We're still keeping an eye on the pace of the reorganization of the financial regulatory structure over here, and I thought it might be interesting to take a quick look at the tenor of the arguments for regulatory reform. Interestingly, the Paulson blueprint doesn't spend a lot of time on the current financial crisis, although that surely played a role in the timing of its release. Instead, it spends plenty of time outlining the patchwork history of financial regulation, with an aim to show that the current regime is more a product of path dependent happenstance than considered reflection.
But why regulate now, given that the system was just as patchworky a decade and two decades ago? The blueprint also seems animated by a fear of globalization, and a sense that agencies ought to provide a regulatory environment in which American markets can compete successfully with foreign ones:
Globalization of the capital markets is a significant development. Foreign economies are maturing into market-based economies, contributing to global economic growth and stability and providing a deep and liquid source of capital outside the United States. Unlike the United States, these markets often benefit from recently created or newly developing regulatory structures, more adaptive to the complexity and increasing pace of innovation. At the same time, the increasing interconnectedness of the global capital markets poses new challenges: an event in one jurisdiction may ripple through to other jurisdictions.
These developments are pressuring the U.S. regulatory structure, exposing regulatory gaps as well as redundancies, and compelling market participants to do business in other jurisdictions with more efficient regulation. The U.S. regulatory structure reflects a system, much of it created over seventy years ago, grappling to keep pace with market evolutions and, facing increasing difficulties, at times, in preventing and anticipating financial crises.
Largely incompatible with these market developments is the current system of functional regulation, which maintains separate regulatory agencies across segregated functional lines of financial services, such as banking, insurance, securities, and futures.
(emphasis added). There's no doubt, as I've written before, that globalization is exposing regulators to unprecedented challenges, and in some ways I'd expect to see it invoked in any argument for change. But I note that in the Blueprint, globalization is presented not as a "bring it on" opportunity for further American financial triumphs, but as the cause of American financial problems.
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1. Posted by Lawrence Cunningham on May 23, 2008 @ 12:21 | Permalink
Great point. And the globalization argument is used to support a surprising range of proposals, some floating around for decades, like:
(a) to merge the SEC with CFTC and unite regulation of securities with futures, a proposal first made in 1988;
(b) as part of that merger, to expand CFTC’s mutual recognition program, also dating to the 1980s, to securities firms;
(c) to reverse McCarran-Ferguson to create federally chartered insurance companies, an industry campaign underway for decades; and
(d) to create federal charters and Federal Reserve supervision for payment and settlement systems of systemic significance, a practice long encouraged by the Bank for International Settlements.
There's much going on in the Treasury’s Blueprint, some of it radical. There is extensive field preemption of many state laws (especially in insurance but in banking too), considerable expansion and consolidation of federal power and greater delegation of much of that power to SROs.
Another buzzword used even more frequently in the Blueprint than globalization is notable: innovation.
2. Posted by david on May 23, 2008 @ 12:45 | Permalink
great points and it is especially interesting that innovation, in the end, means "preemption." Which foreign jurisdictions, even Canada, rarely think about.
3. Posted by Jake on May 26, 2008 @ 16:23 | Permalink
Larry is absolutely correct that it is a horrible idea to "reverse McCarran-Ferguson to create federally chartered insurance companies, an industry campaign underway for decades."
The very thought makes one want to puke.