New financial regulations could tip global banking sector into new crisis

December 28, 2010 4:44 PM

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The global push to extend and tighten regulation of financial services could backfire and intensify the severity of future banking crises, a new report from two respected research institutes warns today.

The paper, jointly published by the Legatum Institute and the Taxpayers’ Alliance, says that policymakers worldwide are in danger of learning the wrong lessons from the crash of 2008.

The rush by international organisations such as the G20 and the European Union to ratchet up curbs on banks and investment funds risks making matters worse by increasing the likelihood of future meltdowns.

Politicians worldwide are also accused of trying to dodge their responsibility for the crash by unfairly shifting the spotlight onto the financial sector.

“Some of the measures announced are disingenuous political posturing, while others continue existing mistakes partly responsible for the problems we are facing today,” the report says.

“It is entirely possible that the new regulations being implemented could hurt established financial centres like the City of London, while increasing the frequency and strength of global financial crises.”

The report, Financial regulation goes global: risks for the world economy, is written by Dalibor Rohac of the Legatum Institute and Matthew Sinclair of the Taxpayers’ Alliance.

It sets out the role played by financial regulation in bringing about the financial crisis of 2008; it reviews the regulatory response in Europe and the US, and explains why the new international regulatory regime raises the risks present in the world’s financial system.

The report points the finger of blame at US regulations that encouraged the relaxation of restrictions on home loans and the nationalisation of risk by the intervention of the government-backed lenders Fannie Mae and Freddie Mac.

Other measures, such as the Basel accords providing incentives to push lending off balance sheet, added to financial problems.

The response - the G20-sponsored Basel III rules, the Capital Requirements Directive of the EU, and the 2,300-page US Restoring American Financial Stability Act – is sharply criticised.

“Common capital adequacy rules, while increasing transparency, also encourage homogeneity in investment strategy and undertaking of risk, leading to a high concentration of risk.

“That means that global regulations can be dangerous because they increase the amplitude of global credit cycles.”

The report concludes: “In the aftermath of the crisis, politicians have been acting to channel public anger away from themselves and onto the financial sector. This led them to promote a set of policies that might be politically satisfying but do not address the true causes of the crisis.

“It is clear that the current wave of intensive financial regulation is harmful, costly and potentially dangerous for the world economy.”

Dalibor Rohac, Research Fellow at Legatum Institute, said:

“The regulatory response to the meltdown of 2008 has been selective in reinforcing the worst attributes of pre-existing financial regulation. This is a recipe for disaster.”

Matthew Sinclair, Director of the TaxPayers’ Alliance, added:

“Taxpayers can’t afford the economic fallout from new financial crises, but politicians are responding in ways that could increase risk.  The crisis was the result not of too little regulation of the financial sector but the wrong regulations.  Policy mistakes and regulatory failure led to a devastating collapse of a kind not seen in Britain for over a century.  Unfortunately there is a serious risk that politicians trying to build ever more closely harmonised global regulations will create nastier and more frequent global crises.  That approach needs to be reconsidered, we can’t let the response to this crisis produce the next one."

Download the new report

Download the new report


The global push to extend and tighten regulation of financial services could backfire and intensify the severity of future banking crises, a new report from two respected research institutes warns today.

The paper, jointly published by the Legatum Institute and the Taxpayers’ Alliance, says that policymakers worldwide are in danger of learning the wrong lessons from the crash of 2008.

The rush by international organisations such as the G20 and the European Union to ratchet up curbs on banks and investment funds risks making matters worse by increasing the likelihood of future meltdowns.

Politicians worldwide are also accused of trying to dodge their responsibility for the crash by unfairly shifting the spotlight onto the financial sector.

“Some of the measures announced are disingenuous political posturing, while others continue existing mistakes partly responsible for the problems we are facing today,” the report says.

“It is entirely possible that the new regulations being implemented could hurt established financial centres like the City of London, while increasing the frequency and strength of global financial crises.”

The report, Financial regulation goes global: risks for the world economy, is written by Dalibor Rohac of the Legatum Institute and Matthew Sinclair of the Taxpayers’ Alliance.

It sets out the role played by financial regulation in bringing about the financial crisis of 2008; it reviews the regulatory response in Europe and the US, and explains why the new international regulatory regime raises the risks present in the world’s financial system.

The report points the finger of blame at US regulations that encouraged the relaxation of restrictions on home loans and the nationalisation of risk by the intervention of the government-backed lenders Fannie Mae and Freddie Mac.

Other measures, such as the Basel accords providing incentives to push lending off balance sheet, added to financial problems.

The response - the G20-sponsored Basel III rules, the Capital Requirements Directive of the EU, and the 2,300-page US Restoring American Financial Stability Act – is sharply criticised.

“Common capital adequacy rules, while increasing transparency, also encourage homogeneity in investment strategy and undertaking of risk, leading to a high concentration of risk.

“That means that global regulations can be dangerous because they increase the amplitude of global credit cycles.”

The report concludes: “In the aftermath of the crisis, politicians have been acting to channel public anger away from themselves and onto the financial sector. This led them to promote a set of policies that might be politically satisfying but do not address the true causes of the crisis.

“It is clear that the current wave of intensive financial regulation is harmful, costly and potentially dangerous for the world economy.”

Dalibor Rohac, Research Fellow at Legatum Institute, said:

“The regulatory response to the meltdown of 2008 has been selective in reinforcing the worst attributes of pre-existing financial regulation. This is a recipe for disaster.”

Matthew Sinclair, Director of the TaxPayers’ Alliance, added:

“Taxpayers can’t afford the economic fallout from new financial crises, but politicians are responding in ways that could increase risk.  The crisis was the result not of too little regulation of the financial sector but the wrong regulations.  Policy mistakes and regulatory failure led to a devastating collapse of a kind not seen in Britain for over a century.  Unfortunately there is a serious risk that politicians trying to build ever more closely harmonised global regulations will create nastier and more frequent global crises.  That approach needs to be reconsidered, we can’t let the response to this crisis produce the next one."

Download the new report

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