Competition, Not Regulation, Needed to Fix Financial System
More competition rather than more regulation is the answer to fixing the financial system, according to a new paper from the Centre for the Study of Financial Innovation, a London-based independent think tank funded primarily by the financial services industry.
In The Road to Long Finance: A systems view of the credit scrunch, co-authors Michael Mainelli and Bob Giffords argue that only systemic wisdom will provide a long-term solution to the crisis.
“A return to business as usual will leave unaddressed such important problems as too big to fail; abusive risk-taking; perverse incentives; and a dangerous lack of diversity within the system. Simply tightening the current system of regulation will not work because the crisis was not a failure of open markets but a failure of highly regulated markets due to unexpected consequences of regulation and private decisions.”
A few highlights:
- Injecting more competition means a serious re-examination of global investment banking concentration, audit firm concentration, credit rating agency concentration and actuarial firm concentration. We believe that the promotion of competition, then supervision, then regulation should be the order of discussion with an objective of promoting “open” markets.
- The debate should be about “open” markets rather than the dogma of “free” or “regulated” markets.
- “Too big to fail” is too late. We have to stop financial institutions either getting to that size or being in that position. Tellingly, one investment bank in the 1990s had as its strategic objective: “to become too big to be allowed to fail”. It succeeded.
- Competition means having companies that can fail. Yes, society wishes to provide a safety net for retail investors and other groups, but that is a separate issue.
The religion of regulation works best when it worships at the altar of competition.
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