Arguments for and Against Complex Regulation in Banking Essay

It is a well-known fact that nowadays every single thing in every single area is under control. Indeed, governments want to master everything and put as much limits as they can to avoid crisis. Yet, it cannot be denied that among the sectors “affected” by regulation, the area of banking is one of the most important. In an original speech pronounced in August 2012, Andrew Haldane, the director of the Bank of England denounced a too much complicated regulation in banking. If Haldane admits that the regulation is inevitable, it remains that a complex regulation is sometimes useless.

Haldane’s speech entitled “The dog and the frisbee” has been discussed in an article in The Economist of the 8th September 2012. What are positive and negative aspects of the complex regulation in banking? First, we will consider Haldane’s position and understand it. Afterwards, we will see through various examples (including Glass-Steagall Act, Basel I, Basel II, Basel III and Dodd Frank act) in what extent a complex system regulation in banking is essential in some situations but can also be useless in others. Haldane argues that a too much complicated regulation in banking is ineffective.

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Thus, he is convinced that the Glass-Steagall Act 1933 that occurred after the 1933 crisis was one of the most efficient regulations of the history. The fact is that this act was in only 37 pages and was simple to read and to understand. Indeed, for him, the less complicated a regulation is, the better the stability of banks will be. Moreover, he asserts that complex regulations cost a lot of money and requires a lot of people “Mr Haldane estimates that Basel 3 may consume the time of 70,000 workers in the European banking industry” says the article. Haldane supposes that any dog can hold a frisbee without being aware of any physic rule.

The dog will just follow the frisbee and hold it. The same thing is true for a baseball or a cricket player when they run after a ball or a cricket. If physicians wanted to establish formulas to anticipate the path of the frisbee, these ones will be very complicated and useless. As for dogs and Frisbees, Haldane thinks regulation must be made thanks to regulator’s experience and not by editing complicated texts such as Basel II, Basel III or Dodd Frank act. Through a particular example Haldane highlights the fact that instead of focusing on the accumulation of statistics, we should rely on the judgment and experience of people.

Let’s now focus on Glass-Steagall Act, Basel I, Basel II, Basel III and Dodd Franck act and weigh the pros and cons of each of these regulations texts. The Glass-Steagall Act occurred after the 1933 crisis. Following the article, it extols “separated commercial and investment banking”. For Haldane that concise article is one of the most efficient through history and is an essential model for banking reform today. Nevertheless we notice that the American bank Lehman Brothers which is a pure bank of investment and the British bank “Northern Rock” which is a pure commercial bank both collapsed.

That example shows that the Glass-Steagall Act can be in some situations inappropriate. Basel I, Basel II and Basel III are described by Haldane as the “tower of Basel”. Unlike Basel I which was written in only 30 pages, Basel II is 347 pages long and Basel III is 600 pages long. Basel I refer to a set of recommendations in 1988 by the Basel Committee, a committee bringing together central bankers of the G-10 under the aegis of the Bank for International Settlements in Basel.

The act published a set of minimum capital requirements for banks. It was revised in the mid-1990s to include the management of off-balance sheet risks, such as risks associated with derivatives, but it soon became clear that an overhaul of the Agreement was necessary, that what the Committee did with Basel II implemented in 2006. Haldane explains why Basel II was a failure and how the act caused the financial crisis of 2007. “The result, as the world headed into 2007, was that banks’ balance-sheets were much riskier than they appeared. Basel III, published in December 2010 is an amelioration of Basel II; it’s part of the initiatives to strengthen the financial system in the wake of the 2007 financial crisis (“subprime” crisis) under the leadership of the FSB (Financial Stability Board) and G20. Basel III purposes are basically to make banks totalling 7% of their risk-bearing assets and to reduce the sizes of banks. Is Basel III the good solution to have a stable system? The article says “The regulators behind the Basel rules have tended to think a leverage ratio is too unsophisticated. ” What is the ideal size for a bank?

Finally we can discuss Dodd-Frank act of 2010 which is used in the United States. The Act is comprised of sixteen titles, which aim to: “promote the financial stability of the United States by improving accountability and transparency in the financial system, to end “too big to fail”, to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes”. Its implementation will require the preparation of 400 regulations by various agencies. None of those acts succeeded at 100% however most of them failed or will fail at a moment or another.

As Haldane, Asli Kunt, director of development policy at the World Bank thinks that “Less complicated regulations are easier to adapt and enforce and monitor”. In addition he asserts that “if the state does not have the capacity to monitor and policy such complex rules, the likely result is more speeding and more crashes”. As far as I’m concerned, I think that regulation is difficult to implement and everyone will try to avoid it. And because there is a lack of supervisors who are able, with the necessary human capital, to monitor the application of those regulations, they are useless.

It is obvious that despite the different regulations made during history, there is not a “perfect regulation”. On the one hand it is impossible to do without banking regulation, but on the on the other hand we notice thanks to our analysis that less complicated regulation can be more beneficial than we think. Let’s finish with that quote of Haldane which summarizes (in my opinion) perfectly the situation: “To ask today’s regulators to save us from tomorrow’s crisis using yesterday’s toolbox is to ask a Border collie to catch a frisbee by first applying Newton’s Law of Gravity”

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