Harmonising financial regulation – the case against

The "solution" to the financial crisis is widely thought to lie in efforts by governments to bring about a harmonious global regime of financial regulation. That's what the Group of 20 countries set out to do. They called into being a new Financial Stability Board to coordinate the effort and made it the clearing house for ideas. Two years on from their London summit, and the G20 countries have largely gone their own ways. Banks in the US, for example, can still choose between a variety of regulatory regimes without having to move their headquarters to another state, let alone another country. The UK has taken a variety of steps to curb the discretion of bankers but avoided the really tough choices lest the bankers indeed move their headquarters to the US. Tax havens have signs a few protocols making it a little easier for authorities in the developed countries to prevent quite so much leaking from the system. But those agreements haven't put the havens out of business – far from it. You can still dodge taxes much the same as before, and there's more incentive to do so, now that tax rates are going up – but not evenly – in some – but not all – the G20 countries.

Financial regulation: It's on the regulatory side where the biggest, that is, the systemic issues arise. A large number of commentators have called for an end to regulatory arbitrage. That's what the European Union would like to achieve with its three new regulatory oversight boards for banking, insurance and securities, which opened for business in January. But from the US comes a voice of scepticism about the whole idea. Roberta Romano at Yale University is the woman who decried the "quack governance" of the Sarbanes-Oxley Act of 2002, and she's not convinced of the value of trying to rein in hedge funds now. "I contend that the move to regulate hedge funds is misguided because hedge funds were not a cause of the recent crisis, nor are they likely to cause a future one," she writes. The regulatory move on hedge funds can best be understood as hostility to short sellers, and it's directed at the wrong target. But she goes further, suggesting that the whole post-crisis emphasis on regulatory consolidation and harmonisation is just as misguided. Global harmonisation combined with any regulatory error can raise systemic risk, she contends. "When such strategies fail, they do so on a global basis, and can thereby precipitate a global financial crisis," she says. "Accordingly, regulatory arbitrage, a byproduct of regulatory diversity, provides a valuable, and little appreciated, hedge against systemic failure."

Source document: The working paper "Against Financial Regulation Harmonization: A Comment," by Roberta Romano of Yale, is a 21-page pdf file.