The financial crisis and the regulatory response: An interim assessment

Abstract

Most changes in financial regulation are introduced hastily in response to a crisis. For most people, and politicians, financial regulation is not a topic of consuming interest, and hence it is ignored until it appears in the headlines of the daily news feed. At that point, ‘something’ must be done, and so something is. These were the circumstances in which post-2007 reforms were undertaken, and we can now begin to evaluate them, even as they are being put into effect. In the author's view, regulatory failure was a part, but not a principal cause, of the financial crisis. Regulatory assumptions – notably as to the effectiveness of hedging strategies in the private sector and the continuous availability of liquidity – proved faulty, and so regulators failed to provide the ‘speed bumps’ that are the most effective tool in addressing booms and reducing the impact of busts. Moreover, regulatory models that extrapolate from the past are likely to prove ineffective for at least some futures. Finally, the global regulatory bodies themselves were structurally flawed, and poorly coordinated, both internationally and within countries. Some structural reform has now been undertaken, globally, within Europe, and within the United Kingdom. Those reforms were certainly necessary, but are not likely to be sufficient. While it is too early to draw definitive conclusions, the reforms to date probably fall short of the mark.