Thursday, June 27, 2013

Sign of desperation: UK officials think bank lobby needs "ground rules" to prevent another crisis

In his last testimony before Parliament, the Bank of England's Mervyn King whined about banks lobbying government officials to put pressure on bank regulators to limit the amount of capital that the banks were required to hold.

To paraphrase Casablanca, "I am shocked, shocked, to hear that banks would lobby politicians to put pressure on bank regulators to limit their regulatory efforts".

Regular readers know that the Nyberg Report on the Irish financial crisis detailed both how and why this lobbying is effective.  It is and always will be effective because the bank regulators are political appointees who have to report to the politicians.

The clear implication of the banks being able to undermine the bank regulators by lobbying the politicians is that the financial system must be designed in such a way that it is not dependent on the bank regulators.

Fortunately, the financial system is designed to not be dependent on the bank regulators.

Unfortunately, there is a gap between the design of the financial system and how the system is currently being practiced.

The system was designed to not be dependent on the bank regulators because banks were suppose to provide transparency to all market participants into their exposure details (something they did in the 1930s as a sign of a bank that could stand on its own two feet).

The system has become dependent on the bank regulators because the SEC and similar regulators in the  EU, Japan and UK failed to ensure that the banks provided transparency to all market participants reasoning that the financial regulators with their 24/7/365 transparency would be enough.

Your humble blogger has been advocating stripping the financial regulators of their information monopoly.  This monopoly makes the financial regulators a single point of failure in the financial system.  A point of failure that failed in the run-up to our current crisis.  And a point of failure that will fail in the run-up to the next financial crisis.

Stripped of their information monopoly, market participants don't have to fear banks lobbying politicians to pressure bank regulators to restrain their regulatory efforts causing another crisis.  Market participants can proactively discipline the banks and restrain the risk taking that leads to a financial crisis.

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