Wednesday, 26 March 2008

New Labour & the FSA Experiment - Res ipsa loquitur

The cacophony of background noise is a trademark of the political theatre a.k.a. - Prime Minister’s Questions (PMQ’s). But occasionally, one can make what I could only describe as rather telling observations.

David Cameron decided to use his “bag of six” – questions that is, to bludgeon the Prime Minster on the Financial Services Authority (FSA) inept handing of the Northern Rock crisis. Unfortunately for him, his observations on ineptitude were partially reciprocated, as he returned the favour; making a poor case for a valid argument.

The fact is we really need not look very far to see an excellent example of effective regulation in action – cue The Federal Reserve Board. Just take a look at how deftly the Fed dealt with the near collapse of Bear Stearns, and contrast this with the slipshod action or “inaction”, of the FSA in conjunction with BoE in dealing with a similar situation – the collapse of Northern Rock. Even as the dust is still settling, it is clear that the American approach of quasi-public regulation is far more superior. More importantly, the Fed as a unitary authority is an approach that while not perfect, has the benefit of pooling resources, and presenting itself to the banking industry as a sole place of reference.

While I am not quite ready to hitch my cart to the Tory economic engine, I most certainly support the Tories premise to hammer home the point that all this talk about New Labours economic prowess is just that – talk! Furthermore; the decision to split responsibilities of banking supervision and regulation between that of the Bank of England and the FSA have proven to be categorically short-sighted and economically sophomoric.

Yes, we all know the ability of Gordon Brown to verbally vomit statistics at will is amazing, if not of a mild autistic savant. However; The Tory party can rightfully argue that the decision to separate the powers of regulatory supervision between the FSA and the BoE was one of poor judgment.

I further opine that in light of FSA admitting in their own style that they are simply not up to the job, that the regulation of addressing:

      • Banking panics;
      • Striking a balance between private interests of banks and the centralized responsibility of the government;
      • supervising and regulating banking institutions;
      • maintain the stability of the financial system and containing systemic risk in financial markets;
      • to be responsive to local liquidity needs

Be solely the domain of a quasi-public Bank of England. As a trader myself I have a keen interest in a stable and efficient market place. If the regulator of first instance can’t be trusted, relied upon or worst – proves incompetent, it affects us all. For all the talk from new Labour on prudence and stability, it’s only when things fail, that we get the accurate picture.

Res ipsa loquitur – it speaks for itself! The idea that the status quo of relying on the FSA to effectively deal with systemic risk and regulation in the banking sector, is clearly no longer a sustainable proposition. I fear however, that New Labours response to today’s report from the FSA will be genetically in the style of New Labour – more regulation! It really is the case that "less is more!"

More regulation in the area of banking would be the wrong response. What is needed here is calm insightful fortitude in dealing with issues in banking, against the current backdrop of “tight” credit markets. I know it would be the breaking of a lifetime habit for New Labour to instead look to the private sector for the experience necessary in dealing with and examining the types of risk that banks take.

The ability of the regulator to understand such operational banking risk, goes some way to pre-empting such catastrophic failures such as Northern Rock. The Bank of England is in the best position to understand this, it would be folly indeed to not re-examine this remit, and learn a few lesson from our cousins on the other side of the Atlantic – The Fed!

No comments: