Has regulatory reform been misdirected?

Author:Charles Goodhart
Position::Financial Markets Group, London School of Economics and Political Science, London, UK
Pages:236-240
SUMMARY

Purpose The purpose of this paper is to provide a provocative and critical introduction and solutions to significant contemporary issues of financial regulation. Design/methodology/approach The paper is an expert’s review of contemporary issues and challenges in financial regulation. Findings The paper advocates that contemporary financial regulation challenges are... (see full summary)

 
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Has regulatory reform
been misdirected?
Charles Goodhart
Financial Markets Group, London School of Economics and Political Science,
London, UK
Abstract
Purpose The purpose of this paper is to provide a provocative and critical introduction and solutions to
signicant 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
challenges.
Keywords Reform, Regulation
Paper type Research paper
1. Introduction
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
wholesale liabilities.
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.
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1358-1988.htm
JFRC
25,3
236
Journalof Financial Regulation
andCompliance
Vol.25 No. 3, 2017
pp.236-240
©Emerald Publishing Limited
1358-1988
DOI 10.1108/JFRC-05-2017-0042

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