Crisis Resolution - A regulatory paradigm for change

Four weeks into this blog and finally a point has been reached where we can discuss some potential solutions to the regulatory conundrum; namely what reforms might be implemented and how effective these are likely to be (needless to say this post is likely to be a bit longer than the others). Since the autumn of 2008, much change has occurred: In the United States Congress passed the Dodd-Frank act, a move seen by many as a step back towards the Glass Steagall reforms of the early 1930’s. The Basel Committee has once again revised capital, leverage and liquidity requirements, in response to the obvious deficiencies that were identified post-crisis. And Sir John Vickers proposed a mass overhaul of the UK banking system (The White Paper) with the aim of protecting consumer banking from the more risk prone wholesale side (Goodhart, 2011).

                Whilst there is no doubt in my mind that there are undoubtedly positive changes occurring across the globe, my worry is that these new initiatives are too reactive, focusing solely on preventing elements of previous crises from arising again instead of looking to the future. Or, just as futile is the risk of them never being fully implemented. Take for example the liquidity rules imposed on banks under Basel III. These requirements were established on the back of events such as the run on Northern Rock however it appears our memories are fading at a startling rate: just last month regulators in Basel decided to give the banks another four years to meet the targets (The Guardian, 2013). When will policymakers finally crack down on banks?

A framework for change- Simplification and a shift to Crisis Resolution

                In 2008 banks, governments and investors were largely taken by surprise. Many of the banks were running risks they probably didn’t fully understand, moral hazard led to investors not applying pressure on banks to manage risks carefully and the shadow-banking sector became ever-more entwined with the banking system. The crux of it all however was that regulators and politicians were not armed with the tools necessary for effectual resolution. In June 2012 a paper was presented to parliament which aimed at correcting this mistake; ‘Banking Reform: delivering stability and supporting a sustainable economy’. I personally think many of the suggestions it makes are great. Whether or not the reforms it sanctions will be effectively and comprehensively implemented is another question. History indicates that regulators and politicians may lack the conviction to see it through. What follows is a brief overview of the reforms: