Are efforts to ward off another financial crisis causing more harm than good?
Six years ago, a financial and economic crisis rocked the global economy. Since then international regulators, led by the Financial Stability Board and supported by the G20, have designed new laws and regulatory standards to prevent a reoccurrence.
But have these measures helped, or have they made matters worse?
In a report released today by The School of Public Policy, author and noted international economist William White surveys post-crash regulation of financial institutions and finds lessons that should be learned by Canadian regulators.
“The traditional approach of prudential regulators has been to focus on the safety and soundness of individual financial institutions; a bottom-up perspective. In practice, this approach remains dominant. However, in response to recurring financial crises, a top-down approach to prudential regulation (focused on “systemic stability”) has also begun to attract attention.”
While acknowledging the efforts made to increase stability in the financial sector and avoid another crisis, the author points out some negative effects of international regulation, for example, the growth of even more “too large to fail” financial entities in some regions.
“Many of the measures taken to manage the crisis since 2007 have had unfortunate side effects. Not least, measures used to bail out massive, faltering institutions deemed “too big to fail” have only created larger, more complex institutions that would pose an even greater danger were they to fall victim to another crisis”.
Overall, the financial sector will undoubtedly continue to innovate in response to competitive pressures and in an attempt to circumvent whatever regulations do come into effect, the author argues. Regulators need to respond in turn. White suggests that attempts to reduce complexity would not be misguided and that complex behaviour need not necessarily be accompanied by still more complex regulation. Removing impediments to more effective self-discipline and market discipline in the financial sector are also recommended.