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regulatory wish lists March 20, 2009

Posted by Bradley in : Uncategorized , trackback

The Turner Review was published by the FSA this week (along with a discussion paper on banking regulation). It makes for interesting reading. In contrast to many of the recent reports on what went wrong, the Turner Review explicitly raises some big questions about regulation. One of these is about how regulators should deal with irrational behaviour in the financial markets. For example:

the acceptance that financial markets are inherently susceptible to irrational momentum effects does imply that regulatory approaches should be based on striking a balance between the benefits of market completion and market liquidity and the potential disadvantages which may arise from inherent instabilities in liquid markets.

In other ways the report retreads old ground. Although the crisis originated primarily in supposedly well-regulated jurisdictions, the report calls for global agreements on regulatory standards to cover offshore financial centres (and this appears as number 10 in a list of 32 items). As the UK has historically often behaved like an offshore jurisdiction it is a bit odd (although not surprising) to see this emphasis in a UK published report. The rationale for the emphasis on offshore centers is partly that hedge funds are often based in offshore jurisdictions and partly that if regulation is strengthened everywhere but in offshore jurisdictions there could be opportunities for undesirable regulatory arbitrage.

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