The British TV sitcom Yes Minister best explains how politicians and bureaucrats usually react when faced with crises: “Something must be done. This is something, therefore we must do it.”
The long battle for financial reform that Western regulators have been fighting in the wake of the financial crisis reflects this sentiment—to different degrees, as last week proved. European regulators, who find themselves amid an existential crisis, are fumbling their way through it. US regulators, though still unsure what “something” is, are giving more thought to reform.
Europe is frantically trying to reverse market mayhem. Lawmakers last week came up with different sets of rules to govern hedge funds that, as The Economist noted, ended up contradicting one another—despite hedge funds being far from the source of Europe’s current crisis.
Then there was Germany’s idea of a global bank tax that found little support. Germany also banned naked shorts—selling securities without owning them—in euro zone government bonds, credit-default swaps and certain financial stocks, without the thought that a country-specific ban means nothing in today’s world. When France and others opposed the move, showcasing the euro zone’s poor coordination, the mayhem worsened.
Not knowing how to end this chaos, Europe is reacting by throwing anything it can get its hands on at it. Populism then becomes too easy: The UK last year already imposed a 50% one-time tax on bank bonuses.
Illustration: Jayachandran / Mint
The US may have suffered from a similar fit in late 2008 when it banned short-selling, but by last week—after months of reflection—the US Senate attempted more sombre reform. In its financial regulation Bill, populist rage against bonuses is absent. Instead, there are steps to restrict commercial banks from trading with their money, among others.
The upside here is that the US is proactively considering such prudential measures. A partial downside is that, not having pinpointed the “something”, it might be attempting to do too much: It’s unclear, for instance, what role a consumer protection agency will play in preventing future crises.
What is clear, though, is that on both sides of the Atlantic, regulators are exacting their revenge on modern finance, some reactively and without much thought, some in a more proactive fashion. Indian regulators should watch how these approaches play out.
It’s interesting to note that, in some cases, India has long implemented measures the West is now contemplating: The US is considering a kind of circuit breaker on stocks after this month’s flash trading crisis. No one expects Indian regulators to anticipate every problem, but if they stay proactive, they don’t have to fumble for random “somethings”.
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