed to fuel regular boom and busts in London’s property markets.
- 10.
In Fault Lines: How Hidden Fractures Still Threaten the World Economy (Princeton, NJ: Princeton University Press, 2010), Raghuram Rajan makes the point that the political bargain reached in the United States, where wide access to finance was a substitute to progressive taxation and a stronger social safety net, was one of the causes of the subprime crisis.
- 11.
There exists a deep and old literature on the role of professional conventions and culture in economics, but it is a minority sport that today is mainly and most enthusiastically enjoyed in Paris. For further insights, see: (1) Olivier Favereau and Emmanuel Lazega, eds., Conventions and Structures in Economic Organization: Markets, Networks and Hierarchies (Cheltenham, UK: Edward Elgar, 2002); and (2) J. C. Sharman and David Marsh, “Policy Diffusion and Policy Transfer,” Policy Studies 30 (June 2009), pp. 269–89.
- 12.
See Evidence of the Chairman and CEO of the Financial Services Authority to the UK Treasury Select Committee, February 25, 2009.
- 13.
See Jeremy Atack and Larry Neal, The Origin and Development of Financial Markets and Institutions: From the Seventeenth Century to the Present (Cambridge, UK: Cambridge University Press, 2009).
- 14.
In part to avail themselves of the advantageous tax treatment of insurance policies versus traditional savings products, a number of insurance products have a “with profits” or investment component. This requires that they periodically share investment returns with customers who pay a greater premium than they might do if the product was solely insurance.
- 15.
This is to be expected. Those likely to spot that the cozy consensus is wrong may be viewed as too independently minded for collective decision making. Perhaps the majority who got it wrong do not wish to be regularly reminded of their miscalculation by the sight of those who did not. They might believe their job impossible if they must constantly defer to colleagues who got it right in the past for a variety of reasons, including sheer good luck.
- 16.
Perhaps more accurately, the ways AML and AFT regulation are currently carried out are different from looking for financial-system fragilities. The former is heavily focused on processes and right or wrong activities rather than a judgement of the balance of risks and probabilities. That said, it is not inevitable that AML and AFT regulation become overly process oriented. It may reflect politics more than technical factors. Process is also more open to manipulation by the most powerful. See further J. C. Sharman, “International Hierarchy and Contemporary Imperial Governance: A Tale of Three Kingdoms,” European Journal of International Relations 19 (June 2013), pp. 189–207.
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© 2015 Avinash D. Persaud
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Persaud, A.D. (2015). The Shape of Financial Regulation. In: Reinventing Financial Regulation. Apress, Berkeley, CA. https://doi.org/10.1007/978-1-4302-4558-2_13
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DOI: https://doi.org/10.1007/978-1-4302-4558-2_13
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