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Why Regulation from the Central Banks Never Works

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Like army generals, the senior financial regulators are always fighting the last war. Here’s how the game works:

 

The regulator recruits some low-ranking bod from London to tell them what they need to know about the dastardly banks’ various nefarious schemes…

 

The big London institutions recruit high-ranking bods from the regulator…

 

Then the new recruits tell the banks exactly what they can and can’t get away with. And exactly how they should push the envelope.

 

It’s a ‘revolving door’ of staff succession between the central banks and the finance industry. It means the regulator is indeed, always preparing for the last battle. The bigger chequebook offered by the banks ensures they are always one-step ahead of the shoeshine.

 

I was catching up with an old mate the other week and together we lamented the regulatory environment (yes, these are the sorts of conversations old bores like us have for fun!)…

 

Well, Bengt, surely the regulator needs to be beefed up. They need to spend bank-level salaries and get hold of the top talent to keep this industry in check!

 

No, no, no…‘ says I. ‘What we need is anarchy…

 

Regulation just doesn’t work

 

In the run-up to the 2007/08 crisis, regulation failed. It’s practically bound to. When it comes to banking, we’re dealing with big-money power brokers.

 

There’s also the nature of global capital markets. If you don’t like the regulation in one country, then shift operations to another. That’s a powerful tool oft used by the banks. London, in particular, has benefited from open financial markets. Successive governments have kept EU regulation at bay, shielding our banks from legislation emerging from Brussels.

 

The point is it’s extremely difficult to regulate effectively. Either the banks won’t have it, or they’ll continually adapt to new legislation.

 

But the worst of it all is the uncanny ability of the regulators to score own goals.

 

Read the rest of this article at Money Morning

 



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