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new Democratic administration, the economic meltdown and public anger over Wall Street's role has created the conditions for major changes.
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In Ketchum's assessment, much of the focus on reforming financial services regulations will be in areas that have not been traditionally regulated or are not transparent. "Stovepipe regulation in this country has not evolved with the marketplace," he said. "[Leading to the] sickening volatility and huge challenges that the economy has had to deal with."
Ketchum said we now live in a world "where there are entities that can have significant impacts across industries or international borders." As a result, he added, he believes that "some form of systemic risk regulation will exist in most countries by the end of 2009."
In this context, Ketchum defines a systemic risk as "a risk that can significantly impact a country or economy as a whole, as opposed to an individual company undergoing bankruptcy."
SEC Commissioner Luis A. Aguilar's keynote speech, "Reversing Course – Putting Investors First in Regulatory Reform," put similar focus on the need for systemic risk regulation. In his assessment, before further financial services regulations are formed, there must first be a search into the causes of crisis.
In his view, "the real problem is that we didn't have anyone willing to exercise existing authority to look deeply into questionable industry practices -- and to just say no when needed. Instead, we seemed to have had decision makers that weakened regulators and otherwise fostered 'unregulated' markets. Additionally, we often had regulators who failed to pursue their mandates or, at the very least, turned a blind eye to risky practices."
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In his view, the focus in forming new regulation "needs to be on ensuring the continuation of systemically important market functions, not institutions, and should have a clear focus on investor protections." Aguilar suggested a number of directions for such policy to evolve, including the formation of a "council of regulators" that would "avoid the inherent tensions and conflicts that could arise where one regulator has combined responsibility over monetary policy, a vested interest in the safety and soundness of particular institutions, and plenary powers to address systemic risk."
His other proposal, for an "integrated capital markets regulatory body," would merge the SEC, Commodity Futures Trading Commission and the U.S. Department of Labor's Employee Benefits Security Administration, though such a merger is unlikely to happen.
That said, clearly there is a strong push for, in Aguilar's words, a "regulatory regime with a comprehensive investment mandate" that provides for "strong and broad regulatory authority and vigorous enforcement, coupled with flexible exemptive power to permit dynamic regulation where needed." In the past, "there was a reliance on enlightened self-interest to protect the public good. One thing no one can depend on after this financial crisis is enlightened self-interest."
Let us know what you think about the story; email: Alexander B. Howard, Associate Editor