Wednesday night, ASI hosted a meeting in the Quadrant Chambers' Library to discuss the future of regulation in international capital markets. Keith Boyfield, chairman of our Regulatory Evaluation Group (REG), served as moderator of the event, which was titled Whither Regulation? Each of our three guests speakers had ten minutes to argue his position on how the UK can best respond to the US bailout and current credit crisis.
Richard Jeffrey, the Director of Economics & Strategy at Cazenove Capital Management, started off the discussion with the failures of regulation. His main issue was that current regulatory practices focus too much on micromanagement. Regulators are more concerned with establishing common procedures among companies than they are with achieving regulation's main objectives, namely a stable financial system. To put it another way, our regulators do so much legalistic box ticking that they get distracted from the bigger issues at hand. At the same time, this approach stifles innovation and creates barriers to progress and growth in the market. Jeffrey argued that in future regulation needs to focus on basic principles and outcomes, not complex processes. Such a system would allow both financial institutions and regulators to do their respective jobs better. [Click 'read more' to continue...]
Andrew Graham followed with the proposal that private equity is one of the keys to recovery from the credit crisis. As Chief Operation Officer at the British Private Equity and Venture Capital Association, Graham emphasized the importance of competition and free markets in generating economic growth. Regulation leads to high costs and a proliferation insignificant rules that only hinder development, rather than really doing anything to ensure stability. This, he argued, can be seen in the United States as well. He argued that the key to getting through our current economic woes was to get wealth creation going again. So long as companies are not heavily taxed or run out of business, and are free from the micromanagement regulations of both the UK and the EU, private equity, said Graham, will help set the path for recovery and allow firms to look ahead to more prosperous days.
The presentations concluded with Edward Nalbantian, the Head of Banking & Finance at Jones Day. Unlike the first two speakers, Nalbantian suggested that our regulatory approach has been a pragmatic one, despite the current problems in the market. The troubles that we face today are due to problems such as liquidity and asset valuation. He though regulation should not be written off as a possible way to mend this situation. For instance, in the current US president election, Nalbantian said that any administration (Democrat or Republican) would institute regulatory practices to measure risk exposure, leverage capital and create some international uniformity in the market. Banks should rely on their internal economic models, but must be in sync with general regulatory objectives for efficient market operations. Limited regulation, therefore, can provide uniform goals for firms – primarily transparency and stability – while still allowing for financial innovations and incentives.
The speakers’ different approaches to the credit crisis allowed for an enlightening evening of economic debate, and were followed by a very lively question and answer session. It is clear that there are several ways the British government could respond the chaos in the market, yet each speaker – albeit to differing degrees – emphasised the importance free market principles and light-touch government regulation. All three agreed that now is the time to stop living in the past and start working towards a new era of prosperity and growth.