Timidity, thy name is regulators – and that’s why regulators are doomed to fail and the rest of us are destined to suffer for it.
It’s rare to meet a regulator that has the measure of the realm it’s charged with supervising. All too often, regulators appear to be taking orders from their flock rather than giving them. And this creates a dispiriting mechanism for certain failure. The public interest can never be served properly when those charged with protecting it are all too willing to back down in the face of determined, self-serving opposition.
Earlier this month, global banking regulators announced they would ease the liquidity requirements that were to be imposed on banks in the wake of the financial crisis, giving the banks several years to get in line with these softer standards. Effectively, the regulators bent to bankers’ complaints that the new requirements would limit banks’ ability to lend, risking a return to recession.
All of the new limitations being proposed for banks, from capital requirements to liquidity minimums and leverage limits, are because the 2007-08 global financial crisis made it clear they are necessary to prevent a repeat of that calamity. Watering down those requirements bumps up the risk of recurrence and further erodes confidence in the regulators.
Canadian securities regulators also have their own shameful climbdowns, and this leaves well-established market failures unresolved. Instead, regulators must return to them endlessly and the public interest is not served.
Two such issues have resurfaced recently. In mid-December, the Canadian Securities Administrators published a paper examining the conflicts posed by embedded compensation – an issue it has visited repeatedly over the past 20 years. Earlier this month, the Investment Industry Regulatory Organization of Canada launched an effort to address the problem of confusing or misleading job titles – another seemingly straightforward issue that regulators have backed down on in the past.
Crafting solutions to most of these problems isn’t that hard. Having the guts to implement those solutions is where regulators inevitably seem to fail – and we all pay the price for that diffidence.
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