The session brought together HEC Paris professor and mediator of the conference, Jean-Edouard Colliard, Salvatore Gnoni, who runs the Investor Protection and Intermediaries Team in the European Securities and Markets Authority (ESMA), Enrico Perotti, professor of international finance at the University of Amsterdam and Vikrant Vig, professor of finance at the LSE. These four specialists tackled questions such as expectations one can have from regulation and the degree of complexity needed to be efficient.
How can finance regulation be efficient?
Salvatore Gnoni considered the question from his own point of view, the one of a regulator interested in the investors’ protection. Acknowledging both the vital part securities market plays for growth in our market economies and the need for regulation that arises from market failures, he went on to describe how the MiFID II directive passed in the wake of the 2008 crisis recalibrated the relationship between regulation and the financial markets. Its scope was broadened to include structured deposits, stricter rules were created on advice as well as inducement, supervisors gained the power to intervene on products and the issue of governance and implementation were stressed.
Weighing up the notion that regulation has become too complex, Professor Gnoni changed the perspective to address the problem of how to regulate well within a complex environment. He mentioned the growing complexity of products and markets, the impact of new technology on financial markets and the complexity of the negotiation process for the adoption of new legislation, all factors which may lead to the need to create complex regulation. The solution resides first in better regulation principles, principles which are reflected in ESMA’s processes. For the speaker, it is as vital to enforce existing regulations as it is to pass new ones.
In this respect, HEC Professor Gnoni underlined the importance of supervisory convergence which indeed has become one of the priority strategic objectives of ESMA. He went on to mention the tools used by ESMA to deliver on supervisory convergence, including peer-reviews, soft law, mediation, breach of the Union law procedures and, more recently, workshops and thematic sessions. This shift of focus from rulemaking to convergence for the supervisors concluded his intervention.
Dutch-based professor Enrico Perotti followed up by questioning the future of monetary and prudential policies in a context of zero growth. According to him, being provided with a realistic perspective on where we are going could help define the regulation we are looking for. Public debate has been dominated by concern over lack of growth as the world’s richest economies have barely limped forward since 2008. But the essential question should be the rate of growth we should expect. Historical growth rates are linked to technological disruption and its impact on productivity.
Since no recent technological boost has occurred, that production has been reallocated to the emerging world, work participation has dropped and high level of debts has further limited spending boosts. Consequently, the downturn in growth should not be a surprise to the Western world. This lack of growth only compensates past excesses permitted by a credit boost, in the absence of any increase in productivity.
Thus Professor Perotti disagrees with those who believe the same levels of growth will return once the uncertainty that is currently discouraging households from spending will give way to confidence. For him, we are at the end of a debt super cycle and must accept that the past growth was unsustainable and inflated. Clearly, growth in spending was confused with an increase in productivity. Low demand is healthy, or at least realistic, and zero growth per capita has to be the base scenario for regulators.
LSE professor Vikrant Vig went on to discuss the degree of complexity needed for regulation to be most efficient. It has been argued that regulations mirroring the complexity of financial markets have led to an increase of scope for regulatory arbitrage. They have created barriers to entry and a problem of governance. Big banks have the resources to lobby the regulator and find loopholes that permit them to generate rents.
Strikingly, Basel II and III increased the “too big to fail” issue, since the model-based approach of risk assessment gave way to the optimization of the models by the big players. It has to be noted that the regulators also gained from excessive regulation as it reinforced their power. Yet the adequate level of complexity still needs to be found, a difficult task when those involved disagree on a way to measure complexity. However, should we first agree that simpler rules are more efficient and that less is more? After all, speed limits are the same for everyone, and have proved to be efficient.
