OSFI [Canada’s bank regulator] ranks Canadian financial institutions on a ladder according to its perception of how much trouble they might be. Those at the top–that list typically includes the Big Five banks–are the good kids who have their bedrooms in order and require minimal ongoing supervision. A team at OSFI will monitor their financial reports, meet with their officials and, once a year, report to the Minister of Finance on their health. Those at the bottom are disasters waiting to happen, and the regulator steps up its oversight accordingly.
…The U.S. system of bank oversight, in contrast, more closely resembles a group of babysitters who lay out dozens of rules and then watch–if the rules are broken, they bring out the punishments. This emphasis on rules has led to a concomitant focus on circumventing them
From Nick Rowe, who gives Scott Sumner several other interesting thoughts. Spotted by Tyler Cowen, who adds cynically that
If a Canadian investor wishes to take some risk, the New York-based banks may be the most efficient means of doing that.
Which could be because the U.S. regulatory system ensures a bailout of the risky investor more readily than the systems of other countries. I am guessing that is what Tyler is thinking is our source of comparative “advantage.”
In any case, back to the original quote, it gets to the distinction that I make between “letter of law” regulation and “spirit of law” regulation. I keep insisting that letter-of-the law regulation is bound to fail, because the natural impetus toward profit maximization will lead the banks to innovate in ways that are consistent with the letter of the law but violate its spirit.
READER COMMENTS
Brent Buckner
May 8 2009 at 9:07am
c.f. Kedrosky applying Gladwell piece to traders
Kit
May 8 2009 at 9:28am
In 1998 the UK switched from a system similar to the Canadians to the US system by creating the bureaucratic monster Financial Services Authority (FSA).
Don the libertarian Democrat
May 8 2009 at 3:17pm
I agree:
http://dealbook.blogs.nytimes.com/2008/11/04/stephen-schwarzmans-seven-step-program/#comment-391699
Tuesday, November 4, 2008
“He calls for a regulatory system based on “principles” rather than “rules.”
Via Deal Book on the NY Times we get “Stephen Schwarzman’s Seven-Step Program”:
“In an opinion piece in The Wall Street Journal’s Nov. 4 issue, Mr. Schwarzman maps out seven principles he believes should guide any regulation of the financial system. In many of them, he uses the opportunity to criticize the current regulatory framework in the United States, describing a “hodgepodge” of fragmented agencies and laws that make a “fetish of compliance with complex regulations.” He expresses concern that the latest debacle on Wall Street will inspire a thicket of new rules that choke off innovation.”
Here’s my comment:
“He calls for a regulatory system based on “principles” rather than “rules.” He writes:
If we are to sweep a vast array of financial institutions into the net of a single regulator, then that regulator has to be able to regulate not by promulgating a blizzard of ever more complex rules, but by enunciating a set of guiding principles. If these principles are coupled with strong disclosure and oversight, they will give the regulator the flexibility needed to cope with an ever-changing financial landscape, and to provide a clear direction for the regulated institutions.”
I agree with this:
This is the real problem with regulation. These investors can be very clever people, and are adept at shifting the terrain. That’s why regulation always seems to be correcting the last problem.
The solution is either to regulate or supervise risk, especially any investment that shifts risk to a third party or magnifies risk. In other words, broad principles.
However, have you ever noticed that some of these recommendations being bandied about are as simple disclosure and transparency, traits one would think a decent human being would try and exemplify as a matter of course.
— Posted by Don the libertarian Democrat
The Sheep Nazi
May 8 2009 at 7:18pm
I’d like to remind you, and Arnold in particular, what a spirit-of-the-law regime looks like in practice:
Who the [expletive deleted ] do you think you’re dealing with? We’ll have the IRS audit your fund. Every one of your employees. Your investors. Then we will have the Securities and Exchange Commission rip through your books looking for anything and everything and nothing we find to destroy you with.
The distinctive feature of Western law is that it is binding on the sovereign, just as much as on his subjects. In other words, the spirit of the law is the letter of the law. It is the notion that the guy with all the guns, can be bound by mere words on paper, and the custom of reverence to mere words on paper. And, yes, that does means that the government’s OODA loop is going to be slower than a sharp operator’s. But I really don’t want to live in a world where it’s faster, and I don’t think you do either.
[Quote appears to be from http://www.freerepublic.com/focus/f-news/2246890/posts with the expletive deleted by EconLog request.–Econlib Ed.]
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