Stifling dissent at financial regulators not unique to Bank of England

To no one's surprise, Bank of England governor Sir Mervyn King denied a report that his organization stifled dissent.

However, the Bank of England is not the first financial regulator to do this.  As the Nyberg Report documented, all of the Irish financial regulators engaged in stifling dissent.

There is a reason why dissent is stifled.  Each financial regulator insists on speaking to the market with one voice.

It is this single voice that dooms financial regulators to being a source of financial instability.

This can be easily shown by looking at the experience of bank examiners.  Leading up to the financial crisis in Ireland, there were a few individuals who saw the problem.

In order for their view that a problem existed to be communicated to the market, they had to convince everyone above them who worked for the financial regulator.  It is only by doing this that the "voice" of the financial regulator would say there was a problem.

There were two significant factors working against them that effectively stifle dissent.

First, the "voice" would be concerned that saying there was a problem would threaten the safety and soundness of the banks.  Even if there were a problem, there is a risk that by saying the problem exists that it makes the problem worse.

Second, the banks themselves would lobby both senior regulators, who are political appointees, and politicians to say there was no problem.  As we know, none are so blind as those whose current or future paycheck is dependent on not seeing.

At a place like the Bank of England or the Federal Reserve, there is a third reason why dissent is stifled.  The economic PhDs at the top of the shop are naturally defensive of their ideas (they learn this behavior as part of preparing for the dissertation defense) and have an incredible "not invented here" complex.

If they did not think up the solution, then the solution is by definition flawed.  They will go to the ends of the earth to come up with a reason it is flawed.

Take ultra transparency for example.  This is the solution to the problem that banks are 'black boxes' and market participants cannot assess the risk of the banks or exert market discipline on them.

I have been told by numerous economists that the problem with ultra transparency is that it would make so much data available it would confuse market participants.

This is not a flaw with ultra transparency, but rather a feature.  If HSBC is confused and unable to assess Standard Chartered after seeing its exposure data, the message is unmistakable, Standard Chartered needs to be shrunk in size until firms like HSBC can understand it.