Has regulatory reform
Financial Markets Group, London School of Economics and Political Science,
Purpose –The purpose of this paper is to provide a provocative and critical introduction and solutions to
signicant contemporary issues of nancial regulation.
Design/methodology/approach –The paper is an expert’s review of contemporary issues and
challenges in nancial regulation.
Findings –The paper advocates that contemporary nancial regulation challenges are addressed through
governance reforms and an enhanced focus on maturity transformation, rather than a focus on just capital and
liquidity management. In particular, more emphasis should be given to individual decision-makers within
banks rather than institutions.
Practical implications –The review paper considers areas where future regulatory reform may be
enhanced and redirected.
Originality/value –The review provides original and critical perspectives on contemporary regulatory
Keywords Reform, Regulation
Paper type Research paper
The incentive for those in any institution, such as a Central Bank, is to justify and extol the
virtues of the decisions that they have already taken. Criticisms of current regulatory
measures are more likely to come from outsiders, perhaps especially from academics, (with
tenure), who can play the fool to the regulatory king. I offer some thoughts here from that
perspective. I shall try to make two general arguments; rst, bank regulatory failures are
better addressed by governance reforms than by raising capital and liquidity requirements
ever higher; and second, the main lacuna has been in allowing banks to nance illiquid
long-dated property mortgages on the basis of short-dated, runnable and uninsured
2. Persons, not inanimate institutions, are responsible for decisions
So, to start off, I would contend that the regulatory failures that led to the crisis and the
shortcomings of regulation since then are largely derived from a failure to identify the
persons responsible for bad decisions. Banks cannot take decisions, exhibit behaviour or
have feelings – but individuals can. The solution lies in reforming the governance set-up and
realigning incentives faced by banks’ management.
Recent regulatory problems have been greatly reinforced by a widespread tendency to
apply human characteristics, i.e. to anthropomorphise, to an inanimate institute, in this case
a bank. We tend to talk about Bank X having assumed too much leverage or having behaved
in an improper fashion, rather than management of Bank X did such and such; we say that
Bank X was bailed out rather than the creditors and clients of Bank X were bailed out.
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Journalof Financial Regulation
Vol.25 No. 3, 2017
©Emerald Publishing Limited