A more consolidated and intensive approach appearsinevitable

Recent regulatory trends have seen institutionalresponsibility for financial regulation dispersed acrossmultiple institutions, and separated from monetary policy at thecentral bank This trend may now have to be reversed. A more consolidated and intensive approach appearsinevitable. Proposals to combine the various US regulators or atleast to give the Fed over-arching responsibility as asuper-regulator for the financial system have receivedwidespread support, though the details of institutional reformhave yet to be agreed. In the United Kingdom, the wisdom of separating financialregulation from the Bank of England and passing responsibilityto the FSA is increasingly questioned. The need for a lender oflast resort support to a wide range of institutions, and themacroeconomic consequences of a widespread debt crisis, havepushed the Bank of England back into the heart of financialregulation.

If a new instrument for controlling the quantity of creditis eventually implemented, it will probably have to be managedout of the central bank. The FSA may retain responsibility forthe prudential supervision of individual banking institutions,but the overall framework of control will need to be set by thecentral bank. EMERGING REFORM AGENDA If proposals for regulatory reform are to stand any chanceof being implemented, they will need to move beyond a steriledebate over market-led discipline and innovation versus stodgyheavy-handed state regulation. They will have to recognise that collective action problemsand moral hazards in the credit creation process make some formof quantitative control essential. The system needs to achieve afinancial balance alongside internal balance and externalbalance, and for that it needs to develop a third instrument,credit policy, alongside the traditional monetary and fiscalpolicies. Credit policy will need to act directly on the volume ofcredit created, and amount of risk, independently of its price,which is the province of interest rates and monetary policy.

It will need to be contra-cyclical and apply to a broadrange of institutions to be effective. It must be dynamic, capable of being modified as thefinancial system evolves and pioneers new ways to circumvent theexisting controls. It must also be applied on a multilateral basis to preventthe type of regulatory arbitrage which occurred in the late1990s and 2000s. Crude but effectivesafeguards may be preferable to interminable arguments andtheoretical elegance (Editing by Toby Chopra) Regulatory News Bonds.