The return of the rulebook?
3 Nov 08
Glenn Allison urges caution on the response to the crisis in the financial markets
by Glenn Allison
Only 691 ICAS members alive today have lived through a time of graver financial crisis. That is the number of CAs who can recall, first hand, the Wall Street Crash of 1929.
They will recognise the similarities underlying the causes of the two crises. Although the initial political response to dealing with the problems appears to differ, they are also wise enough to predict what will happen next.
The Wall Street Crash preceded a global depression and a regulatory response, the ripples of which still endure. For instance, Fannie Mae, the massive US mortgage lender recently bailed out by the US Treasury, was born out of the Great Depression, to allow hard-up US citizens to step on to the home ownership ladder.
That was then, this is now. “Education, education, education”, was the phrase that defined the beginning of the New Labour era in 1997. Eleven years on, “regulation, regulation, regulation” looks like defining the run-in to the next general election. Those old heads in our membership will know that, as sure as night follows day, the reaction to a financial crisis is an energetic political response which ends in new regulation.
But, as we all know, regulation that is not effective is correctly seen by business as a burden in terms of money and time. It can also have an adverse impact on the competitiveness of economies.
The choices that politicians around the world are about to make could have a major impact on us all – even the majority of us who do not happen to work in financial services. There is a very real chance the authorities could decide that, since financial markets have caused such mayhem, it is not just banks that get tied up in red tape but hedge funds, private equity houses, insurance companies – pretty much anything that has a brass plate in the Square Mile or on Wall Street. I think this would be a mistake. It could halt the flow of capital – meaning less scope for growth and innovation across business in general.
The conundrum that regulators must wrestle with is how to avoid a repeat of a situation where financial services companies are regarded as “too big to fail”. Bail-outs may be necessary in the current climate, but I suspect that when the crisis runs its course, there will be enormous resentment over why one institution can be allowed to fall and another can be rescued. The messages that the bail-outs have sent to the wider public are not good. In a free market economy, it was not supposed to be like this.
If, as seems highly probable, we are to see a tranche of fresh regulation in the world’s financial markets, it is important to ensure that it is based on principles and not a tick-box approach.
Just as it seems the hard fight to persuade the US to accept the pre-eminence of principles-based regulation has been won, the crisis may encourage the lawmakers to revert to the old ways.