Monday, 31 January 2011

Our financial services regulation is bonkers

A business associate pointed out that much of banks' proprietary dealing has decamped to Singapore, which made me think about how inept so much financial services regulation has proved to be. It is regulation by huffing and puffing. Instead of thinking and taking measured steps that are designed to have particular effects  the politicians constantly play to the gallery and think about the next day's news headlines rather than careful policy-making. The outcome is virtually guaranteed to have unintended consequences.

So EU politicians rail at hedge funds although they were not actually the cause of recent financial instability; but ok, they could be connected with the next crisis. But financial institutions are flexible. They move abroad to avoid new regulations and new taxes. What good have the regulations and the taxes done? The hedge funds are still funded by EU banks but now they are outside the reach of EU regulators so, instead of having improved the risks we all face, the politicians have pushed them beyond our control.

Similarly with the proprietary trading. It may be carried out by non-bank institutions or outside EU jurisdiction but, if you follow the money trail, it is still, effectively, the same EU banks that are taking the risks and the profits(losses). So the effect has been the precise opposite of what was intended. Madness.

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