Change for the Sake of Change?

Throughout the last four weeks we have a gone through somewhat of a journey first discussing how the FSA catastrophically failed to do their job, then we talked about how this called for a change in financial regulation through the use of the central bank in financial regulation and in the last post we identified the new proposed structure of financial regulation in the UK. This has all lead up to the point where the question has to be asked will these changes make a difference.

If we were to adopt a free banking way of thinking then the answer would be clearly not as they believe against banking regulation of any form. However for those of us who do believe in banking regulation (the vast majority), it would be of interesting to look at the following diagram:

Although from the USA this tells its own story, once tighter financial regulation was put in place after the great depression the US enjoyed a period of around 40 years with low levels of bank failures and if we look at the red line it also increased equality. So if the UK gets its “house in order” in terms of financial regulation there is a real opportunity to bring back stability into the UK banking sector.

Some argue that the structure was not what wrong in the first place but the people within the structure were the problem and a lot of these same individuals will be involved under this new structure. So is it a case of same organisation with the same mentality but different names (such as PRA and FCA) within the UK regulation. This is clearly something that will have to be avoided. Also there is a question of the transition period to this new structure which some critics argue could take up to two years and this is plenty of time for the FSA to “take its eye off the ball”.

Have I been naïve up until this point? To a certain extent yes, to put the last financial crisis down to the FSA and think that the change in financial regulation by its self can be the cure to a problem that goes much deeper. So to say financial regulation would be the sole contributor and the future saviour of financial crisis to come would be incorrect, but its importance cannot be underestimated within the wider context of future stability, its role is unquestionable.