This is the first of a series of posts that uses Ben Franklin's adage, an ounce of prevention is worth a pound of cure, to highlight specific aspects of the ongoing financial reform efforts.
Long time readers of this blog immediately understand that the FDR Framework is the ounce of prevention. The focus of the FDR Framework is ensuring that all the useful, relevant information is made available to all market participants in an appropriate, timely manner so that they can analyze this information and use it in their actions in a buyer beware capital market system.
Long time readers of this blog also understand that regulatory efforts that do not involve ending the regulators' monopoly on all the useful, relevant information for financial institutions fall into the pound of cure category.
In a preliminary report, the UK's Independent Commission on Banking (ICB) recommended that the retail business be ring-fenced from the investment banking business. That way, if the investment banking business blows up, the regulator can let it go while preserving the retail business at no cost to the taxpayer.
Will this work for a global financial institution with hundreds of subsidiaries in different countries (temporarily setting aside the issue of contagion)?
Nobody knows including the members of the ICB. What is known is that the only way we find out is if one of these global financial institutions fails.
What is also known is that this is a pound of cure if the global financial institution runs into trouble.
Since its inception, this blog has advocated for an ounce of prevention. If the market has all the useful, relevant information, it is possible for the market to exert discipline on the global financial institution and get it to modify its behavior so that it does not fail in the first place.
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