The word regulation frequently carries negative connotations—and for good reason. Often, regulatory rules are influenced by megacorporations who know that they can clobber competitors by helping to pass laws that hurt the little guy. The Dodd-Frank Act of 2010, for instance, was meant to prevent another financial crisis, but it was influenced by megabank lobbyists and carries compliance rules that particularly sting local lenders, who don’t have the big budgets to hire extra compliance officers that the megabanks do. In a speech given to the Kansas City Fed, for example, Andrew Haldane estimates that the financial system will have to hire more than 10,000 regulators and compliance officers to enforce new rules in the Dodd-Frank Act.
Our view is that the financial system needs some regulation, but it doesn’t need thousands of pages of it—or thousands of regulators to implement it. We’d like to see a few simple changes passed, including ending too big to fail and too big to jail.
Regulation #1: End too big to fail
We talk about this on our TBTF page, where we say that ending too big to fail could be acheived in many ways: 1) putting a cap relative to GDP on bank size 2) separating investment and commercial banking, 3) separating insurance and mortgage lending, 4) taxing banks that get bigger than a certain threshold, and 5) encouraging citizens to leave too-big-to-fail banks and instead support local lenders.
Importantly, a bill like Glass-Steagall (the 1930s bill that separated investment and commercial banking) was only 37 pages long, compared to Dodd-Frank’s 800+ pages of legislation and estimated 30,000 pages of rules. Breaking up the megabanks wouldn’t require the heavy compliance procedures of Dodd-Frank.
Regulation #2: End too big to jail
There have been so many megabank fines lately that it’s impossible to list them all here, but two recent instances stand out: HSBC’s money laundering for drug cartels and UBS’s Libor manipulation. In both cases there were people inside the bank who had committed criminal activity (e.g. the people approving money laundering at HSBC and the people manipulating global interest rates at UBS).
But the criminals didn’t go to jail. According to the Guardian, “had the US authorities decided to press criminal charges, HSBC would almost certainly have lost its banking licence in the US,” and chaos would have ensued (some suppose) in the financial markets. So the criminals didn’t go to jail because the bank they belonged to was too big. Had these crimes been committed at a small local lender, however, this wouldn’t have been a problem: the guilty parties would have gone to jail.
Again, our point here is that it wouldn’t require thousands of pages of legislation to reform legislation so we can prosecute individual criminals—whether they belong to a megabank or not.
These aren’t the only regulations that could help the financial system be more stable, obviously. There are other things, including increasing transparency in annual reports, ending off-balance sheet accounting, banning credit-default swaps, etc. The key point here is that effective regulation doesn’t require lots of rules and regulators—indeed, such regulation may ultimately be more harmful than helpful, and give the word regulation its (frequently) deserved bad rap.
See also: 20 local lenders speak out about how Dodd-Frank hurts them