Home' Trinidad and Tobago Guardian : August 9th 2015 Contents AUGUST 9 • 2015 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
FINANCE | SBG15
The new masters of the financial universe
are neither bank bosses nor hedge-fund
titans. They are the regulators whose
job it is to make finance safer.
Daniel Tarullo, Andrew Bailey and
Danièle Nouy, senior regulators in Amer-
ica, Britain and the euro zone respectively, may not
have the salaries, egos or profiles of Wall Street superstars,
but the decisions they and people like them make are
shaping the industry.
As John Mack, a former CEO of Morgan Stanley,
reportedly told his successor: "The government is your
No 1 client."
Even for those who deeply mistrust finance, that
ought to give pause.
The global financial crisis made new rules inevitable
and necessary. Taxpayers need protection from the risks
of failure: hence a series of measures to ensure that
banks finance themselves with more equity, have lots
of liquid assets and will "bail in" creditors if they col-
The disaster of 2008 persuaded officials not simply
to write harsher rules, but also to be more flexible. Risks
can materialise in unexpected places; dull old money-
market funds, for instance, proved a shocking source
of vulnerability. The industry can game static, well-
understood rules more easily than dynamic, fuzzy ones.
Naturally the regulators therefore want wiggle-room.
Consider Tarullo, a governor at the Federal Reserve who
takes the lead on financial regulation. His responsibilities
include an Orwellian-sounding group called the Large
Institution Supervision Coordinating Committee, which
organizes annual stress tests at big American banks. To
prevent these tests from being gamed, the Fed has been
careful not to reveal the models it uses to calculate the
losses banks would suffer from hypothetical shocks.
Executives, to say nothing of investors, are largely left
in the dark about the assumptions that determine
whether banks can return money to shareholders.
Regulatory discretion extends well beyond the stress
tests. Officials apply tougher standards to heftier and
more interconnected institutions. The criteria by which
specific companies are anointed as "systemically impor-
tant financial institutions" are not precise.
The case for being strict with banks is that they
borrow heavily, sometimes from individual depositors
who can yank their money out in an instant. As rule-
makers turn their attention from banks to other insti-
tutions and markets, however, things become blurred:
Debt levels are lower, as is the risk of runs. Met Life,
an insurance company, is challenging in court the
decision of an American financial-stability council to
call it systemically important, arguing among other
things that it has not seen the information that the
council used to reach its conclusion.
Regulatory agencies also have immense discretion in
how they deal with wrongdoing. Officials have meted
out huge fines to banks---US$87 billion in 2014 alone---
as part of secret settlements that risk leaving the guilty
insufficiently punished or the innocent tarnished. Few
institutions have the chutzpah that Met Life has shown
in taking on its regulator in court. Cases against indi-
viduals ought to be more common.
Finance is messy. Risk does not sit tamely inside one
set of institutions. Ambiguity and unpredictability help
keep bankers on their toes. The attitude of many is
summed up by one former regulator: "The best way
to regulate is to line the banks up occasionally and shoot
one of them."
Regulators are not the only ones with an interest at
stake, of course. Investors in banks, insurers and the
like are financially exposed to the decisions of officials.
They have rights too. Systems ostensibly designed to
ensure safety can easily backfire: Regulators routinely
prefer credit to finance property rather than small busi-
nesses, for example. Society s interest in keeping bankers
in check must be balanced against its interest in holding
officials to account.
The best way to manage these trade-offs is through
transparency. The Economist
to rule them all
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