Finance : a return to regulation

By Christian Chavagneux

The US and Europe have revealed their plans to regulate the finance industry.  The principals of both plans are good, but the true test will come in their implementations.

On June 18th of last year, Barack Obama presented his plan for the reform of American finance regulation at the same time as the European heads of state revealed their plan with the same objective.  The political dynamic instilled by the G20 conference of last April was still in effect; on both sides of the Atlantic, the rulers took strong positions on taking the finance industry in hand.  The vigilance of these plans depends solely on their implementation; there may be a gap between the announced regulatory plans and the reality of the politics needed to put them into action in the months to come.

On a more general level, the US and Europe want to create a central regrouping entity together, made up of regulators in order to collectively and steadily manage the finance industry and its investments.  However, such a collective would naturally permit a rapid public intervention in the case of rising risks for the entire sector- a “macro-prudential policy.” Where the US chose to place the new committee for financial regulation under the authority of the Secretary of the Treasury, Europe preferred having the governors of the European Central Bank elect a president for the European committee on systematic risk.

This European committee would not have the power to force a member nation to give financial aid in the case of an economic crisis (i.e. bailing out a financial institution that is bankrupt).  The American central bank, on the other hand, is compelled to give priority to not only failing banks and industries but all financial institutions (i.e. hedge/investment funds, insurance agencies, etc.) if they are deemed “too big to fail,” that is to say that their bankruptcy would irrevocably damage the entire financial system because of their debts to or intricate involvement with numerous other businesses.  Thus these institutions are the object of increased surveillance and are forced to place much more financial capital aside in the case of a future crisis.  Europe should also evolve and adapt this policy.       

Hedge funds and accounts not on the balance sheet will also be monitored much more carefully on both sides of the Atlantic.  It is certainly still too early to correctly judge their effect on the financial market and its regulation, and their exact monitoring has yet to be defined.  The US has also made it known that it will willingly lead an international push for public economic controls and affirms that its other pre-emptive measures will be in place before the Congressional debates come Fall.      

From Alternatives Economiques no. 282, July 2009

Edited and translated by Dara Kagan.